[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]
INDIVIDUAL RETIREMENT ACCOUNTS (IRA's)
IN THE RETIREMENT SYSTEM
=======================================================================
HEARING
before the
SUBCOMMITTEE ON SELECT REVENUE MEASURES
of the
COMMITTEE ON WAYS AND MEANS
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED TENTH CONGRESS
SECOND SESSION
__________
JUNE 26, 2008
__________
Serial No. 110-90
__________
Printed for the use of the Committee on Ways and Means
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COMMITTEE ON WAYS AND MEANS
CHARLES B. RANGEL, New York, Chairman
FORTNEY PETE STARK, California JIM MCCRERY, Louisiana
SANDER M. LEVIN, Michigan WALLY HERGER, California
JIM MCDERMOTT, Washington DAVE CAMP, Michigan
JOHN LEWIS, Georgia JIM RAMSTAD, Minnesota
RICHARD E. NEAL, Massachusetts SAM JOHNSON, Texas
MICHAEL R. MCNULTY, New York PHIL ENGLISH, Pennsylvania
JOHN S. TANNER, Tennessee JERRY WELLER, Illinois
XAVIER BECERRA, California KENNY HULSHOF, Missouri
LLOYD DOGGETT, Texas RON LEWIS, Kentucky
EARL POMEROY, North Dakota KEVIN BRADY, Texas
STEPHANIE TUBBS JONES, Ohio THOMAS M. REYNOLDS, New York
MIKE THOMPSON, California PAUL RYAN, Wisconsin
JOHN B. LARSON, Connecticut ERIC CANTOR, Virginia
RAHM EMANUEL, Illinois JOHN LINDER, Georgia
EARL BLUMENAUER, Oregon DEVIN NUNES, California
RON KIND, Wisconsin PAT TIBERI, Ohio
BILL PASCRELL, JR., New Jersey JON PORTER, Nevada
SHELLEY BERKLEY, Nevada
JOSEPH CROWLEY, New York
CHRIS VAN HOLLEN, Maryland
KENDRICK MEEK, Florida
ALLYSON Y. SCHWARTZ, Pennsylvania
ARTUR DAVIS, Alabama
Janice Mays, Chief Counsel and Staff Director
Brett Loper, Minority Staff Director
______
SUBCOMMITTEE ON SELECT REVENUE MEASURES
RICHARD E. NEAL, Massachusetts, Chairman
LLOYD DOGGETT, Texas PHIL ENGLISH, Pennsylvania
MIKE THOMPSON, California THOMAS M. REYNOLDS, New York
JOHN B. LARSON, Connecticut ERIC CANTOR, Virginia
ALLYSON Y. SCHWARTZ, Pennsylvania JOHN LINDER, Georgia
JIM McDERMOTT, Washington PAUL RYAN, Wisconsin
RAHM EMANUEL, Illinois
EARL BLUMENAUER, Oregon
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C O N T E N T S
Page______
Advisory of June 18, 2008 announcing the hearing................. 2
WITNESSES
The Honorable Ron Kind, a Representative from the State of
Wisconsin...................................................... 6
The Honorable Kenny C. Hulshof, a Representative from the State
of Missouri.................................................... 9
Barbara Bovbjerg, Director, Education, Workforce and Income
Security Issues, U.S. Government Accountability Office......... 14
W. Thomas Reeder, Benefits Tax Counsel, Office of Tax Policy,
U.S. Department of the Treasury................................ 59
Bradford Campbell, Assistant Secretary of Labor, Employee
Benefits Security Administration, U.S. Department of Labor..... 49
______
Leo Estrada Ph.D., Professor of Urban Planning, University of
California, on behalf of AARP.................................. 80
J. Mark Iwry, Nonresident Senior Fellow, The Brookings
Institution; Principal, The Retirement Security Project and
Research Professor, Georgetown University...................... 93
Dallas Salisbury, President and Chief Executive Officer, Employee
Benefit Research Institute (EBRI).............................. 117
Ross Eisenbrey, Vice President, Economic Policy Institute........ 123
Randolf Hardock, Davis & Harman, on behalf of The Savings
Coalition of America........................................... 133
SUBMISSIONS FOR THE RECORD
American Council of Life Insurers, Statement..................... 155
Andrea Levere, Letter............................................ 156
Massachusetts Mutual Life Insurance Company, Statement........... 160
The Workplace Savings Working Group, Statement................... 161
INDIVIDUAL RETIREMENT ACCOUNTS (IRA's)
IN THE RETIREMENT SYSTEM
----------
THURSDAY, JUNE 26, 2008
U.S. House of Representatives,
Committee on Ways and Means,
Subcommittee on Select Revenue Measures,
Washington, DC.
The Subcommittee met, pursuant to notice, at 10:05 a.m., in
room 1100, Longworth House Office Building, the Honorable
Richard E. Neal [Chairman of the Subcommittee] presiding.
[The advisory of the hearing follows:]
ADVISORY FROM THE COMMITTEE ON WAYS AND MEANS
SUBCOMMITTEE ON SELECT REVENUE MEASURES
CONTACT: (202) 225-5522
FOR IMMEDIATE RELEASE
June 19, 2008
SRM-10
Neal Announces Hearing on
Individual Retirement Accounts (IRAs)
and their role in our retirement system
House Ways and Means Select Revenue Measures Subcommittee Chairman
Richard E. Neal (D-MA) announced today that the Subcommittee on Select
Revenue Measures will hold a hearing on the role of Individual
Retirement Accounts (IRAs) in our retirement system. The hearing will
take place on Thursday, June 26, 2008, in the main Committee hearing
room, 1100 Longworth House Office Building, beginning at 10:00 a.m.
Oral testimony at this hearing will be limited to invited witnesses
only. However, any individual or organization not scheduled for an oral
appearance may submit a written statement for consideration by the
Committee and for inclusion in the printed record of the hearing.
FOCUS OF THE HEARING:
The hearing will focus on the recently issued report by the
Government Accountability Office (GAO), entitled Individual Retirement
Accounts, Government Actions Could Encourage More Employers to Offer
IRAs to Employees, June 2008; the role of IRAs in our retirement
system; and legislative proposals for automatic IRA enrollment.
BACKGROUND:
More than 30 years ago, Congress created IRAs to provide workers
not covered by a pension plan with an option to save for retirement.
The need for workers to preserve their retirement savings when they
change employment was the basis for further Congressional action
utilizing IRAs in a worker's ability to roll over savings from an
employer-sponsored plan. This rollover option accounts for the majority
of assets held in IRAs.
In addition, Congress has used IRAs as an incentive for small
employers to provide retirement plans for their workers. In 1978, the
Simplified Employee Pension (SEP) was created. Under a SEP, an employer
with 25 or fewer eligible employees can establish an IRA for each
eligible employee. Salary reduction contributions are made to the IRA
on the employee's behalf. Another option for small employers is the
Savings Incentive Match Plan for Employees (SIMPLE), created in 1996.
Under a SIMPLE, employers with 100 or fewer employees can establish an
IRA for each eligible employee. The employee makes elective deferrals
to the IRA and the employer makes certain matching contributions. There
is also the payroll deduction program which allows the employer to make
payroll deductions which are contributed to an IRA established by the
employee. These various types of IRAs are in addition to traditional
IRAs and Roth IRAs. Traditional IRAs allow eligible individuals to make
tax-deductible contributions to the account, and investment earnings
accumulate on a tax-deferred basis. Certain income limits apply and
distributions are taxable. The Roth IRA allows eligible individuals to
make after-tax contributions with generally tax-free investment
earnings. Certain income limits apply and distributions are tax-free.
In announcing the hearing, Chairman Neal stated, ``I have always
been a strong advocate for creating retirement savings opportunities
for every American. That is why I have introduced legislation, along
with several co-sponsors, to create automatic payroll deposit IRAs for
workers who do not have access to employer-sponsored pension plans. The
bill would require employers to automatically enroll employees in a
payroll deduction IRA unless the employee opts out. Our proposal could
raise the national savings rate by nearly $8 billion annually. This
hearing will explore these ideas along with other issues related to
IRAs.''
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Chairman NEAL. Let me call this meeting to order. I hope
that our guests would take their seats. I want to welcome
everyone to this hearing on the role of Individual Retirement
Accounts, or IRAs, by the Subcommittee on Select Revenue
Measures.
By way of introduction, I think that my bipartisan
credentials on this issue have been pretty sound. I incurred,
as a young Member of this Committee many years ago--let's put
it this way. I increased my name recognition with Chairman
Rostenkowski in my push to expand IRA limits. At that time, his
argument was fairly simple, and it's still something we need to
be mindful of, making sure that the basis of the IRA is not
just to allow wealthy people to save more.
At the same time, I worked with the former Chairman of this
Committee, before he was the Chairman, to expand IRA limits. We
had a great deal of success back in the mid-1990s.
You have all probably heard of the three-legged stool meant
to prop up retirees in their golden years. That is Social
Security, pensions, and savings. Today we will be discussing
personal savings, and why the national savings rate continues
to decline. As you can see from the slide I hope will be
displayed as I speak, our personal savings rate has declined
over the decades to a paltry one-half of 1 percent since 2005.
IRAs have existed for decades now with the hopes that those
without employer plans would save on their own. Yet, we are
still faced with under-utilization by the intended targets. GAO
recently projected that 37 percent of all workers will retire
with 0 plan savings. That of young and low income workers, 63
percent will have no plan savings at retirement.
Clearly, we must do more to foster personal savings. We
must begin to think more creatively, and use innovation to
capture this group of workers who are not saving. One of the
vehicles is the auto-IRA, which Mr. English and I have
sponsored here in the House. I really think that this could get
done next year.
With 75 million workers with no access to a workplace
retirement plan, and only 10 percent of these workers saving on
their own, clearly the current incentives are not working.
Today's hearing will explore these issues and other ideas to
reach out to those who should be saving more.
As George Foreman observed--and I quote--``The question
isn't at what age I want to retire, it's at what income.'' If
only we all had this same observation in our twenties, we
wouldn't be fighting so hard to save in our fifties.
With that, I recognize my friend, Mr. English, for his
opening statement.
Mr. ENGLISH. Thank you, Mr. Chairman. Mr. Chairman, I find
myself entirely in agreement with the thrust of your remarks. I
want to express my gratitude to you for having this hearing,
and creating an opportunity to build toward an expansion of
IRAs, and potentially the addition of the auto-IRA, which I
have been privileged to join you in sponsoring in the House of
Representatives
The issue of improving our retirement savings system is one
that certainly lends itself to bipartisanship. It is
particularly important to me, as co-Chairman of the
Congressional Savings and Ownership Caucus. Clearly, we need to
do more to encourage all Americans to save for retirement. We
need to work together to find creative solutions.
The U.S. retirement savings system has been described by
many, as well as yourself, Mr. Chairman, as that three-legged
stool, with Social Security, employer-based retirement plans,
and personal savings constituting each of those legs.
The first leg, Social Security, covers workers on a near
universal basis. But the benefits of the program are limited by
statute. The system itself faces significant financial
challenges over future decades, due to changes in demographics.
The second leg, employer-based retirement savings plans,
includes both traditional defined benefit pension plans, and
more recently established defined contribution arrangements,
such as the now-familiar 401(k) plan. Such employer-based plans
are estimated to cover only about one-half of the workforce.
Although three-quarters of the workers whose employers
currently offer such a plan do participate in it, an estimated
75 million American workers are employed by businesses,
typically small businesses, which do not offer such a plan.
The third leg of the retirement stool is personal savings.
Unfortunately, the personal savings rate, which averaged about
9 percent during the 1960s, 1970s, and 1980s, now has been on
steady decline for a generation. Alarmingly, the personal
savings rate has been less than one percent in every quarter
since 2005. This constitutes a quiet crisis that is a core
challenge to the competitiveness of our economy.
Congress has enacted numerous tax incentives over the past
several decades designed to encourage retirement savings, both
through employer-based plans, and through individually owned
savings plans. This hearing will focus on one such set of
retirement savings vehicles: in particular, IRAs.
IRAs were first created in their traditional form in 1974,
and they have been expanded repeatedly since. As we're going to
hear from our witnesses today, these savings vehicles play a
significant role in the U.S. retirement system. More assets are
held in IRAs than any other type of retirement savings
arrangement, including 401(k) plans.
Due to ongoing concerns regarding the retirement savings
patters of Americans, especially among low and middle-income
individuals, I have been excited to pursue proposals to expand
IRAs, particularly, Mr. Chairman, your proposal to create an
automatic IRA. Building on the success of similar initiatives,
I believe this tool has the potential to fundamentally expand
savings opportunities for millions of Americans, and generate
billions of dollars in new savings.
Mr. Chairman, I look forward to hearing from the
distinguished panels that you have arranged for this morning,
and I am hopeful that their testimony will help us develop
creative solutions--and I hope also, a groundswell of support
in the House for the initiative you have outlined. Thank you
very much.
Chairman NEAL. Thank you, Mr. English. Consistent with that
principle of the distinguished, we have two Members of the
Committee, Mr. Kind and Mr. Hulshof, and together they will
advocate for legislation modifying SIMPLE plans.
On our second panel, we will hear from government
witnesses, starting with Mrs. Barbara Bovbjerg, the Director of
Education, Workforce, and Income Security Issues at the GAO.
Next, we will hear from Mr. Tom Reeder, the Benefits Tax
Counsel in the Office of Tax Policy at the Treasury Department.
Then we will hear from Mr. Bradford Campbell, the Assistant
Secretary in the Employee Benefits Security Administration at
the Labor Department.
Our third panel will allow us to welcome a number of
witnesses from the private sector, beginning with Dr. Leo
Estrada, a board member of AARP, and a Professor of Urban
Planning at UCLA. We also will welcome Mark Iwry, who is a
fellow at the Brookings, a Professor at Georgetown, and a
Principal at the Retirement Security Project, but still finds
time to share his thoughts this morning with the congress.
Next we will hear from Mr. Dallas Salisbury, the President
and CEO of the Employee Benefit Research Institute. We also
welcome Ross Eisenbrey, Vice President for the Economic Policy
Institute. Finally, we will welcome Randy Hardock of Davis &
Harman, who will be testifying on behalf of The Savings
Coalition of America, whom, I might point out, I worked with
back in the early and mid-1990s.
Without objection, any other Members wishing to insert
statements as part of the record may do so. All written
statements written by the witnesses will be inserted into the
record, as well.
I recognize Mr. Kind.
STATEMENT OF THE HONORABLE RON KIND, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF WISCONSIN
Mr. KIND. Thank you, Mr. Chairman, and Ranking Member
English, Members of the Committee. It's kind of fun to be on
this side of the table, isn't it Kenny, for a change?
But we really appreciate the opportunity to testify today.
I think both you and Mr. English teed up the issue very, very
well. I couldn't be more supportive of the proposal of
automatic IRA legislation that you have introduced.
I think one of the best things we did with pension and
reform legislation a few years back was call for automatic
enrollment of 401(k)s, because we all know one of the greatest
obstacles to increase individual savings in this country is,
quite frankly, inertia, just getting people to do something.
So, automatic enrollment, I think, would be a tremendously
helpful and beneficial step to try to increase the individual
savings rate.
But you have both highlighted what the problem is. We have
an effective zero percent on an individual savings rate right
now in the country. You couple that with the bad savings on the
public ledger side of things, too, and all three legs of the
retirement savings stool is in great jeopardy today.
We know we have some long-term fiscal challenges dealing
with the solvency of social security. We have had a dramatic
decline in defined pension plans throughout the country, from
roughly 65 percent from 1979 to a little bit under 10 percent
today. We are not doing enough, I feel, to encourage and
incentivize greater individual savings opportunities for
employees throughout the country.
But as Mr. Hulshof and I were looking into this, there was
a real glaring hole out there that we felt needed to be
addressed, and that was the savings options or opportunities
for employees in small businesses. Because today there just
isn't a lot of participation along these lines, even though
back in 1996--as this Committee is well aware--with the
creation of SIMPLE 401(k)s and SIMPLE IRAs, it was meant to get
at this pool of workers to make it easier for them to set up
their own savings.
Now, here we are, 12 years later, there really hasn't been
any reform or changes or modifications based on what we have
learned. We have learned a lot during that time: the fact that
there aren't that many plans still being offered, because in
most instances for small employers, it's either too
complicated, too costly, or there is--it's a somewhat risky
endeavor. That was the impetus behind the legislation that we
have introduced, H.R. 5160, or The Small Business Add Value for
Employees Act, the SAVE Act. I thank Mr. English for being one
of the original cosponsors on the legislation, as well.
With your insistence, Mr. Chairman, what's helpful is the
recent GAO report that came out this month. The recommendations
that they're making is very consistent with many of the
proposals that we're offering in this legislation, to try to
increase and incentive the opportunities for employers to offer
IRA savings opportunities for more employees, because the
numbers are very stark.
Today we know that only 14 percent of small businesses
offer a 401(k) plan; 63 percent of small businesses throughout
the country offer no savings option at all to their employees.
That's roughly 71 million workers in small businesses that
don't have a plan that they can participate in, even if they
wanted to. That's a lot of people who are being left behind,
and perhaps the most vulnerable population that we have, when
it comes to retirement security and needs.
But let me just quickly and briefly summarize what the
legislation would try to address, both the complexity, the
cost, and some of the risky endeavors that small employers are
facing.
We are trying to increase flexibility for employers under
the legislation, and it would remove the requirement that
SIMPLE IRA plans operate only on a calendar ear basis.
Authorizing small businessowners to make mid-year changes to
their SIMPLE plans ensures that businessowners need not wait
until the beginning of the year to move to a new retirement
plan.
The SAVE Act also would change outdated SIMPLE IRA rules
that unnecessarily restrict an employer's ability to contribute
to the employee savings. Under current law, the employer is not
permitted to match more than three percent of the employee's
salary, and make more than 2 percent non-elective contribution
to workers' accounts. The SAVE Act would remove this
restriction, and allow employers to make additional
contributions to all participants' accounts.
We are also trying to increase incentives for employers to
just offer more SIMPLE IRAs to their employees. The Act would
make a number of important reforms with this goal.
First, it would create a new automatic IRA option under the
Internal Revenue Code. Although we still leave it discretionary
with the employer, whether they want to have an automatic
enrollment--and I think that's something we can have a further
conversation about, as far as modifying the legislation that
we're offering--automatic IRAs would provide a relatively
simple and cost-effective way to increase retirement security
for those 71 million employees who sometimes aren't taking
steps in order to increase their own savings.
Also, the SAVE Act would increase the small employer
pension plan startup cost credit for small businessowners to 50
percent of the startup cost. This, again, is consistent with
some of the findings of that GAO report that just came out this
month.
It would also allow a one-time $25 tax credit for every new
employee who is enrolled in the savings program.
Finally, it increases incentives for employees to
participate in SIMPLE IRA plans, and would update the annual
contribution limits. Employees covered under the 401(k) plans
today are permitted to save up to $15,500, annually. But small
business employees can only save $10,500 annually, under a
SIMPLE IRA. We're just bringing that to parity, and we see no
reason why there is a distinction or discrimination with SIMPLE
IRAs, given the contribution limits of 401(k)s.
So, we think, you know, this legislation, if we can move it
forward in a bipartisan fashion, I think addresses the
interests and the concerns that you, Mr. Chairman, and Mr.
English, and others on the Committee are trying to get at
through this hearing and through important legislation that you
have addressed.
We are trying to reach those 71 million or so employees in
small businesses that don't have an opportunity to save, while
addressing some of the concerns and feedback that we were
getting from small business employers throughout the country--
cost, complexity, some of the risks involved--through the
incentives that we have built into this legislation.
So, thank you again for the opportunity to testify today.
We look forward to working with you and others on the Committee
to move forward on this. Thank you.
[The prepared statement of the Honorable Mr. Kind follows:]
Statement of The Honorable Ron Kind,
a Representative from the State of Wisconsin
Chairman Neal, Ranking Member English and other Members of the
Subcommittee, thank you for the opportunity to testify today.
As a first term Member of the House Ways and Means Committee, I
decided early on to focus much of my work on issues and concerns
relating to small businesses. I did this for the simple fact that my
district has a large number small businesses. In fact, Wisconsin as a
whole has 447,000 small businesses which employ a higher than national
average of 54 percent of the workforce.
Earlier this year I held several small business forums in my
district where I continuously heard that retirement and savings issues
were a top concern. As I dug into the issue I discovered that the
majority of small businesses don't offer any retirement savings plans
to employees because it is often a complicated, costly, and a somewhat
risky endeavor.
Small business owners often wear multiple hats and simply do not
have enough time and resources to devote to administering a complicated
financial product. According to a survey of small businesses conducted
by Harris Interactive, only 14 percent of small businesses offer a
401(k) plan and 63 percent do not offer any form of retirement benefits
at all.
That is why I, along with my friend and colleague Rep. Kenny
Hulshof, introduced H.R. 5160, the Small Businesses Add Value for
Employees (SAVE) Act of 2008, to make several enhancements to the
existing SIMPLE IRA and SIMPLE 401(k) retirement plans. These changes
are supported by many in the small business community and the
retirement industry in general as common sense approaches to encourage
small business owners to offer savings plans to their employees.
As you may know, SIMPLE IRA and SIMPLE 401(k) plans were created in
1996 to address the need for an easy way to administer savings plans
for small businesses of 100 employees or less. Since 1996, thousands of
small businesses have taken advantage of the new plans, with almost 2
million workers now covered by a SIMPLE IRA.
Very little modifications have been made to the SIMPLE IRA since it
was first created. On one hand, this is a good thing since we do not
want to discourage small employers by constantly tinkering with the
mechanics of the program, making it more costly to administer. On the
other hand, after over ten years of operation, I do think the SIMPLE
IRA is ready for some modernization.
The SAVE Act would help accomplish this goal by helping minimize
the barriers to small business retirement plan sponsorship through a
number of important changes:
To increase flexibility for employers, H.R. 5160 would remove the
requirement that SIMPLE IRA plans operate only on a calendar year
basis. Authorizing small business owners to make mid-year changes to
their SIMPLE plans ensures that business owners need not wait until the
beginning of the year to move to a new retirement plan.
The SAVE Act also would change outdated SIMPLE IRA rules that
unnecessarily restrict an employer's ability to contribute to their
employees' savings. Under current law, an employer is not permitted to
match more than 3 percent of the employees salary or make more than a 2
percent nonelective contribution to workers' accounts. H.R. 5160 would
remove this restriction and allow employers to make additional
contributions to all participants' accounts.
To increase incentives for employers to offer SIMPLE IRAs, the SAVE
Act would make a number of important reforms. First, the SAVE Act would
create a new Automatic IRA option under the Internal Revenue Code.
Automatic IRAs would provide a relatively simple and cost-effective way
to increase retirement security for the estimated 71 million workers
whose employers do not sponsor plans. The Automatic IRA option would be
voluntary on the part of the small business owner, but would require
participating owners to automatically enroll employees in the plan.
Second, the SAVE Act would increase the Small Employer
Pension Plan Start-up Cost Credit for small business owners to 50
percent of the start-up costs for new SIMPLE IRA plans and would allow
for a one-time $25 tax credit for every new employee who is enrolled in
the savings program.
Lastly, to increase incentives for employees to participate in
SIMPLE IRA plans, the SAVE Act would update annual contribution limits.
Currently, although employees covered under a 401(k) plan are permitted
to save up to $15,500 annually, a small business worker can save only
up to $10,500 annually in a SIMPLE IRA. I see no reason to continue a
policy that discriminates against small business owners, particularly
at a time when we are trying to encourage Americans to increase their
personal savings.
In conclusion, Chairman Neal, I greatly appreciate the opportunity
to testify today and to highlight this important legislation to improve
the rules that govern SIMPLE retirement plans. Larger pools of savings
will have positive benefits for economic growth. By encouraging
savings, the amount of capital available for investment will increase,
which is a primary source of job creation and worker productivity. I
look forward to working with you and the other Members of the
subcommittee to see these and other important reforms enacted.
Chairman NEAL. Thank you, Mr. Kind.
Mr. Hulshof.
STATEMENT OF THE HONORABLE KENNY C. HULSHOF, A REPRESENTATIVE
IN CONGRESS FROM THE STATE OF MISSOURI
Mr. HULSHOF. Thank you, Mr. Chairman. As you made your
opening statement, you referenced a former Chairman of this
Committee, Mr. Rostenkowski. Note, as he gazes down upon us,
the trace of a smile on his portrait. I'm sure he was
recognizing the wisdom that you had regarding IRAs at an early
time on this Committee. I am certain that that's why he has
such a pleasant expression.
Chairman NEAL. I also will assure you he still remembers--
--
[Laughter.]
Mr. HULSHOF. You and I, Mr. Chairman, have had the
opportunity to respectfully discuss, perhaps debate, in a
number of arenas. I remember in the Rayburn hearing room on
Social Security we talked about the challenges of solvency, and
the timing, and the eminence of those. I think you have
adequately touched on that, as has my friend, Ron.
The first baby boomer began to retire on January 1 of this
year. If tradition holds, one out of every 2 senior citizens at
the age of 62 will opt out for early retirement. So, whether
that number continues to hold, or whether they continue to stay
strong in the work force, we don't know. But, obviously, time
is of the essence, as we look at what can we do for this arena
of retirement.
Now, I think we should also highlight the fact that this
Committee has distinguished itself over the course of years of
working in a bipartisan way to address the pension challenges.
Our former colleague, Mr. Portman from Ohio, our former
colleague, Mr. Cardin--now in the other body--from the State of
Maryland did some tremendous work in the whole areas of
pension, especially as we began to move the discussion away
from defined benefits to defined contributions.
So, this Committee has a great record, I think, as far as
helping prepare for those golden years. I am not sure that
Kind-Hulshof will roll off the tongue, or be as significant as
Portman and Cardin, but nonetheless, we're here because we
think that we are on the right track.
In fact, as--we had these discussions before the GAO report
really came out, and we saw that we were at least on the same
page in many of these important aspects as far as providing
some updates to the SIMPLE plans, and I think Ron has touched
on them fairly significantly.
If I were to summarize what we hope to accomplish by the
SAVE Act, it would simply be flexibility and portability. As
Ron talked about, the flexibility for small businesses, you
know, some of these are--in fact, I'm not quite sure even--that
there were these obstacles in place, but we have seen now--and
as Ron pointed out, but as I would also cite--that in a 2005
publication of the Investment Company Institute's perspective,
the number of SIMPLE IRA plans had been growing at an average
of about 25 percent per year between 1998 and 2003. But we want
to expand those opportunities, and providing flexibility for
small businesses is a way to do that.
On the other end of it, though, for the employee,
portability. You know, again, we are such a mobile work force,
that having the opportunity, then, to have universal
portability by allowing rollover assets into other qualified
plans I think is another feature of our bill that should enjoy
some pretty strong support.
You know, our Nation, Mr. Chairman, was built on the backs
of able and willing entrepreneurs who, with a little faith and
a lot of ingenuity, started businesses in the hopes of
achieving the American dream. These small businesses have been
enormously successful, and of course, drive our National
economy to the greatest degree. They have to surpass numerous
hurdles to making those businesses survive and grow.
Of course, attracting the most talented, bright workers to
participate in that American dream, attracting those employees
is crucial to their growth, and offering the employer-sponsored
retirement plans such as a SIMPLE IRA or 401(k) certainly helps
that goal.
So, I would like to thank my friend from the State of
Wisconsin for his willingness to yet again reach across the
aisle, and for us to have the opportunity to work together.
Thank you, Mr. Chairman, for giving us this opportunity for a
hearing to highlight some of the things that we think would
move us forward, as far as providing more flexibility and
portability in the pension arena.
[The prepared statement of the Honorable Mr. Hulshof
follows:]
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Chairman NEAL. Thank you both for your very sound
testimony. Are there questions of our two panelists?
The gentleman from California, Mr. Thompson, is recognized.
Mr. THOMPSON. Thank you, Mr. Chairman. I don't have a
question, I just want to thank both of you for being here
today. This is an extremely important issue for all of our
constituents in all of our districts. We need to do everything
we can to make sure that people are prepared and have the
retirement--the financial retirement--security they need in
order to live a gainful life during those retirement years. So,
thank you very much.
Chairman NEAL. We thank you both for your testimony.
Mr. THOMPSON. Thank you, Mr. Chairman.
Chairman NEAL. Could we have the next panel? Ms. Bovbjerg,
are you ready to proceed?
Ms. BOVBJERG. Yes, Sir, I am. Thank you.
Chairman NEAL. Please.
STATEMENT OF BARBARA BOVBJERG, DIRECTOR, EDUCATION, WORKFORCE
AND INCOME SECURITY ISSUES, U.S. GOVERNMENT ACCOUNTABILITY
OFFICE
Ms. BOVBJERG. Mr. Chairman, Members of the Subcommittee, I
am really pleased to be here today to speak about Individual
Retirement Accounts, and their role in retirement saving.
Congress created IRAs in 1974 to help build and preserve
retirement savings, and over time, has developed a variety of
these accounts, including the traditional IRAs, Roth IRAs, and
several types of workplace-based IRAs, such as SIMPLE IRAs,
SEPs, and payroll deduction IRAs.
My testimony today focuses on: the role of IRAs in
retirement saving; the prevalence of workplace-based IRAs and
the barriers that limit access to them; and finally, the ways
that government agencies can help. My statement is based upon a
report we issued recently for Ways and Means on this topic.
First, let me speak on the role of IRAs. Although intended
to generate, as well as preserve retirement savings, IRAs today
gain most of their assets from transfers--we call them
rollovers--from other retirement accounts, such as 401(k)'s.
Between 1998 and 2004, over 80 percent of funds flowing into
IRAs came from other accounts. This means IRAs are an effective
and important means to preserve retirement assets already
saved, but play a significantly smaller role in building such
savings.
Also, IRA ownership is limited, and is skewed toward
households with relatively high earnings levels and educational
attainment. In other words, people who have resources are more
likely to have IRAs than people who do not.
Those who own IRAs are more likely to have traditional
IRAs, set up by individuals on a tax-deferred basis. A smaller,
but growing, number of people hold Roth IRAs, in which
individuals make aftertax contributions, but take tax-free
distributions in the future.
I would like to turn now to IRAs offered through the
workplace. To address the issue of low retirement plan
sponsorship among small employers, Congress created SEP and
SIMPLE employer-sponsored IRAs. Labor also issued a regulation
under which an employer could, without being considered a plan
sponsor under ERISA, maintain a payroll deduction program for
workers to contribute to IRAs.
Individuals are thought to be more likely to save for
retirement if payroll deduction and other workplace
arrangements are available to make saving easy and routine, and
the limited regulation of these types of IRAs is designed to
encourage employers to offer them.
But such arrangements for workers appear to be relatively
rare, although there are little data available. According to
Labor data, only about eight percent of workers in small firms
have SIMPLE IRAs. Only about 2 percent of them have SEP IRAs.
Data are not available at all for payroll deduction IRAs.
In interviews we conducted, experts pointed to a range of
possible barriers, including: administrative cost, especially
for small employers who don't have automated payroll systems; a
lack of incentive for employers; a perceived lack of
flexibility in promoting such plans to employees; and simply a
lack of awareness of these arrangements.
This leads me to my third point: how government can help.
Clearly, Federal agencies have much to do to better publicize
these options, and support the very small employers who need
help to administer payroll deduction arrangements. They also
need better aggregate data on use of such options, and what
employers need.
We have made recommendations to Labor and IRS to develop
more regular and informative data collection that we believe
will lead to better targeting of these programs to assure
higher employer participation. If the government is successful
in encouraging a higher employer take-up of these options--
which we believe will result in higher retirement saving--it
will be important to develop an oversight strategy that
balances the inducement of limited regulation against the need
to assure that contributions are going to the IRAs set up to
receive them.
This is why we have recommended that Congress consider
assigning authority over payroll deduction IRAs, where
currently there is no clear regulatory jurisdiction. This will
be especially important if other policy changes are adopted,
such as the auto-IRA proposals that are under consideration.
In conclusion, the IRA is an excellent and well-used means
to preserve retirement assets that have already been saved. But
it is under-utilized as a means to build saving. It's
particularly disappointing that payroll deduction IRAs, which
require so little of employers, are so seldom offered.
Government can and should do more to encourage and oversee
these savings arrangements to help all Americans better prepare
for their retirement future.
That concludes my statement. I hope I can submit my written
statement for the record, and I await your questions.
[The prepared statement of Ms. Bovbjerg follows:]
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Chairman NEAL. You certainly can.
Mr. Campbell.
STATEMENT OF BRADFORD P. CAMPBELL, ASSISTANT SECRETARY OF
LABOR, EMPLOYEE BENEFITS SECURITY ADMINISTRATION, U.S.
DEPARTMENT OF LABOR
Mr. CAMPBELL Thank you, Mr. Chairman. Chairman Neal,
Ranking Member English, and the other Members of the
Subcommittee, I very much appreciate the opportunity to come
here today to discuss the Department's efforts to promote and
also protect the interests of workers in employer-sponsored
IRAs.
My name is Bradford Campbell, I am the Assistant Secretary
of Labor for the Employee Benefit Security Administration. Our
mission is to protect the retirement security of--the security
of retirement health and other employer-provided benefits in
the private sector. We are committed to promoting policies that
encourage retirement savings, and protect employer-sponsored
benefits.
Employers today can choose from an array of retirement plan
designs that were created by Congress to make it easier for
Americans to save. IRAs are an important vehicle among these
options that may encourage small employers, in particular, to
provide retirement programs for their workers. Employer-
sponsored IRAs, such as SEPs and SIMPLEs are employee benefit
plans under ERISA that were designed specifically to address
these concerns of small businesses.
The Department has jurisdiction over employer-sponsored
IRAs, and is responsible for their oversight and for their
compliance with ERISA's fiduciary standards. In our oversight
role, we employ a comprehensive, integrated approach which
encompasses programs for: compliance assistance; interpretative
guidance; prohibited transaction exemptions; education and
outreach to small businesses, as well as workers; enforcement
and participant assistance directly to workers who have
questions about their plans.
By contrast, payroll deduction IRAs are not employer-
sponsored plans subject to ERISA, but are individually owned
IRAs that merely make use of an employer's payroll process to
withhold and forward contributions to the individual's IRA. Our
guidance that we issued helps employers ensure that their
payroll deduction arrangements are not ERISA plans, and
therefore, do not carry with them the associated reporting
burdens, and so forth, as Congress intended. But, as with other
individual IRAs, the IRS oversees and enforces the law with
respect to payroll deduction IRAs.
The Department believes that this current oversight
structure for IRA retirement programs is appropriate, and we
would oppose changes in current law that would shift to the
Department the oversight of retirement programs that are not
employer-sponsored, such as payroll deduction IRAs.
We have devoted significant resources to assisting small
employers in choosing a retirement program through
comprehensive education and outreach and regulatory programs.
These initiatives include publications that we have developed,
in consultation with the IRS. I have a few of them here today:
``Choosing a Retirement Solution for your Small Business'' is
one; ``SEP Retirement Plans for Small Businesses;'' ``Simple
IRA Plans for Small Businesses;'' and also a ``Payroll
Deduction IRAs for Small Businesses,'' which helps employers
know how to structure these arrangements.
We have also recently issued a DVD which goes through the
real-life experiences of several small employers, as they
evaluated their operations and decided which of these plans to
choose. We have partnered with the American Institute of
Certified Public Accountants, as well as the Chamber of
Commerce and some other organizations, to help us reach out to
small businesses to work with them and their service providers
to make plans more available.
We also have a very active participant assistance program
that helps individuals with their benefits questions and
problems. Our benefits advisors provide information, but they
also seek informal resolution of complaints. If appropriate,
they refer those complaints on for investigation.
Since October of 2006, our benefits advisors have resolved
183 complaints involving missing contributions to SIMPLE and
SEP IRAs and, through informal dispute resolution, recovered
just over $1 million on behalf of about 1,000 workers.
In addition, these complaints resulted in 157 cases
referred for investigation.
Now, we match our enforcement--or our outreach and our
assistance with very strong enforcement and oversight. Overall,
EBSA, which, in our mission of protecting all employer-provided
benefits, has been reporting results in recent years that are
nearly double those of the previous years. Last year we had
about 1.5 billion in civil results, and about 115 criminal
indictments resulting from our investigations. Since 2001, that
has been approximately 11 billion in civil results, and over
800 criminal indictments.
With respect to SIMPLE and SEP IRAs, in the past 3 fiscal
years we have had enforcement results of about 1.2 million.
Most of those violations involved the failure to forward
contributions, or failure timely forward contributions to the
IRA.
Given the size of the employer-sponsored plan and IRA
universe, we believe that our integrated approach is effective,
very effective, in providing compliance assistance,
interpretative guidance, and strong enforcement. We work
closely with the IRS and the Treasury Department to conduct
enforcement, as well as to reach out to employers.
So, thank you for the opportunity to testify today. We are
committed to promoting retirement programs, and to helping
employers understand the options that Congress has provided for
them, and ensuring the security of savings under our
jurisdiction. Thank you.
[The prepared statement of Mr. Campbell follows:]
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Chairman NEAL. Thank you, Mr. CAMPBELL
Mr. Reeder.
STATEMENT OF W. THOMAS REEDER, BENEFITS TAX COUNSEL, OFFICE OF
TAX POLICY, U.S. DEPARTMENT OF THE TREASURY
Mr. REEDER. Chairman Neal, Ranking Member English, and
Members of the Committee, thank you for the opportunity to
appear today to testify on IRAs and their vital role in
generating and maintaining retirement savings of American
workers and their beneficiaries.
The IRA has been an important retirement savings tool since
1975. IRAs are now available to all Americans with compensation
income. Certain tax preferences of IRAs, however, are dependent
on the individual's level of income, and whether the individual
is covered by an employer-sponsored retirement plan.
As more fully described in my written testimony, there are
several types of IRAs, including two special IRAs that can be
sponsored by employers. IRAs are particularly valuable to those
individuals who do not have access to other employer-sponsored
savings plans, and also operate as a portable entity into which
employees can combine and efficiently manage the retirement
savings they have accumulated over their working careers.
The Administration remains committed to educating employers
about all their retirement plan options. Although the large
employers typically sponsor workplace retirement savings
programs, such as 401(k)'s, 403(b)'s, 457 plans, many employers
lack the knowledge or the resources to adopt and maintain these
plans.
Along with the Department of Labor, the Treasury Department
and the IRS have taken significant steps to publicize the
advantages of employer-sponsored IRA-based savings programs,
and to educate employers and individuals on the ease of setting
them up.
For example, the IRS has developed a model plan document
for SIMPLE IRAs and SEPs, and has created a number of
publications and online resources, many in cooperation with the
Department of Labor, as Mr. Campbell has just testified.
The Administration has long been concerned that the rules
of employer retirement savings plans are unreasonably
complicated. This complexity imposes substantial compliance,
administrative and enforcement costs on employers,
participants, and the government, and hence, the taxpayers in
general.
Moreover, because employer sponsorship of a retirement plan
is voluntary, this complexity discourages many employers, and
especially small employers, from offering a plan at all.
Complexity is commonly cited as a reason the coverage rate of
employer-sponsored plans has not grown above 50 percent
overall, and has remained below 25 percent among employees of
smaller firms.
To address the hurdles employers face in trying to
establish savings plans for their employees, the
Administration's budget includes a proposal for an employer
retirement savings account, or ERSA, to combine the various
types of employer-sponsored savings plans to a single type of
plan with simplified administrative rules for small employers.
The Administration has also proposed a significant
simplification of individual IRAs to create just two types of
IRAs with extremely simple distribution rules: one that can be
used for any purpose at all; and the other would be just for
retirement. Of course, the Administration will be open to other
proposals that decrease the complexity or administrative burden
on small employers who want to provide savings opportunities
for their employees.
While the Treasury Department and the IRS have been
promoting employer-sponsored retirement savings programs, and
developing new ideas to make plan sponsorship even easier, we
are concerned about the prospect of imposing mandatory
requirements that could affect the ability of an employer,
particularly a small employer, to run its business efficiently,
and compete effectively in its marketplace. Operating a
business already involves a significant amount of investment.
Adding yet another burden could have an adverse effect,
particularly on small employers, which are so essential to the
success of our economy.
Moreover, mandating a particular benefit on small
employers, particularly to the extent such benefits impose a
significant cost on the employer, could affect the employer's
decision to offer other employee benefits that may be more
relevant to the employer's work force, particularly health
coverage.
In conclusion, we should not lose sight of the fact that
the IRA generally is not as powerful a retirement savings tool
as other tax-qualified retirement plans, such as the 401(k),
the 403(b), other defined contribution plans and defined
benefit plans. This is primarily because the restriction on
pre-retirement distributions in such other plans avoids much of
the pre-retirement leakage that occurs in IRAs. We should not
encourage the adoption of IRA programs by employers that are
willing and able to adopt plans that are a better deal for
their employees.
Mr. Chairman and Members of the Committee, thank you for
the opportunity to testify, and I look forward to answering any
questions.
[The prepared statement of Mr. Reeder follows:]
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Chairman NEAL. Thank you, Mr. Reeder. Ms. Bovbjerg, you
have offered a very interesting chart on page 13, which shows
how easy payroll deduction IRAs are for employers: no
reporting, no matching, et cetera. But still, usage is very
limited.
Do you think if there were credits to offset some of the
administrative costs, we might see greater participation by
employers?
Ms. BOVBJERG. One would hope so, since we heard so much
about administrative costs when we were interviewing various
stakeholders in this system.
But, at the same time, one of the things we heard was that,
despite all the effort that, clearly, the Department of Labor
has made, to make these types of arrangements known to small
employers, many say that they don't know about them, that it's
not well publicized. So, anything that you were to do on the
tax incentive side would certainly have to be very well
publicized at the same time.
Chairman NEAL. You cite a study showing that automatic
enrollment in a 401(k) plan increased participation by new
hires from 57 percent to 86 percent in 1 year. The increase was
especially dramatic among young and low-income workers. I read
recently that TSP has decided to auto-enroll in the same way.
Does it seem that the evidence from auto-401(k)'s show some
need for an opt-out system, rather than opt-in? If we really
want to induce more savings, is that the path we should travel?
Ms. BOVBJERG. Well, it's certainly encouraging that the
initial information on auto-enrollment in 401(k)'s suggests
that the idea that everyone had in creating this system appears
to be right, that inertia can work for you in encouraging
saving, rather than discouraging saving. That might be
something that could work with workplace-based IRAs, as well.
Chairman NEAL. Okay. Mr. English?
Mr. ENGLISH. Thank you, Mr. Chairman. Mr. Reeder, may I ask
specifically, one of the topics that we are exploring today is
obviously the concept of the automatic IRA.
Can you generalize and share with us Treasury's view of
this initiative and this device?
Mr. REEDER. Yes, Mr. English. The automatic enrollment, as
has already been pointed out by other testimony, is a very
effective tool in getting people who wouldn't ordinarily save
to save. The Administration is committed to making auto-
enrollment programs work.
The Pension Protection Act greatly improved the ability for
employers to provide auto-enrollment. We believe that auto-
enrollment, even in the context of an IRA, would greatly
increase savings among employees, particularly low-income
employees.
Mr. ENGLISH. Mr. Campbell, what is the view of the
Department of Labor of the prospect of an automatic IRA device?
Mr. CAMPBELL Well, as has been alluded to, in the context
of 401(k)'s and other plans, automatic enrollment has proved to
be very effective. The Department of Labor, as well as
Treasury, have been very active in implementing regulations to
facilitate that, and to make that known to employers, and
advertise it. I think there is no reason that concept wouldn't
work for IRAs, as well.
One distinction I think, though, is in the context of
401(k)'s, there is an employer who is selecting the providers
of the investment options that workers are defaulted into when
they don't give investment direction. Then, from the proposals
I have seen so far, it is not clear to me how that issue would
be addressed in some of the automatic IRA proposals.
Mr. ENGLISH. I guess, in a related point, in your view,
studying the two proposals before the Committee, how would you
anticipate automatic IRAs would be administrated? Could they be
administered without an excessive burden? Do you see any
particular challenges in their Administration?
Mr. CAMPBELL Well, obviously, the goal would be to make a
program like that not present an excessive burden.
I do think the issue I just mentioned is one of the crucial
ones. In the context of a 401(k) or other plan, there is always
someone out there who is responsible for the selection of
investments, who is looking at the appropriateness, at the
fees, and carrying out their fiduciary duties and assessing
those factors in the interest of the workers.
If the intention in an automatic IRA is that the employer
not be sponsoring a plan, it's not clear to me who then would
fulfill that function, and how that would function in practice.
Mr. ENGLISH. Mr. Reeder, from the standpoint of the
Treasury, do you see any special challenges in administrating
automatic IRAs?
Mr. Reeder. Other than the one Mr. Campbell pointed out, we
don't see any special challenges.
Mr. ENGLISH. Thank you, Mr. Chairman.
Chairman NEAL. Thank you, Mr. English. The gentleman from
Washington, Mr. McDermott, will inquire.
Mr. MCDERMOTT. Thank you, Mr. Chairman. I've been in
Congress 20 years, so I fly back and forth on the same airline
every Friday and Monday. I have gotten to know the United
employees quite well.
I had a discussion with one of them the other day about the
pension system that we have created for him by our laws, which
allow companies to go into bankruptcy and strip out their
pension benefits, and then throw people into the pension
guaranty fund. This gentleman has worked for United Airlines as
a flight attendant for 22\1/2\ years, and he is going to
receive $272 a month when he retires.
Now, I--what I am struggling with is how do we make a
better system. It used to be that you went to work for a
company like United, and you came out with a defined benefit--
you knew what you were going to get when you got to your senior
years, and you--we've changed all that by allowing the
bankruptcy laws to be applied in the way they have.
How does this system of forced enrollment in a 401(k), how
does that make it better for them? Explain how he will be
guaranteed at the end of his working career, if he started 22
years ago putting money into this, how does he guarantee that
he has a better deal now?
Mr. CAMPBELL Is that addressed to me, Sir?
Mr. MCDERMOTT. Any one of you.
Mr. CAMPBELL The--one of the virtues--obviously, all the
different sorts of retirement plans and pension plans that are
available have different strengths and weaknesses, which is one
of, I believe, the benefits of our system, in that employers
and workers are able to, together, select the plans that make
the most sense for their particular situation.
One of the benefits of a 401(k) plan is portability. The
contributions that have been made to the plan are the property
of the worker from their inception, and can be rolled over and
transferred from job to job. In an increasingly mobile work
force, where fewer employees are choosing to work for the same
employer for 20 or 30 years, that's a valuable benefit.
That is not at all to denigrate the importance of defined
benefit plans, which is part of the reason the Administration
urged Congress to pass the Pension Protection Act, to improve
that system, improve its solvency, and protect the benefits of
the workers that they've been promised.
Mr. MCDERMOTT. Is this system--education has always had the
kind of--sort of you put your money in, and you can carry it
from one university to another.
The question is how do you give the worker the ability to
understand the costs in the system, and--the average person
doesn't spend their life, if they're a professional, sitting
around, figuring out what the 401(k) fees are, and where
they're hidden, and all that sort of thing. What clarification
do we need to make it possible for them to know what they're
actually buying into, and what they're going to get?
Mr. CAMPBELL Well, the Labor Department currently has two
regulations that we are in the processing of proposing that
address both of those concerns.
The first is building on the investment advice provisions
in the Pension Protection Act that make it easier for workers
to get access to professional investment advice to help them
make those decisions.
The second deals with disclosures to workers about both the
fees, the past history, the performance, the nature of the
investments in their plans in a very concise and useful way.
So, that, rather than getting 20 or 30 pages of legal
gobbledegook in a prospectus that is not read, the workers
would instead get a very concise comparative document, or a
chart that would let them get the basic information at a glance
of what the options are in their plans, and make comparative
judgements about them.
We anticipate issuing those proposed regulations in the
near future. They are currently pending at the Office of
Management and Budget under review, pursuant to the executive
order.
Mr. MCDERMOTT. How do you guarantee the worker that some
plan manager is not going to be doing what we've been seeing in
Wall Street recently?
Mr. CAMPBELL Well, the Pension Protection Act provided a
number of safeguards to ensure that the investment advice is
impartial, and not tainted. Essentially, it either has to be
provided on a level fee basis, in which the person providing
the advice gets paid the same, regardless of the options the
worker picks to invest in.
Alternatively, advice will be provided through an unbiased
computer model that would have been certified not to give
biased outcomes.
Mr. MCDERMOTT. But the worker----
Mr. CAMPBELL So, I that the congress has addressed that.
Mr. MCDERMOTT. But we just saw on television this last week
people who, as the companies were going downhill at 100 miles
an hour, were still recommending that people buy those stocks,
right? How do you stop that? How do you protect the worker on
United Airlines from that kind of investment scheme?
Mr. CAMPBELL Well, again, I think the intent that Congress
has in passing the PPA, and that the Administration had in the
investment advice provisions, is that workers will benefit from
better information. There may well be analysts in the universe
of picking stocks who advise this, that, or the other.
But the basic information about investing: the importance
of diversification, the importance of investing in a way
appropriate for your age, so that you're not holding 100
percent equities, or 80 percent employer stock when you're 10
years from retirement, that type of information will be
extremely valuable to workers, and is the kind of information
investment advice will make available.
Mr. MCDERMOTT. Thank you, Mr. Chairman.
Chairman NEAL. Thank you, Mr. McDermott. The gentleman from
Connecticut, Mr. Larson, to inquire.
Mr. LARSON. Thank you, Mr. Chairman, and let me say from
the outset I am an unabashed cosponsor of the Neal-English
automatic IRA.
I have some questions and concerns, though, with respect to
those that are not able to receive the benefit. I would like to
ask all the panelists, but I will start with Mr. Reeder. This
question has a couple of parts to it.
What, in your estimation, are the income classes for those
who can benefit from IRAs? Who does this leave out? Is there a
way, and what would be a way to--for government to help bridge
this gap?
I believe that a saver's credit can be that bridge, but I
am interested in what the panelists have to say. We will start
with you, Mr. Reeder.
Mr. REEDER. As I pointed out in my testimony, the current
tax preferences are dependant upon people's income, and whether
or not they're covered by a employer-based retirement plan.
So, if they're not in an employer-based retirement plan,
any taxpayer can gain the tax preference. I believe you're
referring to people who aren't taxpayers.
Mr. LARSON. Exactly.
Mr. REEDER. Therefore, a tax preference is of no use to
them.
Mr. LARSON. So, for example, people in the $30,000 to
$50,000 range, can, in fact, because of--end up with no income
tax liability, in essence, are the people most in need of
savings, but in fact, it seems as though our system is geared
toward providing those that don't need the savings to getting
the savings.
Is there a way that you could see for government to bridge
that gap, to help out the $30,000 to $50,000 person in this
area?
Mr. REEDER. I think a lot of the people in that $30,000 to
$50,000 gap are taxpayers, and they can avail themselves of the
saver's credit, which is available. But I think you're
referring to those people in that range that are not taxpayers.
The bulk of those folks are already getting a very large much
larger portion of their income in retirement through social
security.
So, there is a forced savings program in place already, in
the form of social security for the----
Mr. LARSON. With the country at, for the first time since
the Depression, at negative savings, should the government be
involved in providing incentives to assist people in that range
group?
I am all in favor of the automatic IRA. I think that that's
a great step forward. But I think that there is still a gap.
Mr. Campbell, what does the Labor Department think?
Mr. CAMPBELL One of the benefits of a payroll deduction
IRA, for example, even if you ignore the question of whether
there is a particular tax benefit to an individual, it is still
a very convenient and easy way to save. One of the things I
think studies have generally shown is that the easier it is to
save, the less additional effort an individual has to make, the
more likely they are to do so.
So, even if there is not a tax incentive for a lower income
worker by virtue of a lack of tax liability, they still may be
very effective in having these simplified programs as options--
--
Mr. LARSON. What about a government-incentivized saver's
credit?
Mr. CAMPBELL Well, I really do think I should probably
defer to the Treasury Department on tax credit issues.
Mr. LARSON. Mr. Reeder, what about a government-
incentivized saver's credit?
Mr. REEDER. Well, the saver's credit that exists, we're
very much in favor of. We're a little bit concerned about
making it refundable. We are constantly concerned about
complexity of Administration and potential fraud that is
available any time you have a refundable credit. But that is
something that should be studied.
Mr. LARSON. Isn't it something like 59 million people that
are eligible, but only about a fifth of them participate?
Mr. REEDER. I'm not particularly familiar with that
particular ratio, but that sounds reasonable. That sounds like
it's logical.
Mr. LARSON. Ms. Bovbjerg?
Ms. BOVBJERG. The saver credit--I'm aware that there are
some statistics that it's not used to the extent that it could
be. Making it refundable could entice more people into saving.
I would like to see some analysis of how effective that would
be, and how much it might cost, and I'm glad to hear that maybe
that is being done.
I think, though, that, as Mr. Campbell says, the inertia of
having something that is more automatic would be a huge factor
for people. It would be interesting to see how much of the
problem that might address.
Mr. LARSON. Mr. Reeder, you said that there were a lot of--
you were concerned about the fraud, abuse, and administrative
costs.
Could you amplify on that at all? I see my time is up,
but----
Mr. REEDER. Well, I am not an expert in the Administration
of all the credits at Treasury, but I do know that there are
some issues, especially, for instance, with the earned income
tax credit, which is refundable.
Mr. LARSON. Thank you, Mr. Chairman.
Chairman NEAL. Thank you, Mr. Larson. The gentlelady from
Pennsylvania, Ms. Schwartz, is recognized to inquire.
Ms. SCHWARTZ. Thank you, Mr. Chairman. I too want to
express my support, enthusiastic support, for Mr. Neal's
legislation. I think the experience that we have seen already
with opting out, rather than opting in--you've mentioned about
the--getting people to--the inertia work in their direction,
which is to encourage savings, is really important for all of
us.
I think just--well, this afternoon, we will be passing a
resolution to encourage Americans to save. Mr. Johnson and I
did that. Having some tangible ability to do that, as we
suggest in--with the IRAs, automatic IRAs, is really a good
thing. So,--and I--so, like I say, I have been very supportive
of doing more to encourage Americans to save, recognizing what
we're up to.
One of my questions, and one that I wanted to raise with
you, is something--is whether we could use the IRAs in a way
that also addresses a slightly different problem.
I know there are some exceptions, or ways you can withdraw
early from IRAs now, so it's a little different than what we've
been talking about, but I wanted your opinion about something
I've been thinking about, and that is that early retirees,
basically those who are 59-and-a-half, may find themselves,
particularly as we are moving ahead, unable to afford health
insurance. It's really the largest group, as I understand it,
of those Americans who don't have insurance, who are over 55,
before they get Medicare.
I think that, particularly if they don't have health
benefits that they can afford or extend beyond employment, if
they choose to retire early, over 55, there is 5\1/2\-year
potential gap of when they're going to find it very difficult
to pay for health insurance, private health insurance.
So, my question is kind of an open-ended one, is what do
you think about using potential--using tax law to allow people
to withdraw from their IRA for the express purpose of paying
for health insurance if they have chosen to retire early, for
those five-and-a-half years? Can we make some exceptions in the
ability to withdraw?
This is not withdrawing early, but to be able to use--say,
not have to have them pay tax. So, it's treated sort of the
same way that, if they were employed, they wouldn't have to pay
taxes on their health benefit. This would sort of apply the
same principle, but to the IRA, which they could then withdraw
without penalty at age 59\1/2\.
So, sort of an open-ended question as to what you think
about that. My thinking here is not only is health coverage a
huge issue for many Americans, but particularly for those
before Medicare in those early retirement years, but you know,
it's also a way that people might want to say, ``I don't want
to save, because I'm afraid I might have certain kinds of
expenses.''
So, we have made some exceptions around education and
health premiums if you're unemployed or buying a first home.
So, given the concern we have about 47 million Americans, many
of whom are in this age category, what do you think about that?
I don't know if you haven't thought about it, but if you have,
it's just sort of a concept?
Again, that would encourage people to think about using
IRAs because they would know that they would be able to have
the ability to use it for yet one more purpose.
Mr. REEDER. I don't know that any of us are in the position
to give you a definitive answer, because this is one of the
first times we have heard about it. But being from Treasury, I
think I will start off the answers.
We, at Treasury, have long been concerned about the
increasing erosion of retirement savings. When IRAs were first
created, they were established solely for retirement. Now, not
a year goes by when something doesn't come up to tap into those
retirement savings, all of them good reasons, very valid
reasons.
What you are proposing is a kind of a super-preference,
because it would give to the distribution tax exemption, so it
would be tax-free going in and tax-free going out. There is
already a very limited area where that occurs, and that's with
the HSAs. I think if you did that with IRAs, you may actually
encourage people to tap their retirement savings who might not
already be inclined to tap their retirement savings. They may
have other assets that they could use to pay that insurance,
but instead would use the retirement savings because it would
be tax-free.
Also, a question whether or not it's equitable to give
somebody who has an IRA that super-tax preference over somebody
who doesn't have the IRA, who couldn't have the tax-free----
Ms. SCHWARTZ. But now with HSAs, for example, we get tax
preferences for HSAs, and there are many people who don't have
access to HSAs. You know, there are people who don't get health
benefits through their employer. We give quite a bit of health
preference--preferences to employers and employees who get
benefits through their employer--through their workplace. If
you're an individual, that's a different concern.
So, there are--there is a significance tax preference.
Anyway I know it's a new idea----
Mr. REEDER. I understand.
Ms. SCHWARTZ [continuing]. But I just wanted to--I just was
interested in whether that--it was something we might be able
to consider as we consider encouraging people to save for
retirement.
Again, some of the things that I think prevent people is
that they worry about expenses coming up that they won't be
able to handle that are pretty immediate. Even in this case,
particularly someone who might have not started an IRA a long
time ago--I mean, I don't think the 25-year-olds are thinking
about this, but someone who is 45 might be thinking of this,
who might say, ``Well, I could do an IRA, but what happens to
me, you know, when I'm 59\1/2\ and I'm going to retire early?''
So, if you have some thoughts about it--I think my time is
up--but if you have some thoughts about it going forward, I
certainly would appreciate maybe your thinking about that, or
we could be in touch with you about this. Because again, these
are both important issues for us, both retirement savings and,
of course, health coverage for Americans, particularly those
who are in early retirement, pre-Medicare.
So, I think with that, maybe this is a chat I should have
with the Chairman at some point, as well. But I will. So, thank
you very much.
Chairman NEAL. We thank the gentlelady. The gentleman from
New York, Mr. Crowley, is recognized to inquire.
Mr. CROWLEY. Thank you, Mr. Chairman. If I could, for Ms.
Bovbjerg as well as Mr. Reeder, my question pertains to the
benefits in the Tax Code for encouraging retirement savings.
The government estimates show that the Treasury--$110 billion
in revenue in an effort to encourage savings. That was in 2007.
But the data shows that those who are receiving--who are saving
in IRAs are--tend to be better educated and higher wage earners
than the average American.
The question I have--and not necessarily in a way to
disparage the system, it's just more a sense of feel from you
all--do you think that these tax subsidies are encouraging
savings, or are they simply rewarding people for actions that
they would otherwise--they would take normally anyway, in terms
of savings?
If you think these benefits are helping to encourage
savings, how can we expand these benefits to capture more
Americans in the system?
Ms. BOVBJERG. Well, you're bringing up the flip side of the
point that someone raised earlier, which is a tax incentive is
a bigger incentive for someone who is in a much higher tax
bracket than----
Mr. CROWLEY. Right.
Ms. BOVBJERG [continuing]. It is for someone who is not
paying very much tax. This is an issue that, actually, comes up
all the time in the pension area, and it is something that Ways
and Means has asked GAO to look at, the distributional effects
of the tax preferences and pensions.
Mr. CROWLEY. Mr. Reeder?
Mr. REEDER. I think the behavioral economists--of which I
am definitely not--would agree that the incentives do produce
new savings. But I also think they would agree that some of the
savings is savings that would occur anyway. So I think the
answer is, a little bit of both.
Mr. Larson was focusing largely on how to refocus that tax
preference so that it does create retirement savings that
wouldn't have ordinarily occurred. I don't have the silver
bullet for that answer, and there may be some things you can't
do with the Tax Code. But I think most people here think you
can do most anything with the Tax Code.
[Laughter.]
Mr. CROWLEY. Ms. Bovbjerg, in your report you mention that
there are some barriers that exist that discourage employers
from offering payroll deduction IRAs, and you include in that
lack of flexibility, cost to employers, limited incentives to
employers to offer the plans, and generally a lack of
awareness.
Could you walk us through how a small business--one in the
range of 12 or so workers--would try to access a payroll
deduction IRA for their employees, and do that in a real-world
context, as well as perceived barriers, and suggest ways that
we can help break down those barriers?
Ms. BOVBJERG. I am quite sure I could not do justice to the
plight of the small businessperson in managing such a thing.
But the first thing is you would have to know about it.
Apparently, many of them don't know that this is an option.
They have fears that if they do offer this to their employees,
and they identify a provider and then tell the employees about
it, that suddenly they will be a fiduciary under ERISA, that
they will be a plan sponsor.
Now, we know that that is not the case, that it is not
true, Labor has put safe harbor guidance out there. But if I'm
the small businessowner, I have to be able to understand that
guidance. It probably would also help if my employees asked me
if I would do it.
But I think that it can represent a burden to people to
find out about these things. If they do their payroll by hand,
it's another thing that they have to deal with, to employ the
payroll deduction and send it off to whoever is holding the
IRA. It could be burdensome.
But there are a lot of small businesses who do have
electronic payroll. There are probably not as many for
employers with fewer than 12 employees than for those with 50.
But there are those with electronic payroll who still are not
doing this.
So, when we made recommendations to Labor and IRS, we were
really thinking it's not that Labor's doing something poorly,
or doing something bad, it's just that it's pretty clear when
you go out there that Labor is not doing enough to incentivize
these employers.
Mr. CROWLEY. Thank you. Mr. Reeder, finally, the saver's
credit that was created in 2001 was billed as being a tool to
help taxpayers earning less than $50,000--a credit for
depositing money in their 401(k) accounts.
How many people have enrolled in that program? My concern
is that it does not appear to be working as intended for
several reasons. One, low-income folks don't have the means to
save as others do, simply because they're living paycheck-to-
paycheck.
Secondly, this is a non-refundable tax credit. Many of
these people have very small, if any, income tax liability.
Does the Administration think we should expand this credit
to be a refundable credit?
Mr. REEDER. I am not in a position to say that we are for
or against making it refundable, but I have expressed concerns
about administratability, and it would have to be evaluated in
terms of the revenue involved in the entire portion of the
bill.
But I agree with you, that it doesn't encourage everyone to
save. There are some people who just do not think they have the
means to save.
Mr. CROWLEY. How many actually--if you could, Mr.
Chairman--if I could just further inquire--how many people have
actually enrolled in this program?
Mr. REEDER. It's about 5.3 million people.
Mr. CROWLEY. Generally, of what age are those individuals?
Mr. REEDER. I don't have the age breakdown with me. I don't
even have a speculation. But I could definitely provide that
data. I think we have an age breakdown, I'm not positive.
Mr. CROWLEY. We would be interested in that, I think, how
many people are borrowing from their parents in order to make
access to that enrollment. So, I would appreciate that, thank
you. Thank you, Mr. Chairman.
Chairman NEAL. We thank the gentleman, and the gentleman
from Wisconsin, Mr. Kind, to inquire.
Mr. KIND. Thank you, Mr. Chairman. Thank you, again, for
holding this very important hearing today. I thank the
panelists for your testimony.
Mr. Campbell, real quick, Mr. Hulshof and I certainly would
appreciate any Administration feedback that you might have with
the SAVE Act that we had previously introduced and was
testifying about today.
Ms. Bovbjerg, we appreciate the GAO update of the study and
report that you just released this month on increasing savings
opportunities for more employees.
Perhaps I should have read it a little more closely, but
were you offering some recommendations--and you testified
previously about the need to do more education outreach with
small businesses throughout the country, about the availability
of what already exists, but did GAO offer any recommendations,
or policy guidelines on how we can best accomplish that at all?
Ms. BOVBJERG. It's difficult for Labor, because they are
already doing a lot. We felt that, for example, in the guidance
they could be more specific about what would make you into a
title 1 ERISA employer, and what does not, you know, what
exactly constitutes the safe harbor.
It's difficult to reach out when you don't always know who
is eligible to do this. I mean, one of the frustrations that we
found is there are no data on payroll deduction IRAs. We
thought that anything that could be done to learn more about
these, learn more about what it costs small employers to do it,
you know, what are really the fears out there, and how we can
learn more about how many are out there. We thought that the
Bureau of Labor Statistics, for example, could add some
questions to their national compensation survey that would
help.
I mean, these are also things that could be done in the
context of some of the policy changes that have been suggested
here today, in your bill, or in the Neal-English bill.
Oversight, as well, would be important. Those were the
recommendations that we made.
Mr. KIND. Right. Well, the more that we've researched the
topic, too, I think there is a very real concern about any
fiduciary obligation that small businessowners would have by
offering these types of plans. We were trying to clarify that
more, and make it more explicit in the legislation, that--so
that's not an additional burden that might prevent them from
offering these plans for their employees.
But you know, staying with you--and, if Mr. Campbell and
Mr. Reeder, if you want to chime in on this, as well--but we
were trying to thread the needle a little bit as far as the
automatic enrollment in IRA under our legislation. We allow the
automatic enrollment, but we still allow the discretion of the
small businessowner, whether they want to participate in the
automatic sign-up, or the automatic--therefore, not mandating
it upon them.
Because the concern, obviously, that we share is that if
you have too many strict mandates on small businesses, they're
just going to walk away from it anyway, and not offer it to
their employees.
Does that seem to you to strike the right balance, having
an automatic enrollment, but still leaving it up to the
discretion of the small business employer, of whether or not to
have that feature applied at the plan that they're offering?
Ms. BOVBJERG. Well, you would have to make sure that people
know that this is out there. I think we would have to do more,
because otherwise it's not really clear that you would have
that many employers participating.
On the other hand, it's difficult to measure any increase
that might result, since we don't know how many are out there
now.
Mr. KIND. Right. Mr. Campbell, any thoughts?
Mr. CAMPBELL. Well, I would say, conceptually, that is very
similar to what Congress did in the PPA with respect to
automatic enrollment in 401(k) plans. It's now very clear that
this is a feature that plans may adopt, but it's not required
that plans adopt it.
I guess my concern, as I had expressed earlier, is the
question of, when it comes to automatic enrollment: who is
making decisions about the appropriateness of the default
investments when workers aren't providing elections, who is
assessing the reasonableness of those fees, is the employer a
fiduciary for those purposes or not? That's a question that
didn't arise in the 401(k) context, because it's very clear
they are fiduciaries, and do have that responsibility.
Mr. KIND. All right. That's a good point. Mr. Reeder?
Mr. REEDER. Bearing that particular problem in mind, I
think your approach does strike the right balance. We too are
concerned about the mandates on small employers, and the
likelihood of that affecting other benefits that employers may
offer, and also whether or not the employer is willing to adopt
a more flexible 401(k) plan. If you force them into an IRA, it
may detract from their desire to go into a more sophisticated
plan.
Mr. KIND. Right. Thank you all. Thank you, Mr. Chairman.
Chairman NEAL. I thank the gentleman. The gentleman from
North Dakota, Mr. Pomeroy, is recognized to inquire.
Mr. POMEROY. Thank you, Mr. Chairman. I want to begin by
commending you on this hearing. I think the hearing is very
important in a couple of respects.
First, it clearly establishes that Ways and Means is going
to be vigorous in its assertion of jurisdiction relative to
retirement plans. They are rooted in the Tax Code, this is
squarely in our ballpark. We don't intend to defer to another
Committee. This is what we're going to do. Thank you for your
leadership as Subcommittee Chairman.
Secondly, I really--I think that the panel has been
terrific, and I am very delighted with the engaged
participation of the Members.
As we look at what's ahead of us as a country, getting
people prepared for lifelong income in retirement, and the
retirement savings dimension of that puzzle, is extremely
important. I think we're probably a little belated in really
putting this in central focus, but it's pretty clear from this
morning that's exactly where it is now, and that's terrific.
Better late than never, and I think this is terrific.
I am all for the goal of improving savings. Workplace-based
savings vehicles have been the most effective means of
promoting savings for retirement, in my view. In North Dakota,
we've got about 4 out of 10 workers that have that opportunity.
So, ways that we expand it? I'm very interested in looking at
all possibilities.
I do share the concern that Treasury represented, that we
don't want to advance something by way of a default IRA
administered at the employer level, thinking we're reaching the
roughly half nationally that don't have workplace savings, only
to find that we're somehow eroding 401(k) sponsorship by plans.
I think we've got to pay very close attention to the interplay
of trying to extend reach without somehow disincenting what we
have already achieved in the voluntary employer participation.
So, we will have to be careful on that one.
I want to now turn to issues of retirement savings, and
things that we're hearing. One of the things we're hearing is--
I remember last decade, people my age, the Baby Boomers,
talking about early retirement, suddenly retiring in the
fifties, pretty broad-spread aspiration. 401(k) balances rising
appreciably, everyone pretty happy.
How that has changed. We now see that basically the Dow, at
the beginning of the decade, was $10,500 to--now it's about
$11,800, a 10 percent increase over the last 8 years. The
account balances haven't grown like people thought. Wages have
stagnated, prices have increased. People have actually gone
into their IRAs--their 401(k)s, borrowed against them.
In any event, there is much less anticipation of what's
happening there, which means, I think, there is now a widely
spread view that we're going to be working a few years longer
than we might have wanted or thought we would have to.
The data from GAO, Ms. Bovbjerg, has been particularly
telling, in terms of asset accumulation, especially focused on
the baby boom cohort. I don't know if you're familiar, off the
top, with it or not, but I will quote some of the findings
released a year ago in a GAO study.
The--of $7.6 trillion in financial assets held by baby
boomers, the top 50 percent owned 97 percent; the bottom 50
percent owned 3 percent. It's staggering. The bottom 50 percent
of baby boomers owned 3 percent of the wealth held across that
cohort, with about a third having no wealth whatsoever. I think
that this speaks to, in part, earnings capability--or earnings
levels that really are not providing the opportunity to save.
I have been very pleased with the saver's credit enhancing
the incentive to modest earning levels. While I think it would
be better extended on a refundable basis, the reality is if
your income is so low there is no tax liability, the
opportunity we're going to enlist people even with the saver's
credit extended on a refundable basis, in my opinion, is less
than people might expect.
What does--Barbara, based on your familiarity with these
studies, do you have observations about wealth distribution
across the cohort that you could expand upon?
Ms. BOVBJERG. Well, I know the report that you mention.
It's one that uses the term ``Baby Boom Generation'' in the
title, I think, and we were asked to look at the issue of
whether, when boomers retired--because it's such a large
generation, and each year the birth cohort grew so quickly--
when boomers retired, would there be a market meltdown in the
stock market.
The short answer in this report was, ``Good news: No, there
won't be a market meltdown, because retiree behavior is such
that people continue to buy and sell stock in their retirement,
they wouldn't just sell it all at once.''
The bad news was that hardly anyone in the boomer
generation had assets, and the figures that you mentioned were
very surprising to us. We found that there was a significant
portion of that cohort whose greatest financial asset was their
vehicle. Boomers are not--speaking as one, I can say this--are
not young people any more. I'm sorry.
Ms. TUBBS JONES. Speak for yourself.
Ms. BOVBJERG. Well, I'm on that front edge.
Chairman NEAL. Let's not try that again.
[Laughter.]
Ms. BOVBJERG. But the younger boomers were born in 1964.
They're already in their forties. They needed, in this
retirement income world that we're facing, they really needed
to have started saving before this, and they have a lot of
catching up to do.
We did another report on defined contribution plans that
included IRAs, by the way, because we had difficulty separating
them from 401(k)'s, and we found that the average balances,
even if you project out into the future, into the 1991 birth
cohort, were not really going to be substantial. There will be
people who will have significant balances, who will certainly
have the resources for a secure retirement. But there will be a
significant percentage who will not have anything from defined
contribution plans. They're going to essentially be living on
Social Security.
So, the concern about how to help people save and how to
help assure a secure retirement for people, particularly in the
lower earner categories, is really urgent and crucial.
Mr. POMEROY. Thank you. Thank you, Mr. Chairman.
Chairman NEAL. I thank the gentleman. The gentlelady from
Ohio.
Ms. TUBBS JONES. Thank you, Mr. Chairman.
Chairman NEAL. You're recognized to inquire.
Ms. TUBBS JONES. Ranking Member. I am in the baby boomer
session. I'm a 49'er and I think I'm still young and active.
We're still in this, and we're going to be in it for a while.
But all kidding aside, this is an area that is very
important to me. I don't serve on this Subcommittee any more. I
used to serve on the Subcommittee, and moved on to health
Subcommittee. But retirement security is a big deal for me, and
I think that I want to celebrate my colleagues for offering
this proposal. I have not signed on yet, but I am taking a
close look at it.
There are lots of things that we have to do. Just as we are
in the midst of a real issue in the housing foreclosure area
because people were not well educated in the process--most of
them, there are some who did it, not knowing what the possible
consequences are. There are people in America who are still not
well educated on retirement security.
I want to contemplate that we should determine how our
Committee could give some incentives to young folks to start
very early in the retirement security piece, even if it were
part of--and I'm jumping into the education and the workforce
Committee for a moment, but required course work for young
people to graduate from high school, to require them to
understand this process. But in the interim, while the people
who are already out of high school like us, that just graduated
about 10 years ago, we need to work on incentivizing them, as
well as incentivizing employers and others to encourage
retirement security.
See, when I speak, the bells go off, things start ringing,
and everything. So, I'm going to stop, just for a moment, for
the bells to stop ringing. They stopped. This is my pager going
off on me.
But what I am curious about--and when I was outside in the
anteroom, I heard someone speaking about United Airlines
employees. Who was that? Anybody?
Mr. POMEROY. Mr. McDermott.
Ms. TUBBS JONES. Oh, Mr. McDermott. The reason it's of
importance to me is my father was a United Airlines employee,
my brother-in-law and my sister were all United Airlines
employees, and I watched the concern that happened with that
company, as well as with all the steel companies and all the
rest, about how do we handle that retirement issue.
But as we're talking about IRAs, we tend to be now talking
about people who choose to invest or put money into an
individual retirement account. I think that we're going to have
to spend some time really, really incentivizing employers to
have this discussion, just like we incentivize them to have
money to do training for their workers. Small manufacturing
shops have the opportunity to get money to train their workers.
We ought to figure out how we can include the whole discussion
about financial literacy, as well as investment for the future.
I really don't have a lot of questions. Since the bells are
going off, I know people are looking at me, ``All right, shut
up, Stephanie, we've got to move on,'' but I just come to this
Committee--I know you're not saying that, Earl, you're my good
friend, okay--but I come to the Committee to express my concern
on this issue, to celebrate the work of my colleagues, and to
let you know that, from my perspective, from my office, I'm
ready to go to work to help workers across this country plan
for retirement.
One of the things that I have done in a totally different
area was to incentivize workers who receive lump sum benefits
to purchase an annuity so that that money lasts over time.
Because we all know when you get a lump sum, it seems like a
whole lot of money that day. But if you spend it off, over time
there is none left when you retire.
I thank you, Mr. Chairman, for giving me a chance to sit in
with you guys today and be a part. Thank you very much.
Chairman NEAL. Thank the gentlelady for her thoughtful
commentary. Let me thank our panelists for their very
thoughtful testimony today, as well.
I would like to advise the third panel that we now have
three votes on the House floor. So, the Committee would stand
in recess for approximately 20 minutes. At that moment in time
we would reconvene. I want to thank the panelists, again, for
their help.
[Recess.]
Chairman NEAL. We thank the panelists as we reconvene. I
would like to begin by recognizing Mr. Estrada.
STATEMENT OF LEOBARDO ESTRADA, PH.D., PROFESSOR OF URBAN
PLANNING, UNIVERSITY OF CALIFORNIA, ON BEHALF OF AARP
Mr. ESTRADA. Thank you very much, Mr. Chairman. My name is
Leo Estrada, and I am a member of the board of directors of
AARP, and I am here today to testify on their behalf and our 40
million members who are representative of the nation, as a
whole. Just like the rest of the nation, they are feeling the
impact of the high cost of food and energy, and are being
forced to make difficult economic decisions with dire long-term
consequences.
As increased costs continue, a quarter of all baby boomers
are pulling money out of their retirement savings early to pay
for everyday expenses, like health care and food. For many
segments of the population, the news is even worse. A third of
Hispanics are no longer saving for retirement, and 26 percent
are prematurely raiding their nest eggs to pay for everyday
needs. Half of all women have no pensions, and 44.3 percent of
African Americans aged 65 and older receive all of their income
from Social Security payments, alone.
Certainly this economy is hitting us all, and efforts like
the recently passed stimulus checks are helpful. But we must
look beyond the near term. We are thankful for the Committee's
vision in examining long-term solutions to the financial crisis
our Nation currently faces.
The idea that retirement finances consist of a pension,
personal savings, and social security is dying out. Defined
pensions are fewer and further between, and personal savings
very often consists of equity in a home. AARP believes that all
workers need access to a retirement plan, in addition to social
security. Yet this is a far cry from where we are today.
In fact, millions of Americans go to work every day and
never get the chance to save for their retirement. Many are our
members, and many are children and grandchildren of our
members. According to the IRS, an estimated 79 million U.S.
workers are not participating in a retirement plan in their
workplace. Many of these workers are employed by businesses
that do not even offer a retirement plan.
The lack of access to a workplace-based retirement savings
plan is particularly acute for employees of small businesses.
Only 44 percent of the employees who work in firms with less
than 100 employees have access to an employee retirement plan.
Employers currently can make payroll deduction IRAs available
to their workers, but clearly, very few do.
The data also shows that about 10 percent of people
eligible to contribute to an IRA actually make contributions in
any given year. As a result, a significant segment of the U.S.
work force does not save systematically for retirement.
Mr. Chairman, we must address this lack of workplace
savings option now, or future retirees will face greater
economic instability, and put more strain on already taxed
government programs.
One innovative common-sense idea that can help combat
retirement insecurity is the automatic IRA. It would make a
huge difference to over 50 million workers and their families.
We are very pleased, Mr. Chairman, that you and the ranking
Member of the Subcommittee, Mr. English, have introduced H.R.
2167, The Automatic IRA Act of 2007. We also appreciate the
cosponsorship of other Subcommittee Members. The bipartisan
support for this initiative is a positive development for our
future retirement security.
Your legislation proposes an ambitious but practical
mechanism to expand retirement savings for millions of workers.
This approach involves no employer contributions, no employer
compliance with a qualified plan--ERISA requirements, and no
employer liability or responsibility for selecting a provider
or opening IRAs for employees.
AARP has been reaching out to small businessowners to find
out how they view this legislation for some time, and the
response has been very positive. Small businessowners recognize
the need to help their employees save for retirement.
For example, Mr. Gary Kousan of Allentown, Pennsylvania
reflects the views of many small businessowners. When we asked
him to comment on why it was important to help his 15 employees
save and plan for a secure retirement, he said--and I quote--
''Because I didn't do it myself. My son works for me now, and
if I had started saving when I was his age, I would be in a
much better position. I understand how important it is,'' he
said, ``the auto-IRA is so convenient. As long as my employees
can opt out, it's a great system. It is difficult in a business
this size to offer any significant perks, and auto-IRA allows
me to offer my employees something.''
According to the AARP survey, 84 percent of our members and
76 percent of Americans age 50 and older would like to have a
workplace IRA.
I will leave you with this final statistic. In a recent
study on how the current economic downturn is affecting people,
74 percent said their elected officials are not doing enough to
help those being squeezed by the current economy.
We have listened to the people who are struggling to have a
secure retirement. Their problem is clear, and the automatic
IRA is a first step to the solution.
In conclusion, automatic IRAs create the potential help for
finally filling the gaps in retirement savings coverage in the
United States. Automatic IRAs will be particularly beneficial
to many low-wage workers who do not currently have access to an
employer-sponsored retirement plan.
Thank you, Mr. Chairman, and Members of the Subcommittee. I
would be happy to answer any questions you might have.
[The prepared statement of Mr. Estrada follows:]
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Chairman NEAL. Thank you, Mr. Estrada.
Now I would like to recognize Mr. Iwry.
STATEMENT OF J. MARK IWRY, NONRESIDENT SENIOR FELLOW, THE
BROOKINGS INSTITUTION; PRINCIPAL, THE RETIREMENT SECURITY
PROJECT AND RESEARCH PROFESSOR, GEORGETOWN UNIVERSITY
Mr. IWRY. Chairman Neal, Ranking Member English, other
Members of the Subcommittee, I am Mark Iwry, with the Brookings
Institution. My written statement has been submitted jointly
with my colleague, David John, a senior fellow with the
Heritage Foundation. We are both also principals of the
Retirement Security Project, a non-partisan partnership of
Georgetown University and Brookings, supported by the Pew
Charitable Trust. The two of us would be appearing here
together, but for the fact that Mr. John is in the United
Kingdom, counseling with officials there on very similar
issues.
He and I would first like to express our appreciation to
you, Mr. Neal, and you, Mr. English, for your leadership in
introducing this bipartisan automatic IRA legislation which
embodies our joint proposal, as well as to Mr. Emanuel, Mr.
McDermott, Mr. Larson, Ms. Schwartz, and Mr. Blumenauer, as
well as other Members of the House and the Senate, for
cosponsoring your legislation.
As you know, the automatic IRA is intended to create a
breakthrough in pension coverage, to break that 50 percent
barrier that's been keeping half of the American work force
from having access to easy ways to save at the workplace, and
to do that by staking out common ground that transcends
partisan and ideological differences.
The auto-IRA approach, as you know, is simple. It would
give the 75 million American workers who have no employer-
sponsored retirement plan the chance, through automatic
enrollment, to save, to build wealth by using their employer's
payroll system to send their own pay to their own IRA.
This would be done by combining three familiar building
blocks from our current system, which we know work effectively:
number one, saving through payroll deductions in the workplace,
similar to the 401(k) mechanism; number two, automatic
enrollment into payroll-based saving, which Congress strongly
encouraged in the Pension Protection Act of 2006 in its 401(k)
auto-enrollment provisions, and which is sweeping the 401(k)
market; and third, IRAs, which are well established and
portable.
IRAs make sense in a market-led proposal such as this. They
have a $5,000 maximum annual contribution level, which is high
enough to meet the needs of most Americans--$6,000 if you're
age 50 or older--but it's low enough to avoid competing with
401(k) plans, which allow the individual to contribute $15,500,
$5,000 more if you're age 50 or older, and, combining with
individual and employer contributions, $46,000 a year, compared
to the $5,000 in an IRA.
Specifically, here is how the automatic IRA would work. A
new employee gets a standard notice, perhaps part of the IRS
form W-4, telling the employee about the option to contribute
to an IRA through the employer's payroll system, telling them
they're automatically enrolled at 3 percent of pay in a default
investment that would probably be something like a low-cost,
life-cycle, highly diversified fund, and telling them that they
can opt out if they wish to, or opt for a higher or lower level
of saving, consistent with the IRA rules.
An employer then simply forwards the money, whatever the
employee elected, to an IRA provided by a financial
institution. The employer does not contribute anything, does
not make any outlay, does not comply with plan qualification
rules, does not have to comply with ERISA, does not choose the
investments, doesn't have to do anything other than keep track
of what employees elected and pass on the money.
If the employer wants to avoid choosing a particular IRA
provider, that's the employer's option. It can choose a
provider that it prefers, does business with, et cetera, that
marketed it, or it can say, ``I don't want any part of that,''
and opt for a fall-back entity that would guarantee everyone
has access to IRAs, even if their employer is not marketed by
any IRA trustee or custodian. That would probably be a
consortium or pool of private financial institutions, by
contract.
The bill would call on employers that are not willing to
sponsor any kind of plan--any 401(k) or other plan--that have
more than 10 employees, that have been in business for more
than 2 years to do this, to act simply as a conduit for the
employee's money into the employee's IRA. Even though those
employers would not make any contributions, they would get a
small temporary tax credit that would even be available to
employers who are not required to provide the payroll deduction
as an incentive.
Mr. Chairman, Mr. English, this would all dovetail nicely
with the saver's credit--and I would be happy to address that
in Q&A--and would work very well for people, even who are not
in the work force, by encouraging them, through automatic
debit, to save more in IRAs. Thank you.
[The prepared statement of Mr. Iwry follows:]
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Chairman NEAL. Thank you for your testimony.
Mr. Salisbury.
STATEMENT OF DALLAS SALISBURY, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, EMPLOYEE BENEFIT RESEARCH INSTITUTE (EBRI)
Mr. SALISBURY. Chairman Neal, Ranking Member English, and
Members of the Committee, it's a pleasure to be here. I thank
you for the invitation. I am Dallas Salisbury, president of the
Employee Benefit Research Institute, and Chairman of the
American Savings Education Council.
Since beginning our work at EBRI in 1978, we have published
317 issue briefs. The very first was on the topic of universal
IRAs and deductible employee contributions. Personally, my
first testimony on IRAs was before the Senate Finance Committee
in 1981. They have developed since that time with IRAs now
representing about 27 percent of total retirement system
assets, total assets in that system approaching about $18
trillion.
Employment-based defined contribution plans represent about
26 percent of assets, private ERISA-defined benefit plans about
17 percent, and public sector-defined benefit plans about 30
percent of those aggregate assets.
For 2005, the most recent year for which data is publicly
available: about 10 percent of all taxpayers put money into an
IRA, either directly or through a rollover; 5.3 million made
deductible contributions totaling about $16 billion; Roth IRAs,
6.7 million taxpayers, about $18.6 billion; 2.5 percent of
taxpayers rolled over funds totaling $231.5 billion in that
year; and a total of $140 billion was withdrawn in IRAs during
that year, to be spent on we're not sure what.
This compares to 14 percent of taxpayers who are active
participants in ERISA-defined benefit plans to which $94
billion was contributed, and 35 percent of taxpayers who were
active participants in ERISA-defined contribution plans into
which $228 billion was contributed. Total benefit payments from
those programs, both annuity and lump sums, totaled $333
billion, of which $215 billion was rolled over into Individual
Retirement Accounts, thus underlining a point that Congressman
Pomeroy was making in his earlier testimony: the critical role
that employment-based programs make in the system, and the
tenderness of making changes in other areas that might threaten
those programs.
The GAO report points out the lack of success in
encouraging IRA-based plan development among small employers.
EBRI small employer surveys have found a lack of perceived
employees demand for retirement plans, and higher pay and
health insurance always are deemed to be more important by both
small employers and their workers. Our value of benefits
surveys have consistently found that over 85 percent of
employees, when asked what they would like first, say health
insurance. Only about 7 percent say a defined contribution
savings opportunity.
All of these trends affect a second point, which is that
over 42 percent of the work force still works for an employer
that does not use automated payroll. EBRI has not surveyed
employer attitudes toward automatic IRAs, per se, but did
surveys on individual Social Security account proposals. We
found overall opposition among small employers, if they were
being required to set up any arrangement with any financial
institution.
Overwhelmingly, interestingly, they were in support of
proposals that would allow them to send additional retirement
contributions as part of payroll taxes to the government,
suggesting there would be ways to structure universal or
automatic IRAs that would be acceptable if the ideological
issues could be overcome.
EBRI research on the administrative issues and individual
Social Security accounts reinforces the fact that automatic IRA
designs are possible, but they would take unique approaches not
contained in current legislation in order to minimize
administrative cost. Every test or handle included in these
proposals adds complexity which small employers in our surveys
find troubling. That is not to say it should not be done, but
it does suggest a hurdle.
As GAO points out, there is a great deal we do not know
about IRAs, as a result of limited data availability. Since
1995, the Employee Benefit Research Institute has built a
database on 401(k) data, and effective this year we will begin
adding detailed IRA data to that database. It would be helpful
if the IRS would make more detailed data available on an
ongoing basis so the public on both IRAs and 401(k)s to help us
analyze proposals such as these.
I thank the Committee again for the invitation to testify,
and would be pleased to respond to any questions.
[The prepared statement of Mr. Salisbury follows:]
Statement of Dallas Salisbury, President and Chief Executive Officer,
Employee Benefit Research Institute (EBRI)
Chairman Neal and members of the Subcommittee on Select Revenue
Measures, thank you for your invitation to testify today on the role of
individual retirement accounts, or IRAs, in our retirement system. I am
Dallas Salisbury, president and CEO of the Employee Benefit Research
Institute.
Since beginning our work in 1978, the Employee Benefit Research
Institute has published 317 EBRI Issue Briefs.' The very
first was on the subject of ``Universal IRAs and Deductible Employee
Contributions.'' Since that time we have published data on IRAs on an
ongoing basis. Chapter 15 of the EBRI Databook on Employee Benefits is
on IRA participation and Chapter 16 is on IRA Assets.\1\
---------------------------------------------------------------------------
\1\ EBRI Databook of Employee Benefits, Chapter 15, Individual
Retirement Account--Participation http://www.ebri.org/pdf/publications/
books/databook/DB.Chapter%2015.pdf and EBRI Databook of Employee
Benefits, Chapter 16, Individual Retirement Accounts and Keogh Assets
http://www.ebri.org/pdf/publications/books/databook/DB.Chapter%2016.pdf
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Twenty-three percent of workers ages 21-64 owned an IRA at the end
of 2005, an increase from 15.9 percent in 1996.\2\ We know IRA
ownership increases with family income and age: Among workers with
annual family income of $10,000-$19,999, 8.3 percent owned an IRA,
compared to 35.1 percent of those with family income above $75,000. We
also know education is a more striking indicator: 2.7 percent of those
without a high school diploma have an IRA, compared to 46.5 percent of
those with a graduate degree.
---------------------------------------------------------------------------
\2\ Craig Copeland, ``Ownership of Individual Retirement Accounts
(IRAs) and 401(k)-Type Plans.'' EBRI Notes, no. 5 (Employee Benefit
Research Institute, May 2008): 2-12.
---------------------------------------------------------------------------
IRAs have become the largest single vehicle for retirement assets
in the United States. Assets have continuously grown in IRAs as a
function of new contributions (about $49 billion in the most recent
year for which data are available), but the asset growth is mostly due
to rollover distributions from both employment-based defined benefit
(pension) and defined contribution retirement plans such as 401(k)s
(more than $210 billion, according to the latest data).\3\ As a result,
total IRA assets now exceed the assets in private-sector employment-
based defined contribution plans: IRA assets reached $4.75 trillion at
year-end 2007, compared with $3.49 trillion in private-sector defined
contribution plans.\4\ The Internal Revenue Service (IRS) reports that
7.9 million taxpayers age 65 or older withdrew money from an IRA in
2004, amounting to $76.8 billion.\5\
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\3\ Victoria L. Bryant, ``Accumulation and Distribution of
Individual Retirement Arrangements, 2004,'' SOI Bulletin (Spring 2008):
90-101.
\4\ Board of Governors of the Federal Reserve, Flow of Funds
Accounts of the United States: Flows and Outstandings: First Quarter
2008. June 5, 2008
\5\ Bryant, op cited.
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Since IRAs have been increasingly important to Americans'
retirement security, EBRI has focused a lot of its research on IRAs.
For a 2001 NASI conference, EBRI simulated the projected increase in
the IRAs importance in retirement wealth.\6\ At that time, we estimated
an increase from 28 percent of retirement wealth for males born in 1936
to 40 percent for males born in 1964. Females were estimated to have an
increase from 18 percent to 32 percent for the same birth cohorts.
Since that time, the increased importance of 401(k) plans, and the
likely plan design modifications that are likely to result from the
passage of the Pension Protection Act (PPA) in 2006 will undoubtedly
result in an even larger percentage of retirement wealth contained in
IRAs.\7\
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\6\ Jack VanDerhei and Craig Copeland, (2002). The Future of
Retirement Income: The Changing Face of Private Retirement Plans (pp.
121-147). National Academy of Social Insurance: The Future of Social
Insurance: Incremental Action or Fundamental Reform.
\7\ Jack VanDerhei and Craig Copeland, The Impact of PPA on
Retirement Income for 401(k) Participants, EBRI Issue Brief, No. 318,
June 2008
---------------------------------------------------------------------------
The values accumulated in IRAs would likely be even greater if all
monies contributed and/or rolled over to these accounts were not
available for pre-retirement withdrawals. Simulations from the EBRI/ICI
401(k) Accumulation Projection Model in 2002 showed that the income
replacement rates that could be expected from a combination of 401(k)
account balances and IRA rollovers that resulted from 401(k)
contributions would increase between 11 and 18 percentage points
(depending on salary level) if pre-retirement withdrawals were never
taken from IRA balances.\8\
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\8\ Sarah Holden and Jack VanDerhei, Can 401(k) Accumulations
Generate Significant Income for Future Retirees? EBRI Issue Brief and
ICI Perspective, October 2002. This is a first-order approximation and
does not take into account changes in participant behavior that might
occur as a result of changing the pre-retirement access to this money.
---------------------------------------------------------------------------
At the request of this Committee, the General Accountability Office
undertook a review of individual retirement accounts that was published
this month. The staff of the Employee Benefit Research Institute was
pleased to cooperate with the GAO in their research.
The GAO report does a good job of setting out the current data on
IRAs.
The report also points out the lack of success in encouraging plan
development among small employers due to lack of resources, unsteady
revenues, and lack of knowledge and/or misconceptions in how plans
operate.
Small employer surveys undertaken by EBRI in the past also pointed
out the lack of employee demand for the retirement plans, where higher
pay and/or health insurance was deemed to be more important in the view
of employers.\9\ EBRI Value of Benefits surveys over the past 25 years
have consistently found that workers put health insurance first,\10\
and our most recent EBRI Health Confidence Surveys have found that over
a third of workers have reduced their retirement savings due to rising
health care costs.\11\ All of these trends affect plans with payroll
deduction in general, and programs like non-employer-based IRAs (where
automatic deductions have not been arranged).
---------------------------------------------------------------------------
\9\ Employee Benefit Research Institute, Small Employer Retirement
Survey Results. http://www.ebri.org/surveys/sers/.
\10\ The latest Value of Benefits Survey results can be found in
Rachael Christensen, ``Value of Benefits Constant in a Changing World:
Findings from the 2001 EBRI/MGA Value of Benefits Survey.'' EBRI Notes,
no. 3 (Employee Benefit Research Institute, March 2003): 1-3.
\11\ Employee Benefit Research Institute, Health Confidence Survey
Results www.ebri.org/surveys/hcs/
---------------------------------------------------------------------------
The GAO has pointed out the lack of information on the use of
payroll deduction IRAs (or those that allow a direct debit from a
savings or checking account). GAO does not discuss this topic on IRAs,
but the data is lacking regardless. This is another manner to get
workers' dollars into an IRA before the individual can spend it.
The GAO report suggests tax credits to employers (on p. 29) to
increase the adoption of payroll deduction IRAs. Congress will need to
consider the fact that tax credits to employers for starting these
plans have proven to be ineffective. The EBRI Small Employer Surveys
found that small employers do not understand the tax laws surrounding
plans.
EBRI Small Employer Surveys also have found overall opposition to
proposals that small employers be required to set up arrangements with
financial institutions. However, there is support among small employers
for sending additional retirement contributions as part of their
existing payroll tax deposits and letting the government deal with all
of the administrative issues.
This suggests that proposals like those discussed in the GAO report
for ``automatic IRAs'' for some segment of the population (most
proposals would not apply to about 25 million workers in very small
firms) would need to be carefully designed in order to prove
successful. In fact, research conducted by EBRI on the administrative
issues in individual Social Security accounts\12\ suggests ways in
which an ``automatic IRA'' could be made available to all workers, were
accessibility and accumulation the primary objectives. It could be done
with lower administrative expense and lower business burden than
proposals that are more limited in their scope, but rely on payroll
deduction. This is the case because of the significant portion of the
workforce that is not paid through automated and linked payroll
systems.
---------------------------------------------------------------------------
\12\ Kelly Olsen and Dallas Salisbury, ``Individual Social Security
Accounts: Issues in Assessing Administrative Feasibility and Costs,''
EBRI Issue Brief no. 203, November 1998 (http://www.ebri.org/pdf/
briefspdf/1198ib.pdf); and ``Individual Social Security Accounts:
Administrative Issues,'' EBRI Issue Brief no. 236, September 2001
(http://www.ebri.org/pdf/briefspdf/0901ib.pdf) (Washington, DC:
Employee Benefit Research Institute).
---------------------------------------------------------------------------
Working through our American Savings Education Council and our
ChoosetoSave.org programs, and based upon our 18 years of Retirement
Confidence Surveys, EBRI has found that individuals need to become
convinced of the need to save for the future before they will (a) do
it, and (b) preserve the funds upon job change. While $214.9 billion
was rolled into IRAs in 2004, most workers that receive distributions
of less than $20,000 do not roll over their entire distributions, and
cash out at least some portion of their retirement savings.\13\
---------------------------------------------------------------------------
\13\ Craig Copeland, ``Lump Sum Distributions.'' EBRI Notes, no. 12
(Employee Benefit Research Institute, December 2005): 7-17.
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As GAO points out, there is a great deal we do not know about IRAs
as a result of limited data reporting. Since 1995, EBRI has been
working with the Investment Company Institute and administrative firms
to build a large database on 401(k) plans that has begun to allow many
questions to be answered about the role of those plans in our
retirement system. This year we are starting to build a companion
database of IRA data that will begin to fill many of the gaps in
information identified by the GAO report.
As GAO notes, the IRS does collect a significant amount of IRA
information. Were that information more widely available in a timely
fashion, it would be of great assistance to both the public and the
private sectors. For example, the Census Bureau's Current Population
Survey reports that very few of those over age 55 and 65 report income
from IRAs, Keoghs or 401(k) plans. Yet, the IRS tax records recorded
$140 billion in payments out of IRAs alone in 2004. The Federal
Reserve's Survey of Consumer Finance, and the HHS Health and Retirement
Survey, also under-report income from these programs, when it is
possible to compare individual self-response with ``administrative''
records like tax returns. A major issue for the nation revolves around
the financial status of those near or in retirement, and the
availability of IRS administrative records could make a significant
contribution to policy-making. We hope that the IRA administrative
records database being developed by EBRI will do so as well.
As the GAO report underlines, the primary role of IRAs in our
retirement system today is to provide a tax-deferred account for the
retirement assets of those who have left an employer-sponsored defined
benefit (pension) or defined contribution (401(k)-type) plan. Rollovers
amounted to $214.9 billion in 2004, compared to $48.7 billion in
contributions.
The goal that ERISA set for IRAs in 1974 as a way for all of those
outside of an employer based plan to save for retirement has not been
realized. This underlines the central role played by both Social
Security and employer-sponsored plans in Americans' future retirement
security.
I thank the Committee again for the invitation to testify.
Bibliography: EBRI Issue Briefs on IRAs
Copeland, Craig. ``Individual Account Retirement Plans: An Analysis of the
2004 Survey of Consumer Finances.'' EBRI Issue Brief, no. 293 (Employee
Benefit Research Institute), May 2006.
___. ``Individual Account Retirement Plans: An Analysis of the 2001 Survey
of Consumer Finances.'' EBRI Issue Brief, no. 259 (Employee Benefit
Research Institute), July 2003.
___. ``Retirement Plan Participation and Features, and the Standard of
Living of Americans 55 or Older.'' EBRI Issue Brief, no. 248 (Employee
Benefit Research Institute), August 2002.
___. ``Retirement Plan Participation and Retirees' Perception of Their
Standard of Living.'' EBRI Issue Brief, no. 289 (Employee Benefit Research
Institute), January 2006.
Copeland, Craig, and Jack VanDerhei. ``Personal Account Retirement Plans:
An Analysis of the Survey of Consumer Finances.'' EBRI Issue Brief, no. 223
(Employee Benefit Research Institute), July 2000.
EBRI Staff. ``Employment-Based Retirement Income Benefits: Analysis of the
April 1993 Current Population Survey.'' EBRI Issue Brief, no. 153 (Employee
Benefit Research Institute), September 1994.
___. ``Universal IRAs and Deductible Employee Contributions.'' EBRI Issue
Brief, no. 1 (Employee Benefit Research Institute), January 1982.
Holden, Sarah, and Jack VanDerhei. ``The Influence of Automatic Enrollment,
Catch-Up, and IRA Contributions on 401(k) Accumulations at Retirement.''
EBRI Issue Brief, no. 283 (Employee Benefit Research Institute), July 2005.
Korczyk, Sophie. ``Individual Savings for Retirement: A Closer Look.'' EBRI
Issue Brief, no. 16 (Employee Benefit Research Institute), March 1983.
Salisbury, Dallas. ``Individual Retirement Accounts: Characteristics and
Policy Implications.'' EBRI Issue Brief, no. 32 (Employee Benefit Research
Institute), July 1984.
___. ``Individual Saving for Retirement--The 401(k) and IRA Experiences.''
EBRI Issue Brief, no. 95 (Employee Benefit Research Institute), October
1989.
Scott, Jason S., and John B. Shoven. ``Lump-Sum Distributions: Fulfilling
the Portability Promise or Eroding Retirement Security?'' EBRI Issue Brief,
no. 178 (Employee Benefit Research Institute), October 1996.
Seliger, M. ``Retirement Income and Individual Retirement Accounts.'' EBRI
Issue Brief, no. 52 (Employee Benefit Research Institute), March 1986.
Yakoboski, Paul. ``Large Plan Lump Sums: Rollovers and Cashouts.'' EBRI
Issue Brief, no. 188 (Employee Benefit Research Institute), August 1997.
___. ``Retirement Program Lump-Sum Distributions: Hundreds of Billions in
Hidden Pension Income.'' EBRI Issue Brief, no. 146 (Employee Benefit
Research Institute), February 1994.
Bibliography: EBRI Notes on IRAs
Copeland, Craig, ``The Number of Individual Account Retirement Plans Owned
by American Families.'' EBRI Notes, vol. 29, no. 6 (Employee Benefit
Research Institute, June 2008).
Copeland, Craig, ``Ownership of Individual Retirement Accounts
(IRAs) and 401(k)-Type Plans'' EBRI Notes, vol. 29, no. 5 (Employee
Benefit Research Institute, May 2008).
Copeland, Craig, ``Total Individual Account Retirement Plan Assets, by
Demographics, 2004'' EBRI Notes, vol. 29, no. 3 (Employee Benefit Research
Institute, March 2008).
Copeland, Craig, ``IRA Assets and Contributions, 2006'' EBRI Notes, vol.
28, no. 12 (Employee Benefit Research Institute, December 2007).
Copeland, Craig, ``401(k)-Type Plans and Individual Retirement Accounts
(IRAs)'' EBRI Notes, vol. 28, no. 10 (Employee Benefit Research Institute,
October 2007).
Copeland, Craig, ``IRA Assets, Contributions, and Market Share'' EBRI
Notes, vol. 28, no. 1 (Employee Benefit Research Institute, January 2007).
Copeland, Craig, ``IRA and Keogh Assets and Contributions'' EBRI Notes,
vol. 27, no. 1 (Employee Benefit Research Institute, January 2006).
Copeland, Craig, ``401(k)-Type Plan and IRA Ownership'' EBRI Notes, vol.
26, no. 1 (Employee Benefit Research Institute, January 2005).
Copeland, Craig, ``IRA and Keogh Assets and Contributions'' EBRI Notes,
vol. 25, no. 8 (Employee Benefit Research Institute, August 2004).
Copeland, Craig, ``IRA and Keogh Assets'' EBRI Notes, vol. 25, no. 2
(Employee Benefit Research Institute, February 2004).
Copeland, Craig, ``IRA Assets and Characteristics of IRA Owners'' EBRI
Notes, vol. 23, no. 12 (Employee Benefit Research Institute, December
2002).
Copeland, Craig, ``Lump-Sum Distributions: An Update'' EBRI Notes, vol. 23,
no. 7 (Employee Benefit Research Institute, July 2002).
Copeland, Craig, ``Characteristics of Individual Retirement Account
Owners'' EBRI Notes, vol. 22, no. 6 (Employee Benefit Research Institute,
June 2001).
Copeland, Craig, ``IRA Assets Continue to Grow'' EBRI Notes, vol. 22, no. 1
(Employee Benefit Research Institute, January 2001).
Copeland, Craig, ``Asset Allocation: IRAs and 401(k)-Type Plans'' EBRI
Notes, vol. 21, no. 10 (Employee Benefit Research Institute, October 2000).
Copeland, Craig, ``IRA Assets Total More Than $2 Trillion'' EBRI Notes,
vol. 21, no. 5 (Employee Benefit Research Institute, May 2000).
Copeland, Craig, ``Lump-Sum Distributions Total $87.2 Billion in 1995''
EBRI Notes, vol. 20, no. 10 (Employee Benefit Research Institute, October
1999).
Sabelhaus, John, ``Projecting IRA Balances and Withdrawals'' EBRI Notes,
vol. 20, no. 5 (Employee Benefit Research Institute, May 1999).
Yakoboski, Paul, ``IRAs: Benchmarking for the Post-TRA '97 World'' EBRI
Notes, vol. 19, no. 12 (Employee Benefit Research Institute, December
1998).
Fronstin, Paul, ``IRA Assets Grew by 23 Percent During 1997'' EBRI Notes,
vol. 19, no. 12 (Employee Benefit Research Institute, December 1998).
Fronstin, Paul, ``IRA and Keogh Assets Grew by 16 Percent During 1996''
EBRI Notes, vol. 18, no. 12 (Employee Benefit Research Institute, December
1997).
Yakoboski, Paul and Bill Pierron, ``IRAs: It's a Whole New Ballgame'' EBRI
Notes, vol. 18, no. 9 (Employee Benefit Research Institute, September
1997).
Yakoboski, Paul, ``IRA and Keogh Assets Grew by 16 Percent During 1996''
EBRI Notes, vol. 17, no. 12 (Employee Benefit Research Institute, December
1996).
Fronstin, Paul, ``IRA and Keogh Assets Grew by 6 Percent During 1994'' EBRI
Notes, vol. 16, no. 11 (Employee Benefit Research Institute, November
1995).
Murray, Kathy Stokes and Paul Yakoboski, ``Congress Considers IRA
Expansion'' EBRI Notes, vol. 16, no. 4 (Employee Benefit Research
Institute, April 1995).
Yakoboski, Paul, ``IRA Eligibility and Usage'' EBRI Notes, vol. 16, no. 4
(Employee Benefit Research Institute, April 1995).
Fronstin, Paul and Celia Silverman, ``IRA and Keogh Assets Grew 19 Percent
During 1993'' EBRI Notes, vol. 15, no. 10 (Employee Benefit Research
Institute, October 1994).
Silverman, Celia, ``IRA and Keogh Assets Reach $773 Billion at Year-End
1992'' EBRI Notes, vol. 14, no. 11 (Employee Benefit Research Institute,
November 1993).
Yakoboski, Paul, ``New Evidence on Lump-Sum Distributions and Rollover
Activity'' EBRI Notes, vol. 14, no. 7 (Employee Benefit Research Institute,
July 1993).
Silverman, Celia, ``IRA and Keogh Assets Show Increased Growth in 1991''
EBRI Notes, vol. 13, no. 7 (Employee Benefit Research Institute, July
1992).
Jones, Nora Super, ``IRA Proposals and Their Potential Impact on Retirement
Savings'' EBRI Notes, vol. 13, no. 3 (Employee Benefit Research Institute,
March 1992).
Silverman, Celia, ``IRA and Keogh Asset Continue to Grow during First Half
of 1991'' EBRI Notes, vol. 13, no. 2 (Employee Benefit Research Institute,
February 1992).
Foley, Jill, ``IRA and Keogh Assets Grow More Slowly in 1990'' EBRI Notes,
vol. 12, no. 6 (Employee Benefit Research Institute, June 1991).
Piacentini, Joe, ``IRA Deduction Eligibility Falls under TRA '86'' EBRI
Notes, vol. 12, no. 5 (Employee Benefit Research Institute, May 1991).
Foley, Jill, ``IRA and Keogh Assets Continue to Grow'' EBRI Notes, vol. 11,
no. 7 (Employee Benefit Research Institute, July 1990).
Davis, Jennifer, ``IRA and Keogh Assets Grow during First Half of 1989''
EBRI Notes, vol. 11, no. 1 (Employee Benefit Research Institute, January
1990).
Davis, Jennifer, ``IRA/Keogh Assets Top $400 Billion'' EBRI Notes, vol. 10,
no. 7 (Employee Benefit Research Institute, July 1989).
``IRA, Keogh Asset Growth Slows'' EBRI Notes, vol. 9, no. 12 (Employee
Benefit Research Institute, December 1988).
``IRA/Keogh Asset Growth Slows in 1987'' EBRI Notes, vol. 9, no. 6
(Employee Benefit Research Institute, June 1988).
``IRA, Keogh Assets Top $350 Billion'' EBRI Notes, vol. 8, no. 11 (Employee
Benefit Research Institute, November 1987).
``IRA Assets Reach $262 Billion; Keogh Assets Nearly $42 Billion'' EBRI
Notes, vol. 8, no. 6 (Employee Benefit Research Institute, June 1987).
``IRA, Keogh Assets Jump $70 Billion; Future Growth May Slow Because of Tax
Reform'' EBRI Notes, vol. 7, no. 10 (Employee Benefit Research Institute,
October 1986).
``Value of IRAs under Senate Tax Reform'' EBRI Notes, vol. 7, no. 6
(Employee Benefit Research Institute, June 1986).
``1985 Year-End IRA and Keogh Assets'' EBRI Notes, vol. 7, no. 4 (Employee
Benefit Research Institute, April 1986).
``Medical IRAs'' EBRI Notes, vol. 7, no. 1 (Employee Benefit Research
Institute, January 1986).
``IRA/Keogh Assets Surpass $200 Billion'' EBRI Notes, vol. 6, no. 5
(Employee Benefit Research Institute, September 1985).
``IRA and Keogh Assets Top $120 Billion'' EBRI Notes, vol. 5, no. 6
(Employee Benefit Research Institute, November 1984).
``IRA and Keogh Assets Continue Rising in 1983'' EBRI Notes, vol. 5, no. 2
(Employee Benefit Research Institute, March 1984).
``Major Growth in IRAs Reported'' EBRI Notes, vol. 5, no. 3 (Employee
Benefit Research Institute, May 1983).
``Surveys Show That Individual Retirement Accounts (IRAs) Are Popular''
EBRI Notes, vol. 4, no. 2 (Employee Benefit Research Institute, March
1983).
``IRA Assets Show Significant Growth'' EBRI Notes, vol. 3, no. 3 (Employee
Benefit Research Institute, May 1982).
Chairman NEAL. Thank you.
Mr. Eisenbrey.
STATEMENT OF ROSS EISENBREY, VICE PRESIDENT, ECONOMIC POLICY
INSTITUTE
Mr. EISENBREY. Thank you, Mr. Neal. It's a pleasure to be
here, and an honor.
Proposals like the automatic IRA cannot hurt. The problem
is that they probably won't help much, either. This is because
such proposals don't make 401(k)'s or IRAs a better deal for
ordinary workers. They make it physically easier for them to
put money into an account, but not financially easier.
The shift from traditional pensions which are truly
automatic, in the sense that they automatically create
retirement savings, to IRAs, 401(k)'s, and other individual
savings accounts that require workers to shoulder most or all
of the cost and risk, has left most workers with less
retirement security. It is not enough simply to argue that the
shift from traditional pensions to individual accounts is a
reflection of market forces. The tax incentives Congress
provides for retirement accounts are not a result of market
forces. They are a political decision, and they constitute an
enormous subsidy from the Federal Government that has done
almost nothing to increase retirement savings.
There are three big problems with these tax incentives,
which automatic IRAs would not change: first, only households
that owe income tax are eligible for the subsidies, the size of
which also depends on a household's tax bracket; second, even
if the value of the tax deduction per dollar saved didn't vary
by income level, high-income households have more disposable
income to set aside, so subsidies would still
disproportionately benefit them; and finally, the incentive
effect is weak, or non-existent, since there is no way to
ensure that these tax incentives encourage new saving.
The present value of tax expenditures for 401(k) and IRA
contributions in 2007 amounted to nearly $135 billion. Roughly
70 percent of these subsidies go to the top 20 percent of the
income distribution, and almost half go to the top 10 percent.
The average worker gets little help from this $135 billion, due
to an upside down incentive structure that gives a wealthy
family in a 35 percent tax bracket a tax break 3.5 times more
valuable than a family in a 10 percent tax bracket, even if
each family contributes the same dollar amount to a tax-favored
account.
In other words, those who need the help least to save get
the most help. Thus, it is not surprising that only 3 out of 10
households received a tax break for contributing to a defined
contribution plan or IRA in 2004. Congress, starting with this
Committee, has tilted the subsidy table toward the better off,
and told most Americans, ``You're on your own.''
These tax breaks are not just unfair, they're ineffective,
because they mostly cause wealthy households to shift savings
to tax-favored accounts, rather than increasing overall
savings. Thus, the paradox: the taxpayers are giving up more
and more revenue to promote retirement savings while retirement
security declines, along with the national savings rate. Tax
incentives ought to do more than lower the taxes paid by
wealthy households. They ought to help all workers save for
retirement.
The implicit assumption behind the auto-IRA approach is
that the problem lies with the worker, not with the retirement
options she faces. But even in the best case scenario, a
participant who contributes regularly and does not touch her
savings until retirement, high fees may erode a quarter or more
of her nest egg, compared to savings pooled in a cost-efficient
pension fund.
These problems are compounded by the problem that
individual investors feel torn between low fixed returns and
gambling with their nest egg. Finally, even a worker who saves
steadily and has good luck with investments may outlive her
savings.
So, these problems require the kind of creativity that you
called for in your opening statement, Mr. Neal. I think we need
to think outside the box that we have been in, and we would
like to propose--and I have brought, and would like to offer
for the record, a plan called The Guaranteed Retirement
Account. Could I submit that for the record?
Chairman NEAL. You certainly can.
Mr. EISENBREY. Thank you.
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Mr. EISENBREY. It is a plan that was produced for the
Economic Policy Institute by Teresa Ghilarducci, a retirement
expert. It's a hybrid that combines the best features of
defined benefit and defined contribution plans, including
steady and predictable employer and employee contributions, low
administrative costs, 100 percent portability, and guaranteed
lifetime benefits.
The GRA plan would deliver Federal subsidies to the
families who really need them, while insuring participants
against financial and longevity risk. It starts by converting
tax expenditures for defined contribution plans into
refundable, flat tax credits. A tax policy center analysis of
the GRA plan found that this, by itself, would make 58 percent
of taxpayers better off, and only 16 percent of mostly high-
income taxpayers worse off.
Unlike auto-IRA plans that focus on increasing voluntary
contributions, the GRA plan squarely addresses the issue of
adequacy through mandatory contributions, efficiency gains, and
plugging cash-outs and other leaks.
Workers not enrolled in an equivalent or better pension
plan would be enrolled in a GRA account, contributions equal to
5 percent of earnings, up to the Social Security earnings cap,
could be deducted, along with payroll taxes, and credited to
individual accounts, though the funds would be pooled and
invested together.
I see I am over my limit. I will stop. But we would love to
present this plan in greater detail.
[The prepared statement of Mr. Eisenbrey follows:]
Statement of Ross Eisenbrey, Vice President, Economic Policy Institute
Chairman Neal, Ranking Member English, and distinguished members of
the Subcommittee, I appreciate the opportunity to appear before you
today to discuss ways to expand retirement security. The opinions I
will express are my own and not necessarily those of the Economic
Policy Institute.
Before I begin, I would like to clarify that the issues I plan to
address are relevant to all types of individual savings accounts, not
just IRAs. The distinction between IRAs and defined-contribution plans
is often immaterial, because most funds in IRAs were rolled over from
defined-contribution plans, and some IRAs, like SIMPLE IRAs, are very
similar to defined-contribution plans.
In recent years, the focus of retirement experts and policymakers
has been on proposals to increase retirement savings through payroll
deductions into savings accounts like IRAs or 401(k)s. The latest such
proposal is the Automatic IRA Act, which has been introduced with
bipartisan support in both houses of Congress.
These proposals are designed to overcome behavioral obstacles to
participating and contributing to retirement accounts--by, for example,
requiring workers to opt out of a plan rather than opting in. The
Automatic IRA Act, for example, would require any employer with more
than 10 employees who does not have a retirement plan to offer
automatic deduction to an IRA.
The consensus is that this approach cannot hurt. The problem is
that it will not help much either. This is because these proposals do
not make 401(k)s or IRAs a better deal for ordinary workers, they just
make it easier for them to put money into an account.
These proposals are a distraction from the real problem, which is
that most workers have not been well served by the shift from
traditional pensions, which are truly automatic, to IRAs, 401(k)s and
other individual savings accounts that not only require workers to sign
up for an account, but also shoulder most or all of the cost and the
risk.
One might argue that the shift from traditional pensions to
individual accounts is simply a reflection of market forces. But tax
incentives for savings accounts represent an enormous subsidy from the
Federal Government, with little to show for it.
There are three big problems with these supposed incentives, which
Automatic IRAs would do little to change. First, only households that
owe income tax are eligible for the subsidies, the size of which also
depends on the household's tax bracket.\1\ Even if that were not the
case, high-income households have more disposable income to set aside,
so subsidies would still disproportionately benefit them. Finally, the
incentive effect is weak or non-existent, since there is no way to
ensure that tax incentives encourage new saving.
---------------------------------------------------------------------------
\1\ The Saver's Credit is designed to address this problem, but
most people with incomes low enough to qualify cannot take advantage of
it because they do not owe income tax and the credit is non-refundable
(William G. Gale, J. Mark Iwry, and Peter R. Orszag, ``Making the Tax
System Work for Low-Income Savers: The Saver's Credit,'' Urban-
Brookings Tax Policy Center Issues and Options, July 2005).
---------------------------------------------------------------------------
The present value of tax expenditures for 401(k) and IRA
contributions in 2007 amounted to nearly $135 billion.\2\ According to
the Urban-Brookings Tax Policy Center, roughly 70% of these subsidies
go to those in the top 20% of the income distribution, and almost half
go to the top 10%.\3\
---------------------------------------------------------------------------
\2\ Office of Management and Budget, Analytical Perspectives, FY
2009 Budget, Table 19-4.
\3\ Leonard E. Burman, William G. Gale, Matthew Hall, and Peter R.
Orszag, ``Distributional Effects of Defined Contribution Plans and
Individual Retirement Accounts,'' Urban-Brookings Tax Policy Center,
2004.
---------------------------------------------------------------------------
These tax breaks are not just unfair, they are ineffective, because
they mostly cause wealthy households to shift savings to tax-favored
accounts rather than increase overall savings--thus the paradox that
taxpayers are giving up more and more revenue to promote retirement
savings while retirement security declines.
Tax incentives are supposed to do more than lower the taxes paid by
wealthy households. They are supposed to help workers save for
retirement. Yet enrollment in employer-based retirement plans has
remained stagnant at around 50% of full-time workers. Due to inadequate
contributions, cash-outs and other leakages, Federal Reserve data show
that the median 401(k) and IRA account balance of workers approaching
retirement was $60,000 in 2004, not even enough to buy a $400 per month
annuity.\4\
---------------------------------------------------------------------------
\4\ Survey of Consumer Finances, as cited in Alicia H. Munnell and
Annika Sunden, ``401(K) Plans Are Still Coming Up Short,'' Center for
Retirement Research Issue Brief, March 2006.
---------------------------------------------------------------------------
The implicit assumption behind the ``Auto IRA'' (and ``Auto
401(k)'') approach is that the problem lies with the worker, not with
the retirement options she faces. But even in the best-case scenario--a
participant who contributes regularly and does not touch the savings
until retirement--high fees may erode a quarter or more of her nest egg
compared to savings pooled in a cost-efficient pension fund.
Meanwhile, the worker is likely to be getting little help from the
Federal Government, due to an upside-down incentive structure that
gives a wealthy family in a 35% tax bracket a tax break three and a
half times more valuable than a family in a 10% tax bracket, even if
each family contributes the same dollar amount to a tax-favored
account. In other words, those who need the least help saving get the
most. Thus it is not surprising that only about three out of ten
households received a tax break for contributing to a defined
contribution plan or IRA in 2004.\5\
---------------------------------------------------------------------------
\5\ Burman et al., 2004.
---------------------------------------------------------------------------
These problems are compounded by the problem that individual
investors feel they must choose between low, fixed returns and gambling
with their nest egg. Retirement experts often bemoan the tendency of
many 401(k) participants to invest in money market funds, but it is
hard to argue against conservative investments when you consider that
bear markets can last for a decade or longer. Other people, of course,
take the opposite approach, investing all their retirement savings in
risky stocks in a desperate attempt to catch up. In contrast,
traditional pension funds invest in diversified portfolios and pool the
savings of people who retire at different times, smoothing investment
returns across generations.
Incidentally, the decision-making problem is not limited to those
with little formal education. Los Angeles Times reporter Peter Gosselin
found several Nobel Prize-winning economists willing to admit that they
could not decide how to allocate their retirement savings.\6\
---------------------------------------------------------------------------
\6\ Peter G. Gosselin, ``Experts Are at a Loss on Investing,'' Los
Angeles Times, May 11, 2005.
---------------------------------------------------------------------------
Finally, even a worker who saves steadily and has good luck with
investments may outlive his or her savings. Theoretically, individuals
can insure themselves against longevity risk by purchasing life
annuities, but an adverse selection problem makes annuities expensive
on the individual market, and people are often stymied by the
difficulty of choosing among investment products.
Some of these problems can and should be fixed. Congress has begun
to address the issue of hidden 401(k) fees, for example. But there are
inherent advantages to traditional pensions, because pooling allows
employers or the government to insure workers against most financial
and longevity risks while taking advantage of economies of scale. Thus,
the shift from traditional pensions to individual accounts has
increased administrative costs while saddling workers with risk that
would be easy to insure against in a group plan.
In other words, closing the retirement gap is not simply a question
of increasing contributions, but also ensuring that benefits are
broadly shared and retirement savings and income are secure.
We need a whole new approach. We need to replace IRAs and 401(k)s
with something better. And though traditional pensions work well for
large, stable employers, others are not in a position to take on long-
term pension liabilities.
Last year, the Economic Policy Institute asked retirement expert
Teresa Ghilarducci--who unfortunately could not be here today--to come
up with a replacement for the current system of individual accounts.
The resulting Guaranteed Retirement Account plan \7\ is a hybrid that
combines the best features of defined-benefit and defined-contribution
plans, including steady and predictable employer and employee
contributions, low administrative costs, and guaranteed lifetime
benefits.
---------------------------------------------------------------------------
\7\ Teresa Ghilarducci, ``Guaranteed Retirement Accounts: Toward
retirement income security,'' EPI Briefing Paper, November 20, 2007.
http://www.sharedprosperity.org/bp204/bp204.pdf
---------------------------------------------------------------------------
The GRA plan would reapportion Federal subsidies, which now
disproportionately go to high-income families, while insuring
participants against financial and longevity risk. It would start by
converting tax expenditures for defined-contribution plans and IRAs
into flat refundable credits. A Tax Policy Center analysis of the GRA
plan found that this by itself would make 58% of taxpayers better off
and only 16% of taxpayers worse off, most of them in the top income
quintile. And unlike high-income households, low- and middle-income
households would not fully offset this increase in savings with dis-
saving in other forms.
Unlike ``Auto IRA'' and ``Auto 401(k)'' plans that focus on
increasing voluntary contributions to savings accounts, the GRA plan
squarely addresses the issue of adequacy through mandatory
contributions, efficiency gains, and plugging cash-outs and other
leaks. Like ``pay or play'' healthcare plans, the plan calls for all
workers not enrolled in an equivalent or better pension plan to enroll
in a Guaranteed Retirement Account. Contributions equal to 5% of
earnings up to the Social Security earnings cap would be deducted along
with payroll taxes and credited to individual accounts, though the
funds would be pooled and invested together.
The cost of these contributions would be split equally between
employers and employees. However, employee contributions would be
offset in whole or in part through an inflation-indexed $600 refundable
tax credit that would take the place of tax breaks for defined-
contribution accounts and IRAs.
GRA accounts would be administered by the Social Security
Administration, and the funds managed by the Thrift Savings Plan or
similar body, which in turn would outsource investment functions to an
outside provider. Though the funds would be invested in financial
markets, participants would earn a fixed 3% rate of return adjusted for
inflation and guaranteed by the Federal Government. If the trustees
determined that actual investment returns were consistently higher than
3% over a number of years, the surplus would be distributed to
participants, though a balancing fund would be maintained to ride out
periods of low returns.
Workers would be able to track the dollar value of their
accumulations, the same as with 401(k)s and IRAs. However, account
balances would be converted to inflation-indexed annuities upon
retirement to ensure that workers would not outlive their savings.
The result is that participants would be guaranteed a secure
retirement after a lifetime of contributions. A prototypical worker
could expect a benefit equal to roughly 25% of pre-retirement income
after 40 years. Since Social Security provides such a worker with a
benefit equal to roughly 45% of pre-retirement income at age 65, the
total replacement rate would be approximately 70% of pre-retirement
income, which is considered the minimum necessary to avoid a drop in
living standards upon retirement.
The GRA plan gives workers what they want--a simple, fair and
effective way to save for retirement. According to the Rockefeller
Foundation's American Worker Survey, Americans are equally concerned
about having access to health care and pension benefits, and they are
about three times more likely to want a job that guarantees health
coverage and a pension rather than one that pays more.
Americans are seeking financial security after flirting with day
trading, stock options, and house flipping. Quasi-free market solutions
relying on inequitable and ineffective tax breaks have lost much of
their appeal. Instead of tax breaks for a lucky few, the government
would be telling all workers, ``we'll throw in the first $600, and the
rest is up to you and your employer.''
Admittedly, Americans remain leery of government solutions and
convinced that retirement is unaffordable. The GRA plan addresses these
concerns through advance funding, shared employer-employee
contributions, and a revenue-neutral reallocation of government
subsidies. Thus, it is important to emphasize that the GRA plan would
not increase the Federal deficit and would reinforce the link between
work and retirement benefits, encouraging people to work longer.
Current economic conditions highlight the need for a new plan. In
contrast to Social Security and defined benefit pension plans,
individual accounts like 401(k)s and IRAs are not insulated from the
effects of economic downturns, since asset markets tend to move pro-
cyclically. In a recession, participants are often forced to delay
retirement, which has a spillover effect on unemployed workers as
vacancies shrink. A recession is also likely to reduce contributions
and increase leakages, and some fund managers have already reported an
increase in hardship withdrawals and loans.
The role of housing as a conduit to savings and financial security
has eroded as the housing market has slumped and homes have been
transformed into speculative investments or collateral for loans. Even
ignoring the immediate problems associated with sub-prime loans and
foreclosures, two long-term trends--increased mobility and home equity
withdrawals--point to a greater need for more leak-proof and secure
savings vehicle than housing, which represented nearly 40 percent of
total assets held by households, according to the last Survey of
Consumer Finances conducted by the Federal Reserve. (That figure may,
of course, be somewhat lower today.)
I would like to say that if Automatic IRAs are the answer, you are
asking the wrong question. The question should not be, ``how can we
make a bad system a little better,'' but rather, ``how can we make sure
Americans have adequate and secure retirement incomes after a lifetime
of work?'' The answer, I think, is the Guaranteed Retirement Account
plan.
Before I conclude, I should add that one of our state affiliates--
the Economic Opportunity Institute in Washington State--has come up
with an Automatic IRA plan that would be administered by a state
agency.\8\ The Institute has worked closely with Mark Iwry and other
architects of the Automatic IRA approach.
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\8\ Information about Universal Voluntary Retirement Accounts is
available at the EOI website at http://www.eoionline.org/
washington_voluntary_accounts/voluntary_accounts.html
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However, the Washington State plan would do more to protect workers
than the current Federal legislation. Besides expanding coverage, the
plan would keep costs down by, among other things, using an existing
administrative structure, pooling funds to take advantage of economies
of scale, and negotiating fees with providers.
The plan is a step in the right direction, but because it is
designed to work within the existing Federal framework, it cannot
correct the failures of this system, such as the fact that IRAs
currently function more as tax shelters for the wealthy than retirement
vehicles for the rest of us.
Chairman NEAL. I am delighted to accept it.
Mr. EISENBREY. Thank you.
Chairman NEAL. Mr. Hardock?
STATEMENT OF RANDOLF HARDOCK, DAVIS & HARMAN, ON BEHALF OF THE
SAVINGS COALITION OF AMERICA
Mr. HARDOCK. Thank you, Chairman NEAL. I am pleased to be
here today on behalf of the Savings Coalition of America, a
non-profit organization that promotes efforts to increase
personal savings.
For many years, the Savings Coalition has been a strong
advocate for improving and expanding IRAs. Chairman Neal, over
the years, you have been doing that, doing a great job at that
also. So, we urge you to continue those efforts to further
improve IRA access.
The GAO earlier today expressed concern that many Americans
who didn't have retirement plans at work are not saving enough
for retirement. We agree completely. We need to reach more
people by getting more employers to provide access to IRAs
through payroll deduction mechanisms that have been proven
effective in the 401(k), 403(b), and 457 plan models.
The best way to succeed in encouraging more small
businesses to provide IRA opportunities for their workers is to
give them understandable, low-cost, low-risk alternatives. The
creation of the SIMPLE IRA was a major step in that direction.
The use of the SIMPLE IRA continues to grow.
Just yesterday, the Investment Company Institute released
data that showed that 2.2 million individuals participated in
over 500,000 SIMPLE IRA mutual fund plans in 2007. The
important statistic there is the continuous and steady growth
in the adoption of SIMPLE IRAs since 1998, with a 10-percent
increase in participation just last year.
So, the growth of SIMPLE IRAs has been something that is
actually pretty impressive, but there is still much, much more
to be done, as the other witnesses have said. We need to find
ways to give people access to retirement saving in the
workplace. Our members say that the reasons that doesn't
happen--while there are many, there are four major reasons:
cost, potential employer liability, the absence of incentives
for small business decisionmakers, and the lack of employer
education.
We suggest four changes that we believe would enhance the
availability of IRAs in the workplace. First, we need to give
employers comfort that they will not be exposed to costs,
administrative burdens, and potential liability if they set up
an IRA savings program at work. Many employers simply will not
establish payroll deduction IRAs if they even think they could
become subject to the full range of rules and regulations under
ERISA.
The Labor Department has published helpful safe harbor
comfort for employers, and we believe that needs to be expanded
to clarify that employers can actively promote the idea of IRA
savings in the workplace.
Employers should also be allowed to automatically default
employees into a payroll deduction contribution, unless the
employee affirmatively elects not to do so. Chairman Neal, Mr.
English, your legislation to promote those kinds of defaults is
something we hope to work with you further on.
The second major change we recommend is making SIMPLE IRAs
even simpler, as proposed by Representative Kind, along with
Representative Hulshof and Representative English in H.R. 5160.
Changes that would improve SIMPLE IRAs include: allowing
small employers to move mid-year from a SIMPLE IRA to another
kind of retirement plan; eliminating the restrictions on
rollovers from SIMPLE IRAs into other retirement plans; and
conforming the unique complex penalty tax provisions on
premature distributions from SIMPLE IRAs to the same rules that
apply across the board.
The third type of change that we recommend involves
creating incentives for small business decisionmakers. Right
now, small business employers have no tax incentives to make
IRAs available to their employees. Representative Kind's bill,
your bill, Mr. Neal, would encourage employers with a startup
credit for new plans, and would allow small, one-time tax
credits for each employee that actually signs up.
We also note that the complex IRA income eligibility limits
discourage IRA participation across the board. They have for
years. Without those complex limits, we would see increased
savings among all income classes, and we would see many more
small businesses deciding to set up IRAs for their employees.
Finally, we have to do a better job of educating small
employers. We believe the IRS and the Small Business
Administration can provide better information and education to
small employers about providing IRA savings alternatives. At
the same time, the IRS should be providing additional
information on the availability and advantages of the saver's
credit.
In sum, we can get more employers to offer IRA savings
opportunities to workers with simple, low-cost, low-risk
alternatives like those I have described. Enhanced retirement
savings incentives like these are the most effective
investments we can make, as a nation. Thank you.
[The prepared statement of Mr. Hardock follows:]
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Chairman NEAL. Thank you. I thank all of the panelists.
Mr. Estrada, you testified about the interactive effect of
auto-IRAs and the saver's credit. It's come up a number of
times in this panel's presentation. Can you explain how this
would work?
Are there suggestions that you might have for improvement?
Mr. ESTRADA. Yes, Mr. Chairman. I'm sure Mr. Iwry would
have something to say, as well.
I think the first thing is we all understand the under-
utilization of the saver's credit. In fact, it occurs because
it's most appropriate for people of lower income, of lower
earnings. Therefore, what happens is that we don't--those are
the very individuals who are not saving.
So, the interaction between these two is that the automatic
IRA would provide a savings that would take place, and then
that savings would now become part of the abilities to take
advantage of the saver's credit. So, these two would then
increase the number of people using the saver's credit, and I
think, most importantly, give us a whole new group of savers
that need to be those that can take advantage of this program.
Chairman NEAL. Any other panelists? Mr. Iwry?
Mr. IWRY. Mr. Chairman, I would entirely agree, and add
that the Emanuel Ramstad bill to expand the saver's credit
would do even more to provide incentives to save for the people
who really need those incentives the most, essentially beefing
up the saver's credit by making it refundable, by making it
depositable to the account in which the person saves, such as
the automatic IRA, so that the credit is actually saved,
automatically, and by simplifying it and extending it to more
of the middle class.
Those are attributes that the proposed saver's credit had
when it was first proposed by the Treasury Department, but were
cut down in the legislative process. So, that would further
enhance both savings and 401(k)'s to which it would apply, and
the appeal of the automatic IRA.
Chairman NEAL. Let me follow up with you, Mr. Iwry. We have
heard some concern that IRAs should not displace 401(k) plans,
which are more effective retirement vehicles. But you also
argue that auto-IRA programs might actually spur growth in
these other employer-provided plans. Can you explain your
graduation theory?
Mr. IWRY. Absolutely, Mr. Chairman. Your bill really has,
in a sense, two goals: one direct, and one indirect. The direct
goal is to use automatic payroll deposit to IRAs to extend
retirement savings to tens of millions of people who don't have
it now.
But the indirect goal is to actually encourage employers to
adopt 401(k)'s, SIMPLEs, other plans that involve employer
contributions. It is designed to bring employers into the
system who are currently not willing to adopt any of those
plans, either at the beginning, when an employer realizes that
it would be offering payroll deposit to its employees for the
first time, to give them the opportunity to save on a tax-
favored basis, or after a year or two of experience with that.
There is every reason to expect that a significant number
of employers would realize that jumping up, stepping up to a
401(k) or stepping up to a SIMPLE IRA would be easy and to
their advantage, that their employees like tax-favored saving,
that the employees value the employer's role in making that
available, and that recruitment and retention of valuable
employees is enhanced by the sponsorship of a plan.
That is why a number of the entities, people who market
plans to small employers, have found the automatic IRA to be a
very promising way to actually expand 401(k) formation.
Chairman NEAL. Mr. English?
Mr. ENGLISH. Thank you, Mr. Chairman. Mr. Iwry, I wonder if
you could respond to the point raised by Assistant Secretary
Campbell in his testimony, which I believe you may have been
here to overhear, making the--raising the concern that under an
auto-IRA model, it isn't necessarily clear who would protect
employees from excessive fees, potentially dangerous investment
decisions, or other challenges.
How would this concern be best addressed, and how can we
work, legislatively, to ensure that workers are protected in
these types of plans?
Mr. IWRY. That is a very appropriate and important issue,
of course. There are a number of ways in which the bill already
takes steps toward that.
Number one, an employer is required to remit employee
contributions to the IRAs, just as an employer is required to
remit income tax withholding, or other payroll taxes to the
appropriate Federal tax deposit institution. The IRS would have
authority to impose penalties, under the tax system, if
employers did not remit employees' withholdings.
So, there is a mechanism there. Of course, one would expect
that employers would comply, and that these penalties are not
intended to be imposed, but just as a deterrent, and as
something to give employees the comfort that I think you're
alluding to, that there is an enforcement compliance mechanism.
With respect to the investment, there would be a default
investment similar to the QDIAs, the qualified default
investment alternatives, that Brad Campbell and his
predecessor, Ann Combs, oversaw in the Department of Labor
regulations. They have had a huge impact on the market in the
401(k) world.
Those kinds of default investments that are essentially
standardized, asset allocated, have proven to be very popular,
both with employers and employees. The bill contemplates that a
similar approach would be taken, that there would be a
prescribed kind of default investment, flexible enough so
different financial institutions could provide them, but
sufficiently uniform that we would have the comfort that they
are reflective of good policy.
Mr. ENGLISH. Thank you. Mr. Hardock, you mentioned that one
barrier preventing more employers from offering IRAs is that
many Americans are not eligible to contribute to IRAs under
current law, and that eligibility rules sometimes can be
complicated.
Could you provide us with more details as to how
eligibility, in your view, should be expanded, or made simpler?
Mr. HARDOCK. I think it's very important, and the Savings
Coalition has long supported universal IRA availability, that
every American should have the same access to the IRA and the
tax advantages of the IRA.
If you look at the current contribution limits on
deductible IRAs, they phase out for single individuals between
$53,000 and $63,000; for married couples, $85,000 to $105,000.
But if you want a spousal IRA, the phase-out is--kicks in at
$159,000, and starts to phase out over a $10,000 range.
The Roth IRA limits are different for single, for couple.
There are marriage penalties in some of those limit phase-outs.
There are not marriage penalties in others. The list goes on,
on how complex it is for people to determine where they're
going to be during a year when they may not even know what
their income is, and it makes it very hard to make that IRA
decision.
Mr. ENGLISH. That's an excellent point. Mr. Chairman, I
think this is something that, over time, I think the
Subcommittee could play a particularly useful role in focusing
on.
Mr. Hardock, one of the barriers you're bringing up, and
you have mentioned, is that the contribution limits to IRAs
under current law are, I gather in your view, relatively low.
The advantages of IRAs are sometimes outweighed by the hassle
and cost.
You know, what else could be done to correct this
situation?
Mr. HARDOCK. Well, I think the key ingredient, particularly
in the employer setting, if we want employers to do it, is to
find ways to keep the employer costs down to offer this
alternative. Mr. Iwry just talked about the importance of
keeping the costs down for the individuals also within the IRA
context. That means the rules on IRAs could be simplified, so
there is less paperwork, less----
Mr. ENGLISH. Sure.
Mr. HARDOCK [continuing]. That the financial institution
might have to provide, so they could even provide those
cheaper. Those are the kinds of cost issues, ultimately, that
this comes down to for individuals and employers.
Mr. ENGLISH. Where do you view--I mean, at what level do
you think the contribution limits to IRAs should be adjusted
to?
Mr. HARDOCK. Now, those are difficult revenue decisions. I
think----
Mr. ENGLISH. Let's take it out of the revenue view. I am
looking at it more--what would be the levels at which it would
maximize the benefit, from a savings standpoint?
Mr. HARDOCK. Well, from a savings standpoint, I think
unlimited IRA contributions----
Mr. ENGLISH. Okay.
Mr. HARDOCK [continuing]. Would maximize the savings. But
many investments----
Mr. ENGLISH. But are there some other policy issues that,
apart from just the question of revenue, that maybe could set--
you know, give us guidance here?
Mr. HARDOCK. I think that many have argued that the IRA
limits for people who don't have access to employer plans may
not be adequate, and that those people maybe could use a little
more annual savings, if somehow you don't have access to an
employment-based plan. The IRA limits might not be enough.
Those could be increased somewhat, I think, going forward.
But in the end, it really does come down to how much it's
going to cost. You know, there is the tension there.
Mr. ENGLISH. Yes.
Mr. HARDOCK. That's why they are where they are now.
Mr. ENGLISH. Now, Mr. Eisenbrey, you have offered us what I
think is the familiar critique from the left of IRAs. But would
you not concede that IRAs have been an extremely successful
savings vehicle for the middle class, and made a significant
contribution to at least current pools of retirement savings?
Mr. EISENBREY. No, I guess I am sorry, I can't agree, Mr.
English. The----
Mr. ENGLISH. So, you feel they primarily benefit more
affluent people?
Mr. EISENBREY. They absolutely have. And----
Mr. ENGLISH. With the contribution levels?
Mr. EISENBREY. You know, when you look at--you just have to
look at this in terms of, you know, return on investment. Back
when, you know, we passed ERISA, and when you created the IRA,
the amount of savings by the average American, you know, was--
the savings rate for all Americans was about nine percent.
Mr. ENGLISH. Mr. Eisenbrey, that was----
Mr. EISENBREY. It's now zero.
Mr. ENGLISH. There are a whole variety of factors that have
kicked in to the decline of savings rates.
Mr. EISENBREY. Absolutely.
Mr. ENGLISH. I think it's really very hard to focus on IRA
tax policy as having driven it. What--I guess what income range
would you say defines the middle class?
Mr. EISENBREY. Well, you can define it--Members of Congress
often define it up to, you know, people earning $250,000 a
year. But the median income in the United----
Mr. ENGLISH. Do you define it that way?
Mr. EISENBREY. No, the median income in the United States
is less than $40,000 a year.
Mr. ENGLISH. Yes.
Mr. EISENBREY. Half of all Americans in the work force are
making less than $40,000. So, when your policy concentrates on
raising the limits for people who can put away $20,000 a year
or more into tax-favored accounts, you are----
Mr. ENGLISH. But what about those----
Mr. EISENBREY. You are leaving half of the work force
completely behind.
Mr. ENGLISH. But what about those who have incomes that
vary, and will be in situations in 1 year to kick in $20,000,
but not in year 2, 3, and 4. What about the----
Mr. EISENBREY. That's a minority, it's a very small
minority of people who ever have the ability to put away
$20,000 a year into a retirement account. Half----
Mr. ENGLISH. That's true, except that there are some people
who are--who have a large realization, or will, through sales,
achieve a--you know, a bulge in their income. You don't think
there should be a tax incentive for them to set aside money?
Mr. EISENBREY. I think that our policy has focused so much
on people who are in the top 20 percent of income, that we have
completely lost sight of the fact that, as other witnesses have
said, half of the work force has no employer-provided pension
at all. A third of people will retire----
Mr. ENGLISH. So, you still----
Mr. EISENBREY [continuing]. With only Social Security.
Mr. ENGLISH. You still haven't given me the income
parameters for the middle class, in your view.
Mr. EISENBREY. Well, you--if you wanted to take the middle
third of the income distribution, and say that was the middle,
I--if you took the middle 80 percent of the income
distribution, the middle class would end at about $130,000 of
income in a year.
Mr. ENGLISH. So, you would say----
Mr. EISENBREY. That's the middle 80 percent, just, you
know, taking the top 10 and the bottom 10, saying they're not
middle class, everyone else is. You know, you would not be
focusing on people who could put $20,000 or more away a year
into their retirement account.
Mr. ENGLISH. Well, I have a feeling that probably ideology
has crept in here, so I'm going to turn this back to you, Mr.
Chairman.
Chairman NEAL. But I think that you did raise a good point,
Mr. Hardock responded, Mr. Eisenbrey responded, and I think the
other panelists might have some interest in responding to the
suggestion that Mr. Hardock offered, and that was that we ought
to just take off any income guideline on the ability to
contribute to an IRA.
Mr. Salisbury, you seemed pretty anxious earlier to speak
to that issue.
Mr. SALISBURY. Oh. The comment I was going to make is that
the--Randy was mentioning the issue of universal. If you go
back to the 1980s, when they were still universal, even though
at lower contribution limits, is the complexity created within
the system drove the percentage of individual taxpayers
contributing to these programs from what was a high of 16.7
percent of taxpayers down to last year, the last year we have
data, 3.8 percent of taxpayers, because of the absence of
selling, the absence of clarity.
So, I mean, you get the irony. If the government wanted to
have the revenue loss be the same, except that it would be the
same, then you would get far more individuals contributing to
IRAs, most particularly low-income individuals, if you lowered
the limit of what could go in, but let anybody put it in, so
that, in essence, there would be a far more aggressive
approach.
So, I think it's really a matter of what the objective of
the policy is, and who it wants to be targeted at. There are
ways, clearly, to have more people create IRAs, more people put
money into IRAs. But like all retirement plans, very few
individuals decide to do this on their own. Few employers
decide to do it on their own. It's a question of the level of
sales effort made by the society, and by the institutions. We
have the social experiment, so to speak, 1981 to 1986, and we
know the power of universality, even at lower contribution
rates, if one wants to balance the revenue loss.
Mr. HARDOCK. Mr. Neal, may I just add something?
Chairman NEAL. You sure can.
Mr. HARDOCK. As Mr. English said, we let politics creep
into this. I think Mr. Hulshof said it earlier. These issues
have historically been bipartisan.
Chairman NEAL. Yes.
Mr. HARDOCK. The issue of how progressive your Tax Code is
can be dealt with in a lot of other contexts, and it's a
difficult issue. If you can keep that out of the pension/
retirement debate, and keep this on the lines of how do we get
more people to save, then the data that Dallas just showed, the
40 percent decline in IRA contributions by those who continued
to be eligible after the 1986 Act went after effect, we can get
more savings and you can get your progressivity somewhere else,
if that's what you want.
But if you do it through the system, you get a hugely
complex maze of phase-outs and nobody knows where they are, and
what you get is paralysis.
Mr. EISENBREY. I think Randy would agree with me, though,
that the most important incentive is a financial incentive. If
you give a much smaller financial incentive to a low-income
person to save, that person is going to save less.
So, if you gave the same--and it has to be through a
refundable credit, as Mark Iwry was saying. But if you don't
give a low-income person the same incentive, and you know,
financial incentive, they won't be able to save as much.
Mr. HARDOCK. The saver's credit was a huge step forward in
that direction, and I think there is that incentive part of it.
There is also the water cooler effect part of it, which I think
gets lost when economists talk. There is a buzz that develops.
That is what I think the auto-IRA is trying to do, and other
things, also.
Chairman NEAL. Why don't we recognize Mr. Iwry?
Mr. IWRY. Mr. Chairman, the first rule here, of course,
should be first do no harm. In thinking about the appropriate
level of IRA contributions, the related rules relating to the
ability to contribute to an IRA, the most important
consideration I would suggest is that we do nothing to threaten
the employer plan system, that we do everything we can to
protect the 401(k)'s, the other retirement plans we've got, the
incentive to adopt those, including the SIMPLE plan, which I
might note Randy Hardock and I originated with our proposals
when we were working together at Treasury and Congress then
enacted.
The rules for IRAs, therefore, have to be part of the
ecology, if you will, of the whole retirement system, set at a
level that gets universal participation through your kind of
proposal, the automatic IRA, but not at a level that would
detract from the incentive to sponsor an actual employer plan.
Your bill is attuned to that sensitivity, so that it would
actually enhance that incentive, and make it more thinkable for
employers to take that step up and adopt a SIMPLE or a 401(k),
in addition to or after adopting an automatic IRA.
Chairman NEAL. Thank you. The gentleman from North Dakota,
Mr. Pomeroy, is recognized to inquire.
Mr. POMEROY. I thank the chair. Again, just to echo
comments I made earlier about how much I am enjoying this
hearing, I commend each of you for your very thoughtful
questions and leadership in the course of this morning.
Let's--I think that the data, just the data alone, is
empirical. Regardless of which way your politics takes you in
terms of its interpretation, conclusions you draw from it, it's
important that we master the data here. Let's start by
understanding what has been happening in the retirement savings
world. So, let's start with both defined benefit pensions and
defined contribution plans sponsored in the workplace, and
let's look at this decade, what is happening.
My belief is that we have had some decline. Dallas,
perhaps, as the keeper of the data, do you want to speak to
that?
Mr. SALISBURY. Congressman, we have seen a substantial
decline in proportion of individuals in defined benefit plans.
That has gone from about 28 percent of--with active
participation, about 17.2 percent.
We have seen very dramatic increases in defined
contribution plans at the workplace, both in participation and
assets, and we have seen a relatively flat process vis a vis
Individual Retirement Accounts. The 3.7, 3.8 percent
contributing to a deductible IRA has been relatively constant.
We have seen a growth in the number of individuals contributing
to Roth IRAs. That's now up to about 3 percent of taxpayers.
In relative terms, as I noted, the percentage of taxpayers
in defined contribution plans on an annual basis contributing
on a deductible and/or Roth basis is about six times the number
that are contributing to Individual Retirement Accounts.
Mr. POMEROY. But is that defined contribution number
holding steady? The way I was interpreting current population
survey data was that there had been, actually, an increase--a
decrease there, also.
Mr. SALISBURY. It has--it flattened in the last 3 years,
and is slightly now declining, as it appears that the sales
efforts have apparently reached a saturation point. Now that
automatic enrollment is being put in place, we are likely to
see, with data in the next two to 3 years, an increase in the
number of active participants, as a result of the defaults that
were contained in the Pension Protection Act. Number of plans
has actually slightly declined.
Mr. POMEROY. Is there hope for saving the defined benefit
portion of the marketplace?
Mr. SALISBURY. Very frankly, very little reason to think
that that will occur. Most of the new plan formation of defined
benefit plans has been so-called hybrid, or cash balance plans.
They now represent in excess of 30 percent of plans.
We are seeing some creation of hybrids by relatively small
businesses that are using them because of the more advantageous
deductibility limits than they would have under a defined
contribution plan.
We are seeing a rapid pace of even the nation's very
largest private employers making announcements, including one
that came out of Boeing Company yesterday, that they are
moving--where they have the ability to move their workers from
defined benefit to defined contribution, they are doing it.
Boeing has just announced that earlier this year. Northrop
Grumman announced that.
A small firm that's been in the news lately, Fannie Mae,
announced that within the last month. They will--Fannie Mae
will, interestingly, be retaining its unfunded defined benefit
plan for its highest paid executives, even though it will be
eliminating it for all other employees.
Mr. POMEROY. Very interesting. Very pathetic, I might say.
Mr. Eisenbrey, what do you think the--what is the
circumstance for the worker, as they move from having a defined
benefit plan to a defined contribution option, only?
Mr. EISENBREY. Well, they are clearly worse off. I mean,
they end up with an employer making less of a contribution, by
and large. They end up with more risk. They end up having to
make decisions that they're not prepared to make about
investments.
I am sure you read the story a few years ago by Peter
Gosselin in the LA Times, talking to Nobel Prize winners in
economics about their ability to make investment decisions, and
many of them admitted that they, you know, weren't doing a very
good job, and had trouble doing it. It's not something that the
average person is prepared to do, to make, you know, wise
investment decisions for the rest of his life.
Mr. POMEROY. Yes. I haven't seen the proposal that you
advanced today. Do you--is this--do we just have to accept
that, of the 20 million that still have defined benefit plans,
that that is going to be a vanishing protection for them?
Mr. EISENBREY. Well, our proposal helps in the sense that
by--it takes away the incentive for employers to provide a
401(k), which has led--it's the 401(k), the existence of it,
that has moved, you know, so many employers out of the defined
pension, defined benefit world. I mean----
Mr. POMEROY. Well, the broader----
Mr. EISENBREY. If we hadn't created the 401(k)----
Mr. POMEROY. We have had a decade of----
Mr. EISENBREY [continuing]. We would have way more
traditional defined benefit pension plans.
Mr. POMEROY. But we have had a decade, though, of even
looking at wages alone, where middle class earnings have
stalled out. The productivity gains that our economy has made
have been deposited disproportionately at the highest
elevations of income, and we have greater income disparity than
ever before.
Mr. EISENBREY. That's true.
Mr. POMEROY. So, I mean, I believe that--I don't blame
401(k)'s for the demise of defined benefit plans. I believe
that we have got, basically, an economic trend that I believe
has been facilitated by the policies of this Administration
that has exasperated income disparity by promoting the
interests of the--those at the top earning brackets, and doing
very little for those medium and below.
Mr. EISENBREY. Well, I think that that's true, but it's a
30-year or a 35-year trend. It isn't just something that began
with the Bush Administration. I have to say that this goes back
as far back as the Carter Administration, that we started
seeing that gap between productivity and wage----
Mr. POMEROY. I will accept that part. I want to get Mr.
Iwry in here with his perspective, as a former Treasury
official. What is your view of the marketplace, and what can be
done?
Aside from your proposal to get the broader IRA
opportunities out there, what can be--is there something we can
do to shore up pensions and basically enhance retirement
savings prospects?
Mr. IWRY. Yes, Mr. Pomeroy. There are a number of things,
one of which is to build on the work that you have done in the
past, and that we have worked on together when I was at
Treasury, to expand the saver's credit, to have a refundable
credit that reaches more of the middle class, that even,
ideally, might be deposited into the accounts in which people
save, or at least they might have the option to do that.
I also salute your championing of defined benefit plans in
an era where that's becoming an increasingly lonely exercise.
One glimmer of hope I would offer there is that I think one of
the cardinal virtues of the defined benefit plan that you're
more sensitive to than virtually anyone in Congress, I think,
is, of course, the lifetime guaranteed income, and the
conversion to cash balance plans, which has its--which, once
done in a way that protects older workers, so that it's not
unfair to them, and not too harsh a change, is at least
something that preserves the defined benefit plan in some form.
That conversion also has a downside, which as you know, is
to take the traditional defined benefit annuity-oriented plan,
and convert it to the lump sum plan. The cash balance plan is
the lump sum plan.
But it does not have to be. The fact that the benefit is
framed as an account balance, and is almost invariably paid out
in the vast majority of cases as a lump sum, largely because of
the framing and the encouragement to do that, is something that
I believe we can work with. There are a few cash balance
sponsors that don't pay lump sums. Very few. There are more who
could, potentially, encourage annuitization, rather than
encouraging lump sums across the board, the way they do now.
So, what I am suggesting is that, apart from trying to
revive the dying patient, we can at least do an organ
transplant from the traditional defined benefit into the hybrid
and the 401(k) space.
Mr. POMEROY. Yes, on the 401(k) space--this will be my
final question, Mr. Chairman, I appreciate your letting me go
on here for a minute--the--is there something we can do to get
the 401(k) nest egg annuitized, to provide--can we make defined
contribution plans act like defined benefit plans?
Mr. IWRY. Absolutely, Mr. Pomeroy, and that's been the
strategy that I think, really, Treasury started promoting 10
years ago, when automatic enrollment was first defined and
approved and promoted, almost 10 years ago to this day, in
Treasury rulings.
The strategy is now playing out in the market. As we see,
there is a kind of a de-beatification of the 401(k), which has
not, however, yet reached the pay-out phase. We have de-
beatified enrollment through auto-enrollment, we have de-
beatified investments through the QDIAs, default investments,
and the market is now--the industry is now, I think, exhibiting
an extraordinary degree of creativity and innovation in
developing products designed to annuitize part of that account
balance in the 401(k).
I would very much look forward to working with you and you,
Mr. Chairman, and other Members of this Subcommittee and the
Committee. I know there are others on this panel and in this
room who would share that interest, to try to de-beatify that
pay-out phase as well, and at least encourage lifetime
guaranteed income.
Mr. POMEROY. We are on the same page on that one. Thank you
very much. Thank you, Mr. Chairman.
Chairman NEAL. Thank you, Mr. Pomeroy. I want to thank the
panelists. This was most helpful. As you know, there was a
pretty good turnout here at one point, and a lot of Members of
the Subcommittee were here. Most importantly, I think, to
determine the level of interest, there were a lot of Members
who are not on the Subcommittee who showed today. I would
predict flatly that next year this is going to be one of the
most important avenues of debate in the congress.
So, I thank you all for your participation. Without any
additional comments, the hearing is adjourned.
[Whereupon, at 1:11 p.m., the hearing was adjourned.]
[Submissions for the Record follow:]
The American Council of Life Insurers (ACLI) appreciates the
opportunity to provide our views to the Committee on Ways and Means,
Select Revenue Measures Subcommittee, in connection with the
Subcommittee's hearing on Individual Retirement Accounts (IRAs) and
their role in our retirement system. We welcome the interest of
Subcommittee Chairman Neal, Ranking Member English and other Members of
the Committee on this important topic. In addition, we also want to
thank Chairman Neal and Congressman Kind for their interest in this
issue by introducing bills which address retirement plan coverage. ACLI
supports efforts to increase retirement savings coverage.
During the past several decades, Congress has taken the laudable
steps of increasing and improving incentives for employment-based
retirement savings plans. 401(k) type plans provide a convenient and
successful means by which workers can save. To date, over $2 trillion
has been set aside in these plans for retirement. However, more needs
to be done.
It is estimated that approximately 75 million workers lack access
to a workplace savings plan. We are appreciative of those members of
Congress who have recently sought to focus the public's attention on
this issue and, in particular, applaud the several Members of this
Committee who have introduced legislation seeking to increase workplace
savings opportunities. It is in this same spirit of increasing
retirement savings coverage that the American Council of Life Insurers
(ACLI) submits this statement with respect to proposals to increase
workplace savings coverage and, thus, retirement security.
The ACLI represents 353 member companies accounting for 94 percent
of the life insurance industry's total assets in the United States. Our
member companies are among the country's leaders in providing
retirement and financial security to American workers, providing a wide
variety of products including annuities and pension products such as
401(k), 403(b), 457 plans, and Individual Retirement Accounts (IRAs).
In seeking a solution to the problem stated above, clear empirical
evidence has shown that workers best save for their retirement in
employer sponsored retirement plans. Also, new automatic enrollment
features have shown remarkable success in getting workers to save. We
believe retirement savings solutions should focus on workplace savings
and leverage the success of automatic enrollment. As Congress moves
forward in assessing proposals to expand workplace savings coverage, we
would urge that the following principles be considered.
Solutions Should Leverage/Enhance Existing Retirement
Plan Framework--Efforts to enhance coverage should lead to more
coverage without encouraging a reduction in benefits to existing
workers, i.e., done in a way to ensure 401(k) plan sponsors keep their
plans in place. Congress and the States role should be to ensure that
the laws support and encourage additional coverage, not to compete in
or replace the competitive market place of retirement plan products and
services.
Expand Automatic Contributions Arrangements to Include
IRAs--Employers without a retirement savings plan should be permitted
and encouraged to automatically enroll employees into an IRA.
Automatically enrolling employees in a savings plan has been shown to
dramatically increase participation rates. ``Auto-IRA'' sponsors should
receive the same level of fiduciary protection and state wage law
preemption offered to employers sponsoring eligible automatic
contribution arrangements.
Private Market Place Positioned to Support Coverage
Expansion--The private sector is fully capable of providing a diverse
mix of IRA and 401(k) investment products and services at market
competitive prices. Employers will find a wide array of products to
suit employee needs.
Incentives for Lifetime Income to Ensure a Secure
Retirement--We believe that auto-IRA, 401(k) and other employer-based
savings arrangements should include incentives for plans to include and
participants to elect guaranteed lifetime income payments.
Encourage Auto-IRA, Auto-401(k) with Small Employer Tax
Credit for Plan Start-Up Cost--Small employers that provide payroll
deduction IRAs should be eligible for a start up cost credit to offset
the employer's initial plan formation and Administration expenses.
Enhance Saver's Credit--We support enhancements to the
saver's credit that would lead to greater savings in IRAs, 401(k),
403(b) and 457(b) plans, e.g., permit the credit to be deposited
directly as additional savings to an employee's retirement plan.
Auto-IRA Withdrawal Rules Should Align with 401(k)
Rules--To ensure employees have adequate savings at retirement, auto-
IRA withdrawal rules should be at least as stringent as the 401(k)
rules, i.e., severance from employment, death, disability, 59\1/2\,
hardship.
Encourage Financial Education Opportunities--Coverage
solutions should encourage employer support of access to and the use of
financial education and planning tools to assist workers in balancing
the monetary demands of today with future retirement needs.
Again, we applaud members of Congress for raising the profile of
this important issue and the leadership they have provided on the
subject. The ACLI looks forward to working with policymakers to bring
workplace savings to all Americans.
Dear Chairman Neal,
CFED writes to thank you for sponsoring the Hearing on IRAs in the
Retirement System on Thursday, June 26th. CFED is a nonprofit
organization that works to expand economic opportunity by helping
Americans start and grow their own businesses, go to college, own a
home and save for their futures. We greatly appreciate the discussion
of automatic enrollment and other key legislative proposals that help
individuals connect to the financial mainstream, save and invest toward
asset-accumulation, and achieve financial self reliance.
This letter outlines Federal wealth building policies and their
inequitable impact, demonstrates the successes of programs and policies
that enable low income families to build wealth, and suggests
legislative improvements.
Dating back at least as far as Lincoln's time, the United States
has provided incentives to its citizens to accumulate savings and build
financial assets. From the Homestead Act through modern retirement
incentives, the Federal Government has crafted various types of
policies to assist households in their goal to become more financially
self-reliant. This is, generally speaking, a good thing. Financial
assets provide stability for families, help them plan for the future,
and enable them to weather tough times. Providing incentives for people
to build nest eggs strengthens the economy and fortifies the fabric of
society.
Given these societal benefits, one would assume the nation would be
best served by spreading the benefits of such policies as broadly as
possible. In fact, on the grounds of both equity and effectiveness, a
strong case can be made that those with the fewest resources to begin
with should be offered the greatest assistance and strongest incentives
to save. Those with low wages and few intergenerational resources are
those who struggle most, yet have the most to gain, by building a sound
and secure nest egg. Public policy could ensure they are able to do
this effectively.
One recent effective public policy victory has been the passage of
the Pension Protection Act in 2006 [P.L. 109-280]. One of the Act's
components clarified businesses' ability to automatically enroll their
employees into retirement plans. According to the U.S. Department of
Labor, the PPA ``removed impediments to employers adopting automatic
enrollment, including employer fears about legal liability for market
fluctuations and the applicability of state wage withholding laws.''
Now, nearly half of large firms are implementing automatic enrollment.
In fact, 40% of those firms implementing auto enrollment adopted the
practice over the past two years.
We are supportive of the expansion of--and technical corrections
to--employer-sponsored retirement savings plans. We have learned that
effective strategies for improving savings make it easier to save. As
opposed to traditional plans where employees must actively opt-in to a
system, employers who adopt Auto Enrollment mechanisms enroll all
employees into a 401(k) at a set percentage of their income. Employees
who do not wish to participate can either change the terms of the plan
or opt-out entirely. Through Automatic Enrollment, the savings
incentive comes not only from counteracting employee inertia, but also
through the provision of employer-matching funds. Retirement adequacy
is aided by savings incentives from the employer in matches, and the
Federal Government through tax benefits.
Automatic Enrollment boosts savings participation and wealth
building, especially among groups which have historically had low
savings and participation rates. For example, Auto Enrollment helps
low-income workers save for retirement. Employees earning less than
$30,000 and hired under automatic enrollment have a participation rate
of 77% versus a participation rate of 25% for employees at the same
income level hired under voluntary enrollment. Auto Enrollment also
helps address the personal savings crisis by reducing the number of
`zero savers' and counters inertia among renters and young people. Auto
Enrollment helps people start saving at a younger age: 81% of employees
younger than 25 are plan participants under automatic enrollment,
versus 30% under voluntary enrollment.
However, unlike Auto Enrollment which seeks to equitably target all
workers covered by an employer based plan, many policy initiatives
intended to build wealth and accumulate assets do not reach all
individuals. In our paper, Return on Investment, CFED finds that the
U.S. devotes an enormous level of resources to asset-building
incentives. These policies cost at least $367 billion at the Federal
level in Fiscal Year 2005. Yet, the biggest beneficiaries of this
largesse are those households who need the least help in saving and
investing. A disproportionate share of these incentives goes to very
high-income households, at double the rate of what they pay into the
system.
Meanwhile, low-income families who could use the most help, and
even solidly middle-income families, receive a very low level of
benefits from these policies. Analyzing the largest of these policies,
our study found that more than 45% of the benefits went to households
with incomes over $1 million. These households received an average
benefit of $169,150. By contrast, the bottom 60% of the population
shared among them not quite 3% of the benefits of these policies, or
about $3 apiece. The disparity between asset building incentives
provided through tax policy and discretionary policy is profound: for
every $1 provided in discretionary programs, $582 is provided through
revenue foregone in the Tax Code.
The goals of existing policies are good ones: to encourage the kind
of individual behavior that helps households and supports society. But
how can these goals best be implemented?
The goal of homeownership policy, for instance, is grounded in a
widely shared belief that homeownership has positive personal and
social benefits, and that it is worth a national investment (in the
form of direct spending and tax breaks) to help more households own
homes. Likewise, the goal of retirement policy is grounded in an
understanding that families need to supplement income and Social
Security with targeted savings, and that it is worth a national
investment (in the form of tax breaks) to help more families do so.
One would consequently think, to maximize impact, these policies
would be most targeted to those who do not already own homes, or are
not already saving for retirement. Surprisingly, the reverse is true:
the bulk of the benefits of policies encouraging homeownership go to
those who already own homes. The lion's share of these benefits go to
the top wage earners, but nearly all (94.7%) of the top 10 percent of
taxpayers already own their homes. By contrast, only four in 10 earners
in the bottom 20 percent own their homes. Yet they receive little
benefit from Federal incentives. Wouldn't tools better aimed at lower-
and middle-income earners be more effective in attaining the social
goal of helping more families own homes?
Likewise, if society has a goal of encouraging families to open and
add to retirement accounts, one would imagine that the primary target
would be those with the lowest levels of account ownership, and the
lowest levels of capitalization. Yet we know that the benefits of these
policies go disproportionately to higher-wage households. Only 10
percent of the bottom fifth in income earnings has accounts, with a
median retirement savings value of only $5,000, compared with 88
percent and $182,700 for the top 10 percent. Policies meant to
encourage this kind of saving could be more effectively targeted to the
segments of the population that have the most growth potential.
There are a number of ways wealth building approaches could be
reframed: Lower income caps, for instance, could be implemented on some
policies, or a limit could be placed on the maximum benefit that any
household could enjoy. Savings could then be reallocated to policies
explained later in our comment letter that more explicitly target those
who currently receive little benefit.
One particular area that deserves analysis is the role of tax
expenditures. While direct outlays are subject to annual review through
the appropriations process, tax expenditures often escape scrutiny and
endure with little debate. Some experts, including a former IRS
Commissioner and a Director of the Congressional Budget Office, have
assailed the form of most of these tax expenditures--as deductions
rather than refundable tax credits--as inherently inefficient. Because
of the structure of many of these tax breaks, many families receive no
benefit whatsoever, a fact that would be largely addressed by caps and
conversions to refundable credits. Technically simple and budget-
neutral fixes such as these could go far toward improving the
effectiveness--and equity--of these policies.
Asset building policies, generally, promote good goals that help
families and society. The price tag, however, is high enough that
attention needs to be paid to what we are getting for our money. We
believe that good policies can be improved to help more and more
American families become financially secure.
As you noted, Chairman Neal, families in the greatest need of
asset-building incentives benefit the least from policies such as Tax
Code provisions intended to help generate wealth and promote savings.
The good news is that we know that policies that directly target low-
income families' opportunities for wealth building are effective. While
these programs aim to help families build intermediate wealth (home,
education, business), the lessons are also appropriate for retirement
accounts; especially as IRAs are able to be used for homeownership and
education without requiring payback or penalty.
The U.S. Department of Health and Human Services Office of
Community Services recently released two major studies on the ability
of matched savings accounts to help low-income working families save,
buy homes, pursue post-secondary education and start businesses. The
Assets for Independence (AFI) program's Seventh Annual Report to
Congress finds that Individual Development Accounts (IDAs) are
successful at encouraging savings, building assets and moving low-
income families into the financial mainstream. IDAs are matched savings
accounts that help low income families save for an asset which could be
a home, a small business, or post-secondary education and training.
In addition, a five-year program Evaluation found significant
differences between AFI participants in comparison to similar non-AFI
participants. Individuals and families who participated in an AFI
project were 35 percent more likely to become homeowners, 84 percent
more likely to become business owners and nearly twice as likely to
pursue post-secondary education or training.
Since 1999, AFI has provided funds to more than 390 IDA programs.
The key findings from the Report to Congress find:
More than 53,000 families have used IDAs and received
money management training;
Participants have saved more than $38 million in their
IDAs;
More than 14,500 have used their savings to purchase any
of the three allowed long-term economic assets;
AFI participants saved an average of $873, which
represents a 15% increase since 2005 ($756) and a 47% increase since
2003 ($592);
IDA participants deposited $36.8 million in earned income
into IDAs;
Including match funds, AFI participants used $49.2
million to purchase economic assets;
76% of IDA participants are female, 44% are African-
American, 27% are Caucasian. Since 2002, Hispanic participation
increased from 12% to 18%;
Prior to enrolling in AFI, 52% of participants did not
have a savings account and 91% had never used direct deposit; and
The savings rate for AFI participants is 1.6% of annual
income--compared with.5% for the national personal savings rate.
In addition to the AFI Report, the most recent IDA statistics from
the Office of Refuge Resettlement(ORR) find:
19,065 IDA accounts opened with ORR funds;
Nearly 16,000 assets were purchased, resulting in more
than 2,700 new homeowners, more than 1,400 educational purchases and
more than 1,100 small business start-ups; and
Including match funds, ORR participants used $68 million
to purchase assets.
Based on the data from AFI, ORR and CFED's 2007 IDA Program Survey:
There are now 73,000 IDA participants;
43% (31,500) of account holders have made an asset
purchase;
27% (8,400) of asset purchases were for homes;
19% (6,000) of asset purchases were for education; and
17% (5,200) of asset purchases were for small business
capitalization.
There were also 11,700 purchases (37%) that were made by
accountholders who participate in programs that allow IDA savings for
other purchases, including cars, home repair, and computers or
transferring an IDA to a spouse or dependent. These programs are useful
for refugees, foster care youth, and others seeking to integrate into
America's financial system for the first time.
Relatively simple shifts in public policy could make the proven
benefits of incentives such as Individual Development Accounts
available to a greater percentage of households. This in turn could
make savings more effective and feasible for those who are living
paycheck-to-paycheck.
We recommend that the Subcommittee on Select Revenue Matters take
action soon to expand savings and wealth building opportunities for
American families. We recommend the following legislative actions to
ensure that the infrastructure for wealth building exists and that the
incentives reach those families who currently do not save or whom hold
insufficient savings:
Infrastructure: Policies should take advantage of
opportunities to save and build wealth by using payroll
deductions provided by employers, adding asset-building
programs to services provided by nonprofits, and taking
advantage of tax time when people are focused on their
finances.
1. Support Automatic Enrollment in Individual Retirement
Accounts: IRAs can be utilized as a tool for helping low income
people advance assets. Yet, these savings mechanisms could be
more effective through the implementation of the bipartisan
Automatic IRA Act of 2007 (S. 1141/H.R. 2167). This act would
extend payroll-based retirement savings opportunities to the
vast majority of the 75 million employees currently without
access to a retirement plan. Employers who do not sponsor a
retirement plan would enable direct-deposit payroll deductions
to an IRA and receive temporary tax credits to offset
administrative costs. The law affects all employers in business
for more than two years and with more than ten employees. In
addition to retirement, IRAs, which can benefit from the
Saver's Credit, can be accessed without penalty or payback for
higher education and homeownership expenses.
2. Align intermediate uses within 401(k) and IRAs: We would
like to see the Committee align rules for withdrawals from
retirement accounts for education and homeownership, thus
increasing 401(k) flexibility for intermediate savings goals.
Currently, IRA funds can be utilized for educational attainment
in the year that classes are taken. Also, up to $10,000 in an
IRA account can be used for first-time home ownership. These
intermediate uses are only available as loans from 401(k)s. The
law should align homeownership and education uses with
retirement regulations so that the IRA rules apply to 401(k),
403(b) and other employer provided accounts. The $10,000
lifetime limit for IRA homeownership withdrawals should be
doubled due to the higher price of homeownership. This simple
change would encourage more aggressive participant savings as
employees would be able to save for an intermediate and a long
term goal at the same time in a proven accessible mechanism.
3. Expand Roth IRAs for Youth. The law should permit adults
to use a portion of their Roth IRA allocation to open accounts
for minor children. Current law requires a child have earned
income at least equal to the amount of the deposit to an IRA.
Permitting flexibility would enable to adults to start and fund
accounts for children in their lives (nieces, nephews, cousins,
grandchildren, godchildren, etc.)
Incentives: The mortgage interest and property tax deduction
and 401(k) and IRA tax benefits are some of the Federal
incentives that explicitly reward asset-building behavior.
Federal policies provide subsidies to encourage certain kinds
of savings and investment and these should be expanded to reach
low-income and moderate-income families. In addition,
incentives can help ensure that the modest savings achieved by
low-income and moderate-income families are adequate for
downpayment and retirement security.
4. Expand the impact of the Saver's Credit: The bipartisan
Retirement Savings for Working Americans Act (H.R. 2724) would
provide a 50% match to households earning less than $30,000 for
an individual or $60,0000 for joint filers who save up to
$2,000 in a retirement or 529 college savings account or
Coverdell. The match would be provided through the IRS Form
8888 directly to the retirement account instead of through a
tax deduction.
5. Enact the Savings for Working Families Act: The bipartisan
and bicameral Savings for Working Families Act (S. 871/
H.R.1514) ensures that our nation's savings and ownership
policies assist working-poor families by enabling them to save,
build wealth, and enter the financial mainstream through the
use of a financial product tailored to their needs: Individual
Development Accounts. IDAs add an asset component to income
assistance and enable families to purchase an intermediate
asset (home, college, or business) to help them become
financially self-reliant. SWFA would provide a tax credit to
financial institutions that match the savings of 900,000 low-
income savers.
6. Reauthorize and Improve the Assets for Independence (AFI)
program. AFI is a $25 million IDA program that has been nearly
fully funded every year by Congress and has also been
recommended for near full funding by President Bush in his
annual budgets. However, its reauthorization has expired. The
program needs to be reauthorized and improved with technical
changes to ensure that the program works better for IDA
programs and their clients. Recommended changes include
simplifying interest calculations and asset purchase processes,
expanding resources for financial education, ensuring broader
participation in rural areas, permitting people with
disabilities to participate with SSI, and permitting greater
flexibility on eligibility criteria.
7. Enact Children's Savings Accounts. More than a third of
the 4 million American children born each year--and more than
half of minority children--are born into families that lack
enough savings to weather emergencies or to effectively invest
in their children's futures. To ensure that all children are
encouraged to increase and retain assets, The America Saving
for Personal Investment, Retirement and Education (ASPIRE) Act
of 2007 (H.R. 3740) endows an account with a one-time, $500
government contribution. Households whose income is at or below
50% of the national median income would be eligible for a
supplemental initial contribution of $500. As household income
approaches 100% of the national median income, the KIDS Account
would receive a lesser, evenly pro-rated contribution.
Investments of up to $2,000 per year can be added to the
account. The income earned on the account is tax free. Children
living in families whose household income is at or below 100%
of the national median income will receive a dollar-for-dollar
match on private contributions up to $500 until the child
reaches age 18. The match for private contributions will begin
to phase out for households whose income is between 100% and
120% of national median income. Once the child reaches age 18,
withdrawals can be made for post-secondary education. After the
child reaches age 25, withdrawals can be made for homeownership
and retirement. The bill also calls for financial education
programs for families. ASPIRE encourages savings, promotes
financial literacy, and expands opportunities by establishing a
KIDS Account for every child born in the United States.
CFED encourages the Committee to analyze asset-building policies
and promote those that have positive impact and proven effectiveness.
CFED applauds your leadership to focus attention on Federal policies
and corporate and individual action to promote asset building and
retirement security.
Sincerely,
Andrea Levere
President
Massachusetts Mutual Life Insurance Company (``MassMutual'') is a
mutual life insurance company that was organized in 1851 in
Springfield, Massachusetts. MassMutual is a member of the MassMutual
Financial Group, which is a global, growth-oriented, diversified
financial services organization with total assets under management in
excess of $500 billion as of end year 2007. Our family of companies
serves the needs of over eight million clients by providing a broad-
based portfolio of financial products and services, including: life
insurance, annuities, disability income insurance, long-term care,
retirement planning products, mutual funds, money management, and other
financial products and services.
MassMutual, through its Retirement Services division, has provided
retirement plan services for over half a century. Retirement Services
provides a wide range of services to all segments of the retirement
plan universe, including more than 4,800 defined benefit and defined
contribution plans with more than one million participants. MassMutual,
through its OppenheimerFunds subsidiary, has been satisfying the
investment and retirement needs of investors for nearly 50 years and
remains one of the largest and most respected names in the mutual fund
industry. OppenheimerFunds 401(k) s and IRAs have access to more than
60 Oppenheimer mutual funds that represent a broad spectrum of
investment styles and asset classes. According to Pension & Investments
(May 26, 2008), MassMutual Financial Group is the 14th largest manager
of defined contribution plan assets with more than $64 billion of
assets under management.
MassMutual commends Chairman Neal and the Subcommittee for its
efforts to examine ways to improve pension coverage for all Americans.
Pension plans and other retirement savings vehicles have over $5.882
trillion in assets. While the assets in private sector defined
contribution plans at $3.49 trillion are now larger than those in
private-sector defined benefit plans, IRAs have now become the single
largest source of retirement assets in the United States at $4.75
trillion. Since they were created in 1974, as part of the Employee
Retirement Income Security Act of 1974 (ERISA), IRAs have served three
principle functions. The first is to offer a retirement savings vehicle
for individuals not covered by an employer sponsored retirement plan.
The second is to provide portability to individuals changing jobs by
allowing them to transfer, or rollover, plan assets from their former
employers' retirement plan into an IRA. Finally, IRAs may be used as a
simple employer sponsored retirement vehicle. In 1978, Congress created
the Simplified Employee Pension Plan, or SEP IRA, that is an employer
sponsored IRA. In 1986, Congress created the Savings Incentive Match
Plan for Employees IRA, or SIMPLE-IRA, as a new form of simple defined
contribution plan specifically targeted for small business. Since 1974,
employers have been able to offer a payroll deduction IRAs. While
MassMutual offers a variety of retirement plans and IRAs, in our
experience, relatively few employers offer payroll deduction IRAs to
their employees.
Notwithstanding the obvious successes of private sector retirement
plans and IRAs, approximately 75 million workers, or about half of the
private sector workforce, do not have access to an employer sponsored
retirement plan. Most of these workers are employed by small
businesses. While the reasons for this gap in coverage by small
business are complex and multifold, the challenge it represents is
significant and deserves additional consideration by Congress. One
recent proposal is to create a payroll deduction IRA with automatic
enrollment features similar to those now available in 401(k) plans.
MassMutual applauds the Subcommittee for looking at this issue and, in
particular, commends Chairman Neal for sponsoring H.R. 2167, ``The
Automatic IRA Act.'' For employees who are financially able to save for
retirement, automatic enrollment will increase coverage rates, as has
been demonstrated with auto-enrollment 401(k) plans.
MassMutual believes that one of the ways to increase coverage in
private sector retirement plans is to offer employers simple low cost,
low risk options, targeting small employers, and to remove a number of
regulatory burdens that exist under current law. We believe that
legislative changes can make it easier and more attractive for
employees not participating in employer-sponsored retirement plans to
contribute to an IRA offered through small employers. In seeking to
improve the coverage for all Americans, it is important to keep the
incentives in place for the employer sponsored system. We have concerns
that if automatic IRA programs become widely used and are widely
accepted as a low cost, low risk simple means of providing for
retirement, some employers who currently sponsor more generous 401(k)
type programs may terminate their plan and substitute an automatic IRA.
More study is needed to be certain that an automatic IRA program does
not have the unintended consequence of encouraging employers who
currently sponsor plans to opt out of an employer sponsored qualified
plan and substitute an automatic IRA because it is a less expensive
alternative. Finally, 401(k) plan pre-retirement withdrawals are more
restrictive than IRA withdrawals. Further study is needed to determine
if this leads to excessive ``leakage'' of retirement plan assets.
We applaud the members this Subcommittee for its historic
leadership on retirement issues. Moreover, we thank the Subcommittee
for taking time to consider what can be done to increase the retirement
coverage for all Americans. We look forward to working with the
Subcommittee as it further considers the coverage issue.
Dear Representative Neal and Representative English:
Thank you for holding a hearing on the role of individual
retirement accounts in our retirement system. Long-term financial
security is a cornerstone of the American dream. Yet today, this dream
is at risk. According to the 2008 Retirement Confidence Survey,
Americans' confidence in their ability to afford a comfortable
retirement has dropped to its lowest level in seven years.
Several factors have contributed to this crisis. First, traditional
pensions have been disappearing: less than 20 percent of the private
sector workforce is currently covered by a traditional guaranteed
pension plan, and this number is declining rapidly. The current
personal savings rate is at its lowest level since the Great
Depression. Of course there is Social Security, but that program was
designed to provide a floor of income--it was never intended to be the
sole source of income for people who have retired.
Seventy five million workers, about half of today's workforce,
don't have a retirement plan at work--no pension, no 401(k), and no
profit-sharing plan. In fact, certain groups are less likely to have
access to workplace savings than others. For example, Hispanic and
African-American workers are significantly less likely than white
workers to have an employer that offers a workplace retirement plan.
Even among the minority of American workers who are saving for
retirement, most are not saving enough to maintain their standard of
living. According to the 2008 Retirement Confidence Survey, one-third
of workers who have saved for retirement report having less than
$25,000 in savings, excluding the value of their home and any defined
benefit plans.
Our groups believe that Americans need to have the tools and the
opportunity to achieve life-long financial security. We need to make
saving simple and effective for all Americans. All of us deserve the
peace of mind to know that even if we don't have a pension plan at
work, there is a simple and easy way to put aside money for retirement
through payroll deduction.
This hearing is an important first step. We need Congress to pass
H.R. 2167, the Automatic IRA Act of 2007. The auto-IRA is a simple, low
cost way to provide employees with something of their own--a real
retirement savings tool. In exchange for offering the auto-IRA,
employers will receive a tax credit that will help cover the cost of
administering the plan The bill will help small businesses to be more
competitive with many large and medium size companies in recruiting and
retaining employees since many already offer their employees retirement
saving tools.
With an auto-IRA, there are two simple choices for workers to
make--how much do they want to contribute to retirement and what kind
of retirement account they would like to have. Of course, workers could
choose not to participate. The auto-IRA also allows workers to invest
in accounts and take that account with them if they change jobs.
Currently, too many Americans have little hope of having enough
money set aside for a secure retirement. For these people, retirement
is a source of major insecurity. Congress can help by passing H.R.
2167, the Automatic IRA Act of 2007 and provide access to workplace
retirement savings for millions who currently are not covered. Thank
you for your efforts on this issue.
Sincerely,
AARP
Business and Professional Women
Consumers Union
National Council of La Raza
Women's Institute for a Secure Retirement (WISER)