A solution to the retirement crisis

Posted: 5 pm ET

There’s no question that America is suffering from a retirement crisis. Six out of 10 Americans have less than $25,000 saved up, according to the 2012 Retirement Confidence Survey from the Employee Benefit Research Institute. That doesn’t include the value of their homes or pension plans, but most people don’t have pension plans these days, plus many are losing their homes.

Lately some bigwigs in retirement policy have offered some creative solutions to the retirement crisis.

Teresa Ghilarducci, a professor of economics at the New School for Social Research who has testified before Congress on retirement matters, lambasted our failing retirement system in a recent New York Times op-ed titled, Our ridiculous approach to retirement. Her solution would be a secondary Social Security-like mandate. In her words:

My plan calls for a way out that would create guaranteed retirement accounts on top of Social Security. These accounts would be required, professionally managed, come with a guaranteed rate of return and pay out annuities.

That plan would require a higher payroll tax than what we already contribute to Social Security. As I recently relayed in a tweet, I prefer to invest in a 401(k) plan. That way I’m in control of at least part of my retirement planning .

More recently the government has proposed a new solution. Sen. Tom Harkin, D-Iowa, introduced a plan based on a series of hearings he held on the matter of retirement security as chairman of the U.S. Senate Committee on Health, Education, Labor & Pensions.

USA Retirement Funds

Harkin proposes a defined benefit solution — something akin to the old pension plan, but with some modifications — a hybrid pension of sorts. Companies would not have to bear the risks inherent in a pension plan. And those that already have 401(k) plans in place wouldn’t have to adopt it.

Harkin’s plan would rebuild the private pension system by providing universal access to Universal, Secure and Adaptable (‘USA’) Retirement Funds, according to his report, The Retirement Crisis and a Plan to Solve It.

The highlights of the retirement system are as follows:

• The new system would solve the longevity risk problem by providing a predictable stream of retirement income for life, as well as survivor benefits.
• Responsibility for the system would be shared by individuals, employers and government.
• The so-called USA Retirement Funds would be privately run and regulated plans, with trustee members composed of employer, employee and retiree representatives who would assume fiduciary duties.
• The benefits would be portable so that participants could move from one USA Retirement Fund to another as they make job changes.
• Employers could choose a particular USA Retirement Fund or use the default fund used in the industry, region or via collective bargaining.
• Low-wage earners would be eligible to get a refundable retirement savings credit.
• These USA funds would be cheap due to competition and economies of scale.
• They would have to be completely transparent about investment performance, funding levels and the projected level of retirement benefits based on contribution levels.
• Employers who do not already offer a retirement plan would have to automatically enroll employees, ensure that employee contributions are processed, and make modest contributions. Companies would receive a credit to offset the minimal administrative costs involved.

The proposal is long on ideals but short on particulars. What would be the default contribution rate? How much would employers have to contribute? Who would review the proposals from the mutual fund companies or institutional money managers? How many USA Retirement Funds would there be and how would they be selected?

An interesting factoid: The retirement benefit would be based on contributions and investment performance, but a protracted bear market may result in a smaller check for retirees and employees. But if the investment performance is good, they may get a bigger check. This raises another question: Does this mean checks may get smaller midway through retirement?

Employers wouldn’t have to adopt this retirement system if they already have one in place, but they could do so if they wanted to. And employees would not have to participate: They could opt out.

Harkin’s plan is still in the conceptual stages, but at least retirement industry lobbyists shouldn’t oppose it since it doesn’t call for change in the current 401(k) system. In fact, it presents new business opportunities for the industry. Whether it gets any traction in Congress is altogether another matter.

I like this plan because it lets individuals decide whether they’d like to participate. On the other hand, since participants would be automatically enrolled in the plan, widespread participation would be likely. It could help solve the retirement crisis.

What do you think?

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