AARP and the U.S. Chamber of Commerce organized a public meeting last week to urge efforts to repair the sad state of the nation's retirement programs. Representatives from both groups said any ideological differences between them paled alongside projections that tens of millions of Americans are staring at poverty-like retirements.
Acknowledgement of the widespread lack of sufficient retirement savings has been known for years and was hardly surprising. What is new: the idea that AARP and the Chamber of Commerce can come together on this issue, as the consequences of failing to act become more ominous and imminent with each passing year.
Social Security has a doomsday clock in the form of annual projections about when its trust funds will run out of money. That clock now reads 2033. There is no clock on the nation's broader retirement prospects and their largest component – employer-provided 401(k) retirement plans and individual retirement accounts. If there was, however, its readout would be a lot sooner than 2033.
The two organizations said they support three broad strategies to improve the standard of living for future retirees:
1. Allow all working Americans to have access to tax-deferred retirement savings programs. Only half of the nation's employees can even enroll in such plans today, and many people in that fortunate half don't even participate. The groups want employers who offer retirement plans to automatically enroll participants and to periodically increase their contributions.
2. Keep and strengthen tax incentives to encourage and support retirement savings. There are several proposals afloat to create a new type of retirement savings program for workers whose employers don't offer one. All of them depend on federal tax benefits to defer contributions from income taxes.
3. Expand and improve public education efforts. People need to know more about their future retirement needs for long-term care, out-of-pocket health care expenses and other costs. Social Security was never designed to cover all such expenses and averages less than $15,000 a year in payments to individuals.
In a speech last week, Putnam Investments CEO Robert Reynolds supported these strategies, particularly as they apply to 401(k) plans. He acknowledged there are many retirement challenges but stressed that 401(k)s are part of the solution, not the problem.
Reynolds did not talk about reports of high fees to 401(k) participants, the problems many employees encounter in making informed decisions about how to invest their savings or the fact that many people mistakenly take lump-sum distributions when they switch jobs instead of rolling over their plan balances into IRAs.
Instead, he emphasized that 401(k)s can meet an individual's retirement needs if he or she puts aside enough money and uses the plan improvements authorized by the Pension Protection Act of 2006. "We're actually closer to solving America's retirement challenge than most people realize," Reynolds said. "There's nothing wrong with the 401(k) that can't be fixed by what's right about the 401(k)."
To enjoy satisfactory retirements, many experts say people need to replace 80 to 85 percent of their pre-retirement incomes, including funds from Social Security, employer pensions and retirement plans, and private savings. Putnam research says people without 401(k)s fall far short of this goal, but the story changes for those who have access to the plans and actively use them.
Here are various income-replacement percentages, according to the company's research:
- People who do not have access to workplace retirement plans are on track to replace 41 percent of their income.
- Workers eligible for employer retirement plans: 73 percent
- Active participants in 401(k) plans: 79 percent
- Active participants in 401(k) plans using auto-enrollment features: 91 percent
- Active participants in 401(k) plans using auto-escalation contribution features: 95 percent
- Active participants in 401(k) plans who defer at least 10 percent of their salaries: 106 percent
"We're not talking about some tiny, outlying exception here," Reynolds said. "We estimate that nearly 23 million individual retirement savers are on track to replace more than 100 percent of current income in retirement – and they come from all income classes, not just the well-to-do."
Reynolds said automatic components of 401(k) plans should be made mandatory, not voluntary. "By spreading these practices across all existing [defined contribution] plans," he said, "we would lift the retirement readiness of more than 70 million working Americans."
He also supported the AARP-Chamber priority to expand workplace savings programs to all working Americans. Lastly, he said existing retirement plans should raise their baseline standards for employee contributions to 10 percent or even more.
"We really don't serve anyone well by allowing them to believe that saving 3 percent or 5 percent or even 7 percent is enough to ensure retirement readiness," he said.
The two issues that have frustrated attempts to expand retirement plans include opposition to mandatory participation and savings requirements, plus budget constraints on expanding tax deferrals to encourage broader use of the programs.
The tremendous success of the auto-enrollment provisions of 401(k) plans has provided support to the effectiveness of more required behaviors. While tax deferrals remain a difficult fiscal selling point, there is little doubt that the drain on the U.S. Department of Treasury will be much greater from paying for someone's Medicaid services than their retirement-plan tax deferrals.