The retirement crisis and a plan to solve it

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The Retirement Crisis and a Plan to Solve It

Chairman Tom Harkin

428 Senate Dirksen Office Building Washington, DC 20510 help. email: retirement_security@help. July 2012


After a lifetime of hard work, people deserve the opportunity to live out their golden years with dignity and financial independence. But for most of the middle class, the dream of a secure retirement is slipping out of reach. We are facing a retirement crisis. Consider the following:

? The retirement income deficit ? i.e., the difference between what people have saved for retirement and what they should have at this point ? is $6.6 trillion;

? Only one in five people in the private sector workforce has a defined benefit pension plan; and

? Half of Americans have less than $10,000 in savings.

The retirement crisis will have significant repercussions. As older Americans transition out of the workforce, either voluntarily or involuntarily, many will find that they cannot afford basic living expenses. They will be forced to make the difficult choice between putting food on the table and buying their medication. The retirement crisis will put an enormous strain on our families, our communities, and our social safety net.

The retirement crisis is directly attributable to the breakdown of the traditional "three-legged stool" of retirement security ? pensions, savings, and Social Security. Defined benefit pension plans used to play an enormous role in providing a reliable source of retirement income, but the pension system has been in decline for decades. At the same time, stagnant wages and rising costs are making it harder and harder to build up a nest egg through a retirement savings plan (e.g., a 401(k) or IRA) or otherwise. Fortunately, Social Security is still strong, but it was always intended to be supplemented by other sources of retirement income.

I am committed to ensuring that middle class families have a secure retirement. That is why I have been holding a series of hearings in the Senate Committee on Health, Education, Labor, and Pensions to highlight the state of retirement security and better understand how we can improve the system. This report summarizes the key findings from those hearings and includes two bold proposals to address the retirement crisis. Specifically, I propose providing universal access to a new type of retirement plan ? Universal, Secure, and Adaptable ("USA") Retirement Funds ? that can deliver real retirement security for all working Americans. I have also proposed improvements to Social Security that will increase benefits and make the program stronger for future generations.

I intend for this report to be the starting place in an evolving discussion about retirement security. Over the coming months, I plan to bring together business and labor leaders, policy experts, advocates, and my fellow lawmakers to implement necessary reforms. The retirement crisis is simply too big to ignore, and it is time for us to roll up our sleeves and get to work.


Senator Tom Harkin Chairman


"Retirement." The word used to conjure up images of travelling, pursuing new hobbies, or spending time with the grandkids. But these days, when people think about retirement, all they do is worry. Not having enough savings for retirement is one of people's biggest economic fears, and a recent survey found that 92% of people think there is a retirement crisis in America.1

Retirement (In)security

As a country, we are woefully unprepared for retirement. Half of all Americans have less than $10,000 in savings, and nearly half of the oldest Baby Boomers are at risk of not having sufficient retirement resources to pay for basic retirement expenses and healthcare costs.2 The Center for Retirement Research at Boston College estimates that our "retirement income deficit" is $6.6 trillion. 3 That number represents the gap between the pension and retirement savings that American households have today and what they should have today to maintain

"I, like millions of people in this country, have worked all my life, and I have worked very hard. And I have no retirement savings at all. None."

Karen O'Quinn

pessimistic; only 4% are "very confident" their employees will retire with sufficient assets. That is down from 30% in 2011.7

Breakdown of the Three-legged Stool

The retirement crisis is directly attributable to the failure of the "three-legged stool" of retirement security. Traditionally, defined benefit pension plans ("pensions"), personal savings, and Social Security were seen as the three pillars creating a solid foundation for our retirement system. Each should play an important role in supporting people in old age. However, the stool, never sturdy, has become increasingly wobbly as pensions have disappeared and the middle class is finding it harder and harder to save.

Disappearing Pensions

Defined benefit pensions ? which provide people with a lifetime benefit based on a formula that usually takes into account a person's years of service and salary ? used to play an enormous role in providing a safe and secure retirement for many in the middle class. Although coverage has never been universal, pensions have successfully helped millions of people prepare for retirement by providing a secure, guaranteed benefit for life. Pensions are regulated to protect participants against mismanagement, and they shield people from the risk of market downturns and the possibility of living longer than expected. However, the pension system has been in a steady decline for decades, and now, only one out of every five people working in the private sector has a pension.8

their standard of living in retirement. That is enough dollars that, if lined up end to end, they would stretch to the moon and back 1,000 times and still leave enough left over to pay NASA's budget for the next eight decades.

The public is becoming increasingly concerned about the lack of retirement security. Only 14% of people say they are very confident they will have enough money to live comfortably in retirement.4 That is down 9% since 2002.5 And 69% of people believe they could save until age 65 and still not have enough.6 Employers are even more

These days, employers have largely stopped offering pensions at all. Those that choose to offer their employees a retirement plan tend to provide defined contribution plans ("DC Plans"), such as 401(k) plans. DC Plans allow people to save for retirement on a tax-advantaged basis and are more attractive to many employers because they shift virtually all of the risks associated with the plan to employees. Employers typically are not responsible for investment losses in a DC Plan, and they are not required to make contributions for their employees. DC Plans can be an effective way to help people save for retirement, but they are not a substitute for pensions because they do not provide people with the same level of protection from

US Senate HELP Committee | JULY 2012


financial risk and do not provide a guaranteed stream of even be able come up with $2,000 in 30 days if faced

income for life.

with an emergency.13 For many years, families were able

to mask the effects of stagnant wages and rising costs by

The decline of the traditional pension is going to have becoming two-income households, working more, and

real consequences for individuals and families. Pensions are relying on credit. But the Great Recession exhausted

one of the simplest, most cost-effective means of securing those coping mechanisms and exposed the underlying

a source of retirement income and an important source of economic challenges facing the middle class.14 Now, the

protection for families against economic risk. They are also middle class is struggling just to keep its head above water.

an extremely effective means of keeping older Americans out

of poverty. Research indicates

With the significant

that the poverty rate in 2010

economic challenges facing

for older households lacking

pension income was nine "Pensions are vitally important

families, it should be no surprise that the middle class finds it

times greater when compared to households with pension

for keeping older Americans out of


poverty. The poverty rate in 2010

difficult to save. As noted above, half of Americans have less than $10,000 in savings,

In addition to providing for older US households lacking economic security to pension income was nine times

and 60% of the population has less than $25,000. There have been many positive

individuals, pensions provide enormous benefits to our economy and play

greater as compared to households with pension income."

developments to help people save by expanding access to DC Plans and facilitating

an instrumental role in job creation.10 Every dollar that goes into a pension plan is held

Diane Oakley National Institute on Retirement Security

automatic savings. However, despite all of those efforts, savings rates are still too low,

in trust for a benefit that may

and people are less likely to

not need to be paid for 40 years

report that they are saving for

or more. Consequently, pensions are able to invest those retirement than just a decade ago.15

dollars over long time horizons. That means they are able

to provide critical sources of financing for long-term projects

Social Security: Strong but Not Enough

like technology and infrastructure development.11 Pensions are also able to make investments in good times and bad, so they are an important source of liquidity during economic downturns, such as the Great Recession, when banks and other financial institutions slow or stop their lending. In short, pensions make the kinds of consistent, long-term investments in our economy that spur innovation and create jobs. As pensions disappear, we are losing a key source of investment capital and a driving force behind our economy.

Fortunately, Social Security continues to provide families with a basic level of income security. It prevents millions of Americans from slipping into poverty when their working years are over because, like a pension, Social Security provides Americans with an income stream that they cannot outlive. However, Social Security was never meant to be people's sole source of retirement income. The program replaces only about 40% of the average person's income after retiring, but people typically need

Retirement Savings & the Middle Class Squeeze

65-85% percent of pre-retirement earnings to maintain their standard of living.16 Thus, a robust private retirement

At the same time as middle class families have seen system is absolutely essential to give ordinary people an

their pensions disappear, economic conditions are making opportunity to retire.

it tougher and tougher for people to save through DC

Plans or on their own.12 People are working longer and Cost of the Crisis

harder than ever before, and productivity has steadily increased. However, worker compensation has been flat or negative over the past four decades, and costs of living have been increasing. The middle class is being squeezed, and we are at a point where half of households would not

The breakdown of the three-legged stool of retirement security and the resulting retirement crisis are going to have very real costs. In 2010, nearly 6 million Americans aged 65 and over were living in poverty or near-poverty.17 By 2020,


US Senate HELP Committee | JULY 2012

that number is expected to increase by 33%. Given that an increasing number of older people are reaching retirement age without income to supplement Social Security, we could see even higher poverty rates in the future. This trend will place enormous new burdens on families, and it will strain our social safety net, which is already facing significant financial constraints.

Older people without adequate retirement savings will have trouble just making ends meet. Many will need longterm care, but few seniors will be able to afford it. As a result, they will have to rely on their families for support. This will put a strain on working families, who are already struggling to cope with stagnant wages, rising living costs, and the lingering effects of the Great Recession. It will also make it more difficult for younger family members to save for their own retirement.

In addition to the strain on families, the retirement crisis will have a significant impact on government programs that provide assistance to poor or near-poor retirees. As people are unable to afford basic living expenses in retirement, they will rely more and more on programs like housing assistance, home heating aid, and food assistance. Elder poverty will

"I have paid into Social Security. That's one benefit to look at down the road. But in today's economy... Social Security is not going to be enough."

David Muse

"We don't make enough to save and have no pension coming... Retirement is supposed to be a time when you cherish your family... For me, retirement will be the time to pick up a second, low-paying career."

Teresa Law

also increase Medicare and Medicaid costs because seniors living in or near poverty often have higher incidences of chronic and acute health problems and are also less able to afford private long-term care services. The increased costs will undoubtedly strain our social safety net.

The retirement crisis will have a significant human cost as well. Life will be extraordinarily difficult for seniors without adequate income in retirement. After a lifetime of hard work, many seniors will find themselves forced to choose between putting food on the table and buying their medication. And many people simply will not be able to leave the workforce. They will have to work well into advanced age, eliminating job opportunities for younger workers.

Most Americans do not expect a lavish lifestyle in retirement, but they do want to live out their golden years with dignity and financial independence. We need a retirement system that gives them the opportunity to do that.

US Senate HELP Committee | JULY 2012



Over the past two years, the Senate Committee on Health, Education, Labor and Pensions has held a series of hearings on the retirement system.18 The hearings have taken a hard look at key aspects of the retirement system, and they have provided a clear picture of the kinds of changes we need to ensure the system can work for everyone. Those changes can be boiled down into the following four basic principles:

1. The retirement system should be universal and automatic.

Most people realize that they should be preparing for retirement, but it is often difficult because they have more immediate concerns, like paying the bills and putting food on the table. And people are frequently overwhelmed by the complexity of the financial decisions they have to make.19 However, when saving is easy and automatic, people are much more likely to put money aside.20 By ensuring that every American has access to a retirement plan at work and making participation automatic, we can drastically reduce the retirement income deficit and promote retirement security.

2. The retirement system should give people certainty.

The retirement system should give people certainty that they will have a reliable source of income in retirement. It needs to provide people with the opportunity not just to save for retirement but also to secure a predictable stream of retirement income that they cannot outlive.

3. Retirement is a shared responsibility.

Individuals, employers, and the government all have a role to play in ensuring that every American has the opportunity to retire with dignity and financial independence. It is unfair for any one party to shoulder the burden alone.

4. Retirement assets should be pooled and professionally managed.

The retirement system should not force people to become investment experts. Most people simply do not have the background, interest, or time to manage their retirement funds effectively. Instead, it should give everyone access to prudent, professional asset management and allow people to pool their assets with others to reduce costs and risk, including the risk of living longer than expected.

These four principles should form the framework for developing comprehensive solutions to the retirement crisis. With a retirement income deficit of $6.6 trillion, the crisis is simply too big to ignore. We cannot continue to stand idly by as average Americans struggle to save for retirement and our seniors continue to slip into poverty.


US Senate HELP Committee | JULY 2012

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