Pension Policy

Consumer Agenda for Retirement Security

Initiative #1: Promote a more adequate and secure private retirement income system

A. Establish a cabinet-level committee or presidential commission to explore options for a new private retirement income system for the next generation of workers.

Our nation has come to rely on 401(k) plans as the anchor of our national private retirement income policy.  The financial meltdown has starkly exposed how these do-it-yourself savings plans carry far too much risk to ensure retirement security, and a consensus is emerging that 401(k) plans will not provide an adequate supplement to Social Security to the majority of American workers.  In part, this is because too many people fail to contribute or to contribute enough to these plans, but it is also because many participants often make poor investment allocation decisions, and investment options often have high investment management and administrative fees.  Finally, too many people consume assets before retirement, and in retirement often outlive their assets.

While it is important to make every effort to improve 401(k) plans in order to make them work better for current workers, it is also important to recognize that 401(k) plans were designed to be supplemental savings plans, not vehicles to provide adequate retirement income.  And even the best of reforms will not address their structural flaws.

The financial crisis has highlighted the importance of guaranteed pension plans that provide secure lifetime payouts.  But many companies are moving away from these plans, which place all of the responsibility and risk of retirement savings on employers.  While we should do everything possible to preserve and strengthen these traditional and hybrid defined benefit plans for employees now covered by these plans, there is also an urgent need to develop new plan types that incorporate the best elements of defined benefit plans and 401(k) plans for workers not now covered by private retirement plans.  For future workers, it is time to begin constructing a new model for ensuring retirement security.

A new system should reflect the fact that all taxpayers effectively pay for private and public retirement plans.  The federal tax subsidy for pensions and retirement savings plans is more than $100 billion this year.  This tax subsidy is meant to encourage retirement savings for all working people, but most of the subsidy benefits affluent employees who will save for retirement even without tax incentives.  Thus, lower-paid workers are, in effect, asked to pay more taxes to help higher-paid employees and business owners save for their retirement. 

A new system should be developed on top of Social Security that is universal.  Retirement money should be preserved for retirement (or disability).  It should be pooled and professionally invested, and, in combination with Social Security, should provide adequate, secure lifetime payouts to retirees and their surviving spouses.  There are elements of other systems that could be drawn on for inspiration for a new system, including the TIAA-CREF program for college teachers in this country, collective defined contribution plans used by a growing number of employers in the Netherlands, and Superannuation Funds in Australia.  A thoughtful and focused debate on how to better provide for our children’s retirement should be the heart of retirement policy for the new Administration and the next Congress.

The new Administration should appoint a cabinet-level committee or presidential commission to examine how the current system is working and create new retirement system options for the next generation of American workers.¹