Can those aged 45 to 64 be saved from misery in retirement? How?
Automatic enrollment and soft mandate
Though a major retirement savings overhaul would have the most dramatic impact, there are also smaller reform possibilities that would alter the current system of 401(k)s and IRAs to allow workers to save more money.
The first idea is a policy of “automatic enrollment.” This would take the current 401(k) plans and require employers who offer them to automatically enroll employees in such plans. Dean Baker said this plan could help enroll more people in retirement plans: “As it is now, not always, but generally, when you’re an employer that offers a 401(k) you [the employee] have to opt into it. You have to fill out the forms and say you want to be in it, and people for a variety of reasons…they don’t end up doing it, even though they may actually want it. If you flip that over and you make the default that you’re going to be in the program, and you have, say, 3 percent of your wages taken out, you’re likely to get a much, much higher enrollment rate and you’re not forcing people into it” because employees can opt out.
Monique Morrissey suggested what she called a “soft mandate”: the federal government could require employers who receive tax benefits for offering retirement plans to employees to offer plans that meet certain requirements, including steady employer contributions at a minimum rate. As it stands now, employers can stop matching employee contributions into 401(k) plans at will, as many did during the fallout of the 2009 recession. A “soft mandate” would create tax incentives for employers to match employee contributions and continue matching, regardless of the economic climate. Such a policy could also encourage employers to offer plans with low administrative costs; many current plans charge significant fees for administration that erode employee savings.
The limits of retirement savings proposals
According to the most recent data from EBRI, 48.9 percent of all workers have access to an employer-sponsored retirement plan, and 39.7 percent of all workers participate in such a plan. The Plan Sponsor Council of America’s most recent survey of 401(k) plans reports that 81.6 percent of plans have an employer match provision, and 95.5 percent of plans that have a match provision made a match in 2011. In summary, then, only about 39.7 percent of workers have a retirement plan with an employer match. So, while automatic enrollment and improvements to 401(k) plans would likely improve the retirement prospects of many, they would not help the majority of Americans without access to such a plan in the first place. To do that in the framework of retirement savings reform, a plan that mandated employee contributions would be a necessary.
Some economists, however, have questioned the merit of retirement savings in general when compared to more direct forms of government spending. According to Eric Kingson of Syracuse University, “We already have a universal pension system. It’s called Social Security…It travels with you from job to job. I say build up the system.”
Virginia Reno, the vice president for income security at the National Academy of Social Insurance, added, “By the time you finish describing [such proposals], you’ve described the Social Security program…Why don’t we just do it with the system that’s already in place and works? Social Security is so much more efficient. Of the money that comes out, 1 percent is for administration, the rest is for benefits, which is not true of most anything you try to do through the private sector.”
How could Social Security be enhanced to meet the needs of those nearing retirement?
If, as Morrissey says, “Social Security is the cheapest and most efficient retirement program there is,” how could it be improved to provide real security to future retirees?
According to Eric Kingson, “There are some very simple things that could be done that are not outrageously expensive. One, the CPI could be adjusted” in a manner to help, not hurt, beneficiaries. He suggested starting with a measure called CPI-E, an index that aims to more accurately assess the cost of living for the elderly by more heavily weighting health care and housing costs. “If they had that going back to 1982, benefit adjustments would have been about one-fifth of 1 percent higher each year than they have been.”
The effect of adopting the CPI-E measure, according to a document produced by the U.S. Senate Committee on Health, Education, Labor, and Pensions, would be to “ensure that Social Security benefits keep pace with the rising costs of essential items for seniors, including health care.” Such an approach would therefore help prevent the retirement security crisis from being exacerbated, but would not alone generate the increased benefits necessary to solve it.
To do that with Social Security would require a broader expansion. There are three general ways in which Social Security could be expanded: there could be a targeted or means-tested benefit increase, benefits could be increased across-the-board, or the benefit formula could be adjusted in such a way as to increase benefits for all, while providing low-income households with a greater proportional share of the boost.
How much would a solution cost? They don’t know.
Remapping Debate wanted to find out how much it would cost to guarantee that workers currently aged 45 to 64 will be at roughly the same standard of living in retirement as they were pre-retirement, or, failing that, to find out how much it would cost to keep them out of poverty. It proved surprisingly difficult.
We asked Barbara Butrica, a senior research associate at the Urban Institute, a non-partisan think tank created by the Johnson Administration in 1968 to study poverty and other urban issues, if her organization had an estimate. “If anyone could come up with some estimate, we could. We haven’t done that, and it’s not something we could quickly turn around,” she said.
When asked why the Urban Institute had never researched this question, Butrica said it is highly complex, and that even giving a rough estimate would be difficult due to the degree of variation among individuals and ambiguity over what the goal should be: “What does it mean to have security in retirement? Is it to be above poverty? Is it to have 75 to 80 [percent] replacement rate? Probably a lot that has to do with why more research hasn’t been done on this is these questions haven’t been settled.”
Alan Barber, the domestic communications director for the Center for Economic and Policy Research, also described such research as too complex to be feasible: “When we talk about the poverty line, there’s disagreement of where that is. The White House has one perspective, the progressive caucus [has another, and], the right has even a higher line of what poverty should be. There are so many components that comprise income security…Just the concept of strengthening income security for this cohort — it’s too broad: Too many different factors at play.” We asked whether such a study would be useful if it could be done: “I don’t know. I can’t even think what pieces would go into it.”