Securing Our Financial Future
Hear the stories of individuals who have grappled with daunting obstacles—from student loan debt to the lack of access to workplace retirement plans—that threaten their long-term financial security.
Too many Americans, especially those who work for small businesses, lack access to a payroll-deduction workplace retirement savings plan. This is partly because offering such plans entails burdens and costs that employers may be unwilling or unable to bear.
We recommend the creation of a new, streamlined option called Retirement Security Plans that would allow small employers to transfer most responsibilities for operating a retirement savings plan to a third-party expert, while still maintaining strong employee protections. We would also enhance the existing myRA program to provide a base of coverage for those workers, such as part-time, seasonal, and low-earning workers, who are least likely to be offered a retirement savings plan.
Other workers have access to retirement savings plans but do not contribute. We propose an alternative to nondiscrimination testing along with new tax incentives to encourage employers to adopt automatic enrollment and escalate their employees’ contributions over time.
Once these reforms are in place, we recommend establishing a nationwide minimum-coverage standard to pre-empt the patchwork of state-by-state regulation that is already developing. Beginning in 2020, employers with 50 or more employees that do not already offer a retirement plan that meets certain minimal thresholds would be required to automatically enroll employees into a new Retirement Security Plan or myRA. This would ensure broad access to workplace retirement savings plans while minimizing the burden for employers. Employees would have the ability to change contribution amounts or opt out of contributing entirely.
Americans need to increase their personal savings so that they are better positioned to handle emergencies and major purchases. Insufficient short-term savings can lead workers to draw down their retirement accounts, incurring taxes and (often) penalties. This “leakage” of retirement savings—while it might address an immediate financial squeeze—jeopardizes many Americans’ long-term retirement security. To address this issue, we recommend clearing barriers that discourage employers from automatically enrolling their employees in multiple savings accounts, one for short-term needs and another for retirement.
Some leakage of retirement savings results from system complexity and poorly designed regulation. We propose to ease the process for transferring savings from plan to plan, because many pre-retirement withdrawals occur upon job separation. In addition, early-withdrawal rules and penalties for workplace plans and Individual Retirement Arrangements (IRAs) should be harmonized by raising IRA standards.
Longevity risk, the possibility that retirees will outlive their savings, is a growing and significant threat to retirement security. Social Security, defined benefit pension plans, and life annuities from insurance companies all leverage the power and efficiency of mortality pooling to help individuals manage the risk of longevity. Yet many defined benefit plan participants choose a lump-sum distribution instead of monthly income for life, and few purchase life annuities with their retirement savings. While Social Security provides a form of lifetime income, Social Security benefits alone will not be adequate to meet all income needs for most retirees. For those who have accumulated sufficient savings, other lifetime-income solutions offer the security of an added, regular retirement income that they cannot outlive.
We recommend that plan sponsors integrate sophisticated but easyto-use lifetime-income features within retirement savings plans. For example, it should be easy for plan participants to purchase a guaranteed lifetime-income product in automatic installments. Plan sponsors could establish a default lifetime-income option or offer an active-choice framework, in which participants are asked to choose options from a customized menu. In-plan tools could also help participants make an informed decision about when to claim Social Security benefits and then to schedule withdrawals from their retirement plan to facilitate later claiming of Social Security benefits. We believe employers need safe harbors to limit their legal risk as they offer these features and attempt to educate workers about longevity risk and lifetime income.
Additionally, we recommend clearing barriers to offering a wider array of choices for lifetime income in both retirement savings and pension plans. In defined contribution plans, participants aged 55 and older should be allowed to use their retirement savings to purchase annuities that begin payments later in life. Workers with defined benefit pensions should be able to receive part of their benefit as a lump sum and the rest as monthly income for life, rather than the all-or-nothing choice most have today. Also, to encourage participants to work longer and provide more-consistent work incentives, we recommend allowing employer-sponsored retirement plans to align plan retirement ages with Social Security.
Housing is an important form of savings. Americans own more than $12.5 trillion in home equity—a sum that rivals the $14 trillion that Americans hold in retirement savings. For individuals or couples who lack substantial savings in a retirement plan but who own their residence, homeownership can be a major source of retirement security. A variety of mechanisms exist for tapping home equity to fund regular consumption needs in retirement; for example, homeowners can downsize, use a reverse mortgage, or sell their home and rent instead. These approaches have advantages and drawbacks; retirees with home equity should be aware of the available alternatives and have independent advice to make an appropriate choice for their circumstances.
Federal and state tax policy, however, actually subsidizes the use of home equity for pre-retirement consumption, leaving many retired homeowners burdened with debt and with less equity to support retirement security. We recommend ending these subsidies by eliminating tax benefits for borrowing that reduces home equity.
We also propose to strengthen programs that support and advise consumers on reverse mortgages, which can be a good option for some older Americans. Establishing a low-dollar reverse-mortgage option would facilitate smaller loans while reducing fees for borrowers and risk for taxpayers.
Financial capability—defined as having the knowledge, ability, and opportunity to manage one’s own finances—is lacking among too many Americans. This is a troubling fact at a time when the nation’s retirement system has transitioned toward greater individual control and responsibility.
Exposure to financial knowledge and planning should begin early in life, with schools, communities, employers, and federal and state governments all working to foster a culture of savings and to position individuals to make prudent financial choices. We support a variety of approaches, including implementing recommendations from the President’s Advisory Council on Financial Capability, providing improved personal financial education through K-12 and higher-education curricula, and better communicating the consequences of claiming Social Security early. For example, renaming the earliest eligibility age, currently age 62, as the “reduced benefit age” would better highlight the lower monthly benefits that result from early claiming.
Social Security provides the income foundation for many older Americans, but to maintain that legacy, prompt adjustments to the program are needed. For decades, the program’s trustees have affirmed the need for changes, noting that Social Security faces significant financial challenges. In 2015, the trustees recommended “that lawmakers address the projected trust fund shortfalls in a timely way in order to phase in necessary changes gradually and give workers and beneficiaries time to adjust to them.” Moreover, Social Security has not been updated to reflect a 21st century workforce and society.
Uncertainty about Social Security’s future magnifies the anxiety that many Americans experience as they plan and prepare for retirement. That is why any comprehensive effort to improve retirement security must shore up and modernize the program.
We recommend adjustments to Social Security’s tax and benefit levels to 1) reflect changing demographics; 2) better target benefits on those who are most vulnerable in old age, including surviving spouses and workers in low-earning occupations; 3) preserve reasonable intra- and inter-generational equity; and 4) more fairly reward work. Americans ought to know what they stand to gain from extending their working lives and claiming benefits later—both of which are highly effective ways for individuals to raise their retirement income. Clearer work incentives in the Social Security program would increase understanding of these options and promote better decisions.