The Senate Finance Committee held a hearing on September 17 entitled “Retirement Savings 2.0: Updating Savings Policy for the Modern Economy,” focusing on how public policy could help increase the number of Americans who are financially prepared for retirement.
Chairman Ron Wyden (D-OR) argued that the current system is “out of whack” because notwithstanding the substantial tax benefits, too many are approaching retirement with little savings. He called for reforms to make saving easier and to strengthen incentives for middle-class workers to save for retirement. Chairman Wyden highlighted a proposal to automatically enroll workers without an employer-sponsored retirement plan into a retirement savings account as a possible solution.
Ranking Member Orrin Hatch (R-UT) emphasized the committee’s strong record of bipartisan cooperation, citing the 2001 agreement to increase contribution limits to defined contribution plans and create the Saver’s Credit, which is available to low- and middle-income individuals who contribute to retirement accounts, such as 401(k)s and Individual Retirement Arrangements (IRAs). He added, “in the last 25 years, Democrats and Republicans have worked together to expand savings among workers.”
The committee subsequently heard from five expert witnesses on issues pertaining to retirement savings. John Bogle, founder and former CEO of the Vanguard Group, recommended several reforms to defined contribution plans, including increased employer contributions, expanded access, greater restrictions on pre-retirement withdrawals, and more comprehensive fiduciary standards for institutional money managers. Dr. Brian Reid of the Investment Company Institute advocated building upon the current retirement structure and opposed fundamental changes to existing tax incentives. Specifically, he stressed the advantages of tax deferral, arguing that it equalizes the incentive to save across all income tax brackets.
Scott Betts from National Benefit Services deemed Senator Hatch’s Secure Annuities for Employees (SAFE) Retirement Act (S.1270) to be a “big step in the right direction” because of its “common sense change” that would address inefficiencies in the system and allow small employers to band together to offer retirement savings plans for their employees. Betts emphasized the importance of workplace retirement plans, stating that “[t]he primary factor in determining whether or not a middle-income worker is saving for retirement is whether or not they have a retirement plan at work.”
Dr. Brigitte Madrian, a professor at the John F. Kennedy School of Government at Harvard University and member of BPC’s Commission on Retirement Security and Personal Savings, advocated for the implementation of automatic enrollment in 401(k) plans as a way to close the access gap between income groups. Madrian also pointed out the promise of behavioral economics to help with creating effective financial incentives and mitigating the problem of pre-retirement savings leakage – the practice of withdrawing retirement savings to use for other purposes before retirement. She argued that people respond best to simplicity as well as immediate benefits, but pointed out that “current law right now does not allow for companies to give small, financial incentives to sign up for the savings plan in the first place… So you could not say, for example, ‘Sign up before the end of the month and you’ll get a $50 Amazon gift card.’”
In contrast to the other witnesses, Dr. Andrew Biggs of the American Enterprise Institute, who also participated in a public event on retirement security hosted by BPC’s commission over the summer, was more optimistic about the present and future of retirement savings. Biggs stated, nonetheless, that the outlook could be further improved through greater adoption of automatic enrollment in 401(k) plans, increased focus of investment options on low-cost index funds, and the introduction of a universal, flat benefit paid to all older Americans regardless of earnings or workforce participation that would supplant traditional Social Security benefits.
At the conclusion of the hearing, witnesses were asked to give a policy recommendation that would create “the biggest bang for the taxpayer buck.” The consensus was that there should be stronger incentives for small employers to offer retirement plans. Accessibility and simplicity were also key characteristics that every witness agreed needed to be improved in the U.S. retirement savings structure.
The Senate Finance Committee hearing comes just months after BPC officially launched its Commission on Retirement Security and Personal Savings, chaired by Senator Kent Conrad and The Honorable James B. Lockhart, III. In the coming year, the commission will continue to examine the impact of federal policies on retirement savings, and develop policy recommendations to strengthen and improve the American retirement system, including Social Security, pensions, defined contribution savings vehicles (such as 401(k)s), other personal savings, and strategies to generate lifetime income.
Alex Gold, Harry Baumgarten and Sydney Winkler contributed to this post.
KEYWORDS: 401(K)S, COMMISSION ON RETIREMENT SECURITY AND PERSONAL SAVINGS, INDIVIDUAL RETIREMENT ARRANGEMENTS, JIM LOCKHART, JOHN BOGLE, KENT CONRAD, ORRIN HATCH, RON WYDEN, SENATE FINANCE COMMITTEE, VANGUARD GROUP