Do Future Retirees Have a Future?

As people live longer, healthier lives, it is clear that institutions will have to adapt. Many are doing so: we now have specialized communities and residences, medical care, travel – even special online matchmaking services for senior. Pensions & retirement savings plans, however, have not kept pace.

After 40 years of protecting retirement security, folks are less secure.

Forty years ago, Democrats and Republicans in Congress worked with both business and labor to craft the Employee Retirement Income Security Act, ERISA. Forty years later, we don’t have more retirement security — we have less. Semanticians quibble whether this is a “crisis,” but today more people worry about their retirement than their health care. In the late ‘70s only 25 percent were concerned about their retirement; today it’s 61 percent — and rising. Many fear they can never retire at all.

What’s changed? Back then, only about half of private sector workers had an employer-provided retirement, but almost all of those that did had traditional (defined benefit) pensions with reliable retirement income for their entire lives after retirement (and often the lives of their spouses). Today, it remains sadly true that only about half of private sector workers have employer-provided retirement, but the majority who do have savings plans, not traditional pensions. Those plans are smaller and most are paid out as lump sums.

The consequences of these shifts are that the gross portion of income saved for retirement has declined and that marketing and transactional expenses have increased. The result is that net funds actually available for retirement have declined in proportion to the need. Much effort is being devoted to potential modifications to traditional savings plans to increase savings and to increasing the fraction of savings that provides lifetime annuity income. Thus far, it seems that neither tax incentives nor financial education efforts is particularly effective. So (except for DC tax lobbyists) attention is turning to making savings easier and more automatic.

2014: Surprisingly, a mixed year…

Notwithstanding the general pessimism about government (which was probably not helped by the election) in 2014, there were some important developments.

• Preserving Exising Pensions  Despite much controversy, the Republicans and Democrats in the House worked together to negotiate complex legislation that will enable some severely distressed multi-employer plans from becoming insolvent. Even more impressive, they passed it in both houses of Congress and it has become law. The Multi-employer Pension Reform Act of 2014 will both enable some plans to preserve benefits above the levels guaranteed by the Pension Benefit Guaranty Corporation (PBGC) and will provide funds to PBGC to prevent the failure of other plans. (Full disclosure: Until Labor Day, I was Director of the PBGC).

  Also important was the fact that Detroit and other cities found ways to go through bankruptcy without eliminating their pensions through a combination of benefit cuts, service cuts, and tax increases.

• Encouraging Lifetime Retirement Income  The Treasury Department continued efforts to facilitate lifetime income by enabling annuities to be a part of target-date savings plans. They and PBGC have also worked to allow people to move their funds from a 401k plan into a traditional defined-benefit pension, so that they can count on lifetime income from an institution they know.

  But, taking advantage of ill-conceived regulations whose original purpose was to protect retirees, many companies are eliminating their pension obligations by offering employees lump sum payouts at a discount from the true value of their pension. (Nor are they required to disclose this.) As a result, tens of thousands are losing lifetime retirement income, and getting less for it than they should.

• Expanding Coverage to Those Without Plans  At the Federal level, The President announced that Treasury would offer a voluntary savings plan, MyR(etirement)A(ccount) (but never to be pronounced “Myra”), allowing payroll deductions to purchase a special Federal bond. The most important efforts, however, are being made by states. Tired of waiting for Washington, 15 states (some led by Democrats, some by Republicans) are considering an “opt out” retirement plan for private sector workers whose companies don’t offer one. The state of Illinois has already enacted a program into law and many others are considering doing so.

The Year Ahead

With the widely-anticipated economic recovery, pension plan underfunding should abate somewhat, thereby reducing some of the pressure to eliminate these plans. Nonetheless, it is clear that many employers faced with the combination of funding and fiduciary risk are deciding they would prefer not to remain subject to those pressures. One important issue in such circumstances: will these companies exit by purchasing annuities for their employees, or simply eliminate their obligations by offering lump sum payouts at a discount?

There will also be continuing efforts both to market and improve retirement savings plans. The Department of Labor has, for several years, attempted to extend its fiduciary regulation to brokers who market individual retirement accounts; not surprisingly, those brokers argue strenuously that fiduciary obligations shouldn’t be applied to brokers who have relationships with both buyers and sellers.

What is more likely is that several states will decide to join Illinois and provide automatic, professionally managed, low-fee retirement programs for companies that lack them. This effort could provide additional retirement income to tens of millions. One suspects that, even though members of Congress of both parties despair of federal legislative consensus, they will look to the states privately with fingers crossed