On Wednesday morning, the Bipartisan Policy Center will launch the Personal Savings Initiative (register to join us here). The initiative will be led by former Senator Kent Conrad, who served as chairman of the Senate Budget Committee, and James Lockhart, who served as deputy commissioner of the Social Security Administration and other key roles in the executive branch. Their effort will be supported by a bipartisan commission of nationally recognized experts who will examine legislative and regulatory avenues to improve Americans’ personal savings and retirement security.
Here’s why this effort is needed:
Many Americans aren’t saving enough for retirement.
Don’t take our word for it – researchers from both Boston College and the Employee Benefit Research Institute have analyzed the various types of savings and retirement income for Americans and compared those with projected post-retirement living expenses. The two groups arrived at similar conclusions. One study found that over half of Americans risk not being able to maintain their standard of living in retirement. The other analysis concluded that slightly over 40 percent face the more serious risk of running short of money during retirement for daily necessities, healthcare, or long-term care.
Increased savings would help address this shortfall in retirement preparedness. The tax code provides substantial advantages for retirement savings, and the term “401(k)” has entered the common lexicon.1 Yet, just over half of working-age households participate in workplace retirement plans, and many still do not have access to a retirement savings account at work.
Even for those who have an Individual Retirement Account (IRA), 401(k), or 403(b) account and are nearing retirement, savings are often much lower than they should be. Half of American households near retirement age (55-64) with retirement accounts have less than $100,000, which is not enough to fund a retirement that could last more than 25 years.2
The retirement savings vehicles available to Americans could be improved, and any changes should fit the context of the entire retirement security system.
There has been tremendous change in the retirement landscape over the past 40 years. When the 401(k) was created, the defined-benefit (DB) pension was the dominant form of employer-sponsored retirement plan. As recently as 1998, 70 percent of Fortune 100 companies had a DB plan open to new employees. In 2010, only 30 percent did. While 401(k)s were created as a retirement savings supplement for those with a DB pension income, a growing proportion of new retirees will rely on IRAs and 401(k)s as their main source of retirement income outside of Social Security.
This trend makes it all the more essential that these vehicles are available to workers, easy-to-use, and optimized to meet retirement-security needs. Policies to encourage the availability of and savings in these vehicles should also be considered in the context of the full retirement system, which centrally features Social Security. Other important aspects of that system include housing wealth, which can be a source of retirement income, and preparation for aging-related risks, such as needing long-term care, the cost of which can overwhelm even robust retirement savings and lead to impoverishment.
Policymakers will have several opportunities to act in ways that will affect savings, retirement and income security in the coming years.
Social Security and the tax code are at the center of policy related to retirement security. The Social Security Disability Insurance Trust Fund is on course for insolvency as early as 2016, which could be an opportunity to address broader retirement and income-security challenges. An eventual reform of the tax code will also involve decisions about whether to keep or change tax incentives for retirement savings.
House Ways and Means Chairman Dave Camp included dramatic changes to these tax incentives in his tax reform proposal; new Senate Finance Committee Chairman Ron Wyden has said that savings is one of his priority issues. The last significant reform to address retirement savings was enacted eight years ago (the Pension Protection Act of 2006), and we have learned much from its implementation, as well as recent research in behavioral economics and plan design.
Now is the time to develop practical, bipartisan approaches to improve the retirement savings system for all Americans.
We hope you can join us Wednesday. Details about the event are available here.
Alex Gold contributed to this post.
1 The 401(k), named for a section of the Internal Revenue Code, is the most common employer-based retirement savings account. In most cases, voluntary employer and employee contributions are made on a pre-tax basis with every paycheck. These contributions, along with investment earnings, are not taxed until money is withdrawn, usually during retirement. The 403(b) is a similar arrangement that is available to employees of certain schools and not-for-profit organizations.
2 See statistics from the National Institute on Retirement Security.