[Senate Hearing 112-582]
[From the U.S. Government Publishing Office]
S. Hrg. 112-582
RETIREMENT (IN)SECURITY: EXAMINING THE RETIREMENT SAVINGS DEFICIT
=======================================================================
HEARING
before the
SUBCOMMITTEE ON
ECONOMIC POLICY
of the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED TWELFTH CONGRESS
SECOND SESSION
ON
EXAMINING THE CURRENT GAP BETWEEN WHAT AMERICANS WILL NEED FOR
RETIREMENT AND WHAT THEY ARE ON TRACK TO SAVE, REVIEWING THE SIZE AND
SCOPE OF THIS GAP AND HOW THE RECENT ECONOMIC CRISIS AND OTHER ECONOMIC
FACTORS HAVE IMPACTED THIS DEFICIT AND AMERICANS' RETIREMENT SAVINGS
AND SECURITY
__________
MARCH 28, 2012
__________
Printed for the use of the Committee on Banking, Housing, and Urban
Affairs
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Available at: http: //www.fdsys.gov /
_____
U.S. GOVERNMENT PRINTING OFFICE
76-451 PDF WASHINGTON : 2013
-----------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Printing
Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; DC
area (202) 512-1800 Fax: (202) 512-2104 Mail: Stop IDCC, Washington, DC
20402-0001
COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
TIM JOHNSON, South Dakota, Chairman
JACK REED, Rhode Island RICHARD C. SHELBY, Alabama
CHARLES E. SCHUMER, New York MIKE CRAPO, Idaho
ROBERT MENENDEZ, New Jersey BOB CORKER, Tennessee
DANIEL K. AKAKA, Hawaii JIM DeMINT, South Carolina
SHERROD BROWN, Ohio DAVID VITTER, Louisiana
JON TESTER, Montana MIKE JOHANNS, Nebraska
HERB KOHL, Wisconsin PATRICK J. TOOMEY, Pennsylvania
MARK R. WARNER, Virginia MARK KIRK, Illinois
JEFF MERKLEY, Oregon JERRY MORAN, Kansas
MICHAEL F. BENNET, Colorado ROGER F. WICKER, Mississippi
KAY HAGAN, North Carolina
Dwight Fettig, Staff Director
William D. Duhnke, Republican Staff Director
Dawn Ratliff, Chief Clerk
Riker Vermilye, Hearing Clerk
Shelvin Simmons, IT Director
Jim Crowell, Editor
______
Subcommittee on Economic Policy
JON TESTER, Montana, Chairman
DAVID VITTER, Louisiana, Ranking Republican Member
MARK R. WARNER, Virginia ROGER F. WICKER, Mississippi
KAY HAGAN, North Carolina MIKE JOHANNS, Nebraska
TIM JOHNSON, South Dakota
Alison O'Donnell, Subcommittee Staff Director
Travis Johnson, Republican Subcommittee Staff Director
(ii)
C O N T E N T S
----------
WEDNESDAY, MARCH 28, 2012
Page
Opening statement of Chairman Tester............................. 1
Opening statements, comments, or prepared statements of:
Senator Vitter............................................... 2
Senator Akaka................................................ 14
WITNESSES
Michael Calabrese, Senior Research Fellow, New America Foundation 3
Prepared statement........................................... 20
Jack Vanderhei, Ph.D., Director of Research, Employee Benefit
Research Institute............................................. 5
Prepared statement........................................... 32
James G. Rickards, Senior Managing Director, Tangent Capital
Partners, LLC.................................................. 7
Prepared statement........................................... 88
Additional Material Supplied for the Record
Prepared statement submitted by the Financial Services Roundtable 101
Prepared statement submitted by the AARP......................... 104
Putnam Investments paper: ``Resisting the policy threat to
retirement savings''........................................... 119
Prepared statement submitted by the American Council of Life
Insurers....................................................... 127
(iii)
RETIREMENT (IN)SECURITY: EXAMINING THE RETIREMENT SAVINGS DEFICIT
----------
WEDNESDAY, MARCH 28, 2012
U.S. Senate,
Subcommittee on Economic Policy,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Subcommittee convened at 2:32 p.m., in room 538,
Dirksen Senate Office Building, Hon. Jon Tester, Chairman of
the Subcommittee, presiding.
OPENING STATEMENT OF CHAIRMAN JON TESTER
Senator Tester. I want to call to order this hearing of the
Economic Policy Subcommittee, a hearing titled, ``Retirement
Security,'' or maybe I should say ``Insecurity: Examining the
Retirement Savings Deficit.''
I look forward to hearing from our witnesses this afternoon
about the retirement savings deficit in America, that is, the
shortfall between what Americans are saving for retirement and
what they will need to live comfortably in retirement.
The facts are a bit unsettling. The most often cited
studies peg the size of this deficit in the trillions of
dollars. Only 14 percent of the folks are confident that they
will have enough money to live comfortably in retirement. The
majority of working adults, more than 75 million workers, do
not participate in any private retirement savings plan at all,
and according to a recent report from one of our witnesses, the
majority of American workers has not even tried to calculate
how much they will need to save for retirement.
For some time, trends have indicated that Americans have
been saving less, participating less in retirement savings
plans, and living longer. We cannot escape our demographics,
and we know that the retirement of the Baby Boomers will place
additional strains on Social Security and Medicare.
But we find ourselves confronting an even greater
retirement security challenge today. In 2008, the financial
crisis, the economic meltdown that followed, and the decline in
housing values have, not surprisingly, widened the retirement
savings gap and aggravated many Americans' sense of insecurity
about retirement. Workers unable to find jobs due to the weak
economy do not contribute to employer-provided retirement
plans, reducing future retirement income and security. Market
conditions not only impacted retirement assets and
accumulation, but also hurt enrollment in retirement savings
plans. And the bursting of the housing bubble effectively ended
our ability to rely on the ever-increasing home values to
provide retirement security.
The implications of the economic crisis for workers are
clear. Americans must work longer, save more, or spend less in
retirement in order to retire with sufficient retirement
savings.
We spend an awful lot of time here in the Senate focused on
how to reduce our deficit and strengthen Social Security and
Medicare, but the bottom line is that regardless of any
potential changes to these programs, Americans are simply not
saving enough for retirement.
Since 2008, we have taken steps to improve the economy and
restore confidence in capital markets, but we still have work
to do to address this retirement savings challenge. And before
that savings deficit grows much further, we have an opportune
moment to take a closer look at this issue. We will examine the
retirement savings gap, its nature and scope, and what the
major trends are. We will consider the impact of the economic
crisis on workers' savings and security and what the economic
impact is of the growing retirement savings gap on capital and
labor markets. And we will see how workers have responded and
what that means about what we can expect as the Baby Boomer
generation heads into retirement and better understand what
some of the more effective and efficient strategies are to
encourage greater retirement savings so that workers can
confidently take retirement planning into their own hands.
It is a complicated issue, but today's hearing really gives
us a chance to look more closely at a critical issue of
retirement savings and security in hopes that we can all come
away with a keener sense of the scope, scale of the problem,
and come to grips with it.
With that, I turn it over to my friend, Senator Vitter, for
his opening statement.
STATEMENT OF SENATOR DAVID VITTER
Senator Vitter. Thank you, Senator Tester, for calling this
hearing. It certainly is a very, very important topic. And
welcome and thanks to all of our witnesses. I look forward to
mostly listening and I appreciate you all being here and
offering your thoughts.
This is a very serious concern and a very serious challenge
and I would invite you all to offer your thoughts on as wide a
range of helpful areas as possible, certainly including the
following. I am concerned, along with others, that one real and
significant impact of the Fed's prolonged zero interest rate
policy is a real hit on retirees and others who depend on that
sort of investment and interest income, if you all could
comment on that.
Certainly, any thoughts you have on Social Security reform.
We need Social Security reform, first of all, to ensure the
continued viability and solvency of the system, but I also
think we need expanded flexibility and some new models and new
options to offer folks who are in their working years now to
build toward retirement.
And finally, tax policy and what we can do in the tax area.
Some obvious examples, like increasing IRA limits, but there
are other things, as well, and I would invite any ideas you
have in that area.
And with that, I will be all ears and look forward to your
comments. Thank you.
Senator Tester. Thank you, Senator Vitter.
I would like to welcome our witnesses, a distinguished
panel of scholar and experts on retirement issues, and I want
to thank you for your willingness to testify this afternoon.
First, Mr. Calabrese is a Senior Research Fellow affiliated
with the asset-building program at the New America Foundation
located right here in Washington, D.C. Previously, Mr.
Calabrese served as General Counsel of the Congressional Joint
Economic Committee, Director of the Domestic Policy Programs at
the Center for National Policy, and as a pension employee
benefits counsel at the national AFL-CIO. Welcome, Mr.
Calabrese.
Next, we have Dr. VanDerhei, who is a Research Director of
the Employee Benefit Research Institute, EBRI, a Washington-
based private, nonprofit organization conducting public policy
research and education on economic security and employee
benefits. He is also the Director of both the EBRI Defined
Contribution and Participant Behavior Research Program and the
EBRI Retirement Security Research Program. Welcome, Mr.
VanDerhei.
And last but certainly not least, we have Mr. Rickards, and
he is the Senior Managing Director of Tangent Capital Partners,
an investment bank based in New York specializing in
alternative asset management solutions. He is a counselor,
economist, and investment advisor with 35 years of experience
with several firms, including Citibank, RBS, Long-Term Capital
Management, and Caxton Associates, and I want to welcome you,
Mr. Rickards.
Each witness will have 5 minutes for oral statements and
their written testimony will be made a part of the record in
its complete.
So with that, Mr. Calabrese, would you please get us
started.
STATEMENT OF MICHAEL CALABRESE, SENIOR RESEARCH FELLOW, NEW
AMERICA FOUNDATION
Mr. Calabrese. OK. Good afternoon. Thank you, Mr. Chairman
and Senator Vitter, for this opportunity to testify. It is
great to see that this Subcommittee is taking up this important
topic.
There is no question that a widening retirement savings gap
is creating widespread insecurity. Most individuals are simply
not saving enough over their working life to supplement the
meager benefits that they will receive from Social Security.
One barometer, the National Retirement Risk Index,
indicates that a majority, 51 percent, of working-age
households are at risk of not having enough retirement income
to maintain their pre-retirement level of consumption. Most
worrisome are adults over 45. The index shows 41 percent of
early Boomers and 48 percent of late Boomers are at risk.
These shortfalls represent the cumulative trillions that
the Chairman mentioned. They estimated a couple of years ago a
$6.6 trillion retirement income deficit, which is according to
the Center for Retirement Research, which created the index.
This $6.6 trillion is roughly $22,000 per capita and represents
the present value of the saving and investment shortfall needed
to ensure, on average, retirement security for every American.
What accounts for this enormous savings gap? I believe
America's real retirement security crisis is not Social
Security solvency or the many big firms terminating or freezing
their traditional pension plans. The larger problem is that a
majority of working adults do not participate in any retirement
saving plan, whether a traditional pension, 401(k), or IRA.
Participation in employer-sponsored plans peaked in the late
1970s and appears to be at its lowest level in more than 30
years. Employer-sponsored plans cover fewer than half of all
private sector workers, leaving a projected majority of Boomers
possibly more dependent on Social Security than their parents'
generation is today.
Coverage and participation rates are also strikingly lower
among workers who are low-income, young, work part-time, or
work at small firms. The result of excluding half the Nation
from automatic workplace saving is that nearly two-thirds of
those 65 and older rely on Social Security for a majority of
their income and 40 percent rely on Social Security for 90
percent or more of their income, a dependency ratio that is
even greater for widows.
Not surprisingly, the lowest earning 40 percent of working
adults are accumulating very little in the way of financial
assets. Elderly and the lowest-income quintile receive, on
average, only about 5 percent of their income from either
pension or assets. And because retirees with low career
earnings receive minimal Social Security benefits, about a
third of the elderly on Social Security fall below the
individual poverty line.
So how are America's seniors coping with this savings
deficit? For those 65 and older, rising income from remaining
in or reentering the workforce is replacing steadily declining
income from nonpension assets. Since the mid-1980s, the share
of income for Americans 65 and older coming from wages has
doubled, while the share from asset income has plummeted to
about 12 percent, the lowest level in half a century.
This trend toward more wage income for seniors seems to
confirm opinion surveys showing that a steadily growing portion
of the workforce will at least try to continue to work at least
part-time beyond normal retirement age. And while working past
age 65 or 70 may not seem so bad to us, according to a McKinsey
study, in 2007, nearly half of all Boomers were working in
physically demanding jobs, including 18 percent in construction
and production jobs, and another 14 percent in physically
demanding service sector jobs, such as police, fire, and food
production. Only 21 percent of Boomers are professionals.
While remaining employed will help compensate for rising
disparity in ownership of income-producing assets, it will also
impact labor markets by potentially reducing the availability
of work opportunity and rising real wages for younger workers.
The single most important thing policymakers can do to
narrow this retirement savings gap is facilitate access to
automated payroll deduction savings plans accessible to all.
The fact that so few workers save regularly in IRAs reinforces
what demonstration projects in asset building among low-income
families have found, that it is not primarily access to savings
accounts that spur participation, but what I call the four
``I''s: Inclusion, incentives, infrastructure, and inertia.
So I will just wrap up by explaining what I mean by this.
By inclusion, I mean eligibility and design criteria that allow
every working adult not currently able to participate in a
qualified employer plan to contribute. We need stronger tax
incentives for saving that are more targeted toward lower-
income earners who find it most difficult to save and whose
savings actually add to net national saving. We need an
account-based infrastructure that enables every worker to save
by automated payroll deduction and facilitates career-long
account portability. And finally, we need default options that
convert myopia into positive inertia through automatic
enrollment and payroll deduction, automatic escalation,
automatic asset allocation, automatic rollovers, and automatic
annuitization.
At the end of my testimony, I also mention some other
options for encouraging saving across the lifetime, such as
children's savings accounts, but I will stop there. Thank you.
Senator Tester. Thank you, Mr. Calabrese.
Dr. VanDerhei.
STATEMENT OF JACK VANDERHEI, Ph.D., DIRECTOR OF RESEARCH,
EMPLOYEE BENEFIT RESEARCH INSTITUTE
Mr. VanDerhei. Mr. Chairman, Mr. Ranking Member, Members of
the Subcommittee, I am Jack VanDerhei, Research Director of the
Employee Benefit Research Institute. EBRI is a nonpartisan
institute that has been conducting original research on
retirement and health benefits for the past 34 years. EBRI does
not take policy positions and does not lobby.
My testimony today will focus on the size of Americans'
retirement saving gap, the extent to which its deficit has been
impacted by economic conditions over the past several years,
and the most effective strategies to encourage and facilitate
greater savings for retirement. The testimony draws on
extensive research conducted by EBRI on these topics over the
past 13 years with its Retirement Security Projection Model as
well as annual analysis of behavior of tens of millions of
individual participants from tens of thousands of 401(k) plans
dating back in some cases as far as 1996.
Measuring retirement income adequacy is an extremely
important and complex topic, and EBRI started to provide this
type of measurement in the late 1990s. Figure 1 of my written
testimony shows that when we modeled the Baby Boomers and Gen
Xers earlier this year, 43 to 44 percent of the households were
projected to be at risk of not having adequate retirement
income for even basic retirement expenses plus uninsured health
care costs. Even though this number is quite large, the good
news is that it is five to 8 percentage points lower than what
we found in 2003. It would be my pleasure to explain in more
detail later why American households are better off today than
they were 9 years ago, even after the financial and real estate
market crises in 2008 and 2009.
Who is most at risk? Figure 2 in my testimony shows that,
not surprisingly, lower-income households are much more likely
to be at risk for insufficient retirement income. The 2012
baseline at-risk ratings for early Boomers range from 87
percent for the lowest-income households to only 13 percent for
the highest-income households.
Figure 4 shows the conditional average retirement income
deficits by age, family status, and gender for Baby Boomers and
Gen Xers. The average individual conditional deficit number
ranges from approximately $70,000 for families to $95,000 for
single females and $105,000 for single females. In aggregate
terms, that would be $4.3 trillion for all Baby Boomers and Gen
Xers in 2012.
Last year, EBRI published a report analyzing the percentage
of U.S. households who became at risk of insufficient
retirement income as a result of the financial market and real
estate market crisis in 2008 and 2009. As one would expect, the
answer to this question depends to a large extent on the size
of the account balance the household had in defined
contribution plans and/or IRAs as well as their relative
exposure to fluctuations in the housing market. The resulting
percentages of households that would not have been at risk
without the 2008-2009 crisis that ended up at risk varies from
a low of 3.8 percent to a high of 14.3 percent.
It is difficult to imagine any voluntary strategy more
effective at dealing with retirement income security than
increasing the likelihood of eligibility in a qualified
retirement plan. Figure 8 of my written testimony shows the
importance of defined benefit plans for retirement income
adequacy, and Figure 9 shows a similar analysis for 401(k)
plans. We see that the number of future years the workers are
eligible for participation in a defined contribution plan makes
a tremendous difference in their at-risk ratings, even after
adjusting for the worker's income quartile. When the results
for Gen Xers were aggregated across all income categories,
those with no future years of eligibility are simulated to run
short of money 61 percent of the time, whereas those with 20 or
more years of future eligibility would only experience this
situation 18 percent of the time.
EBRI research has shown repeatedly the traditional type of
401(k) plan under current tax incentives has the potential to
generate a sum that, when combined with Social Security
benefits, would replace a sizable portion of the employee's
pre-retirement income for those with continuous coverage. Our
research has also shown that the automatic enrollment type of
401(k) plan, when combined with automatic escalation
provisions, appears to have the potential to produce even
larger retirement accumulations for most of those covered by
such plans.
Recently, however, there have been proposals to modify the
existing tax incentives for defined contribution plans by
either capping the annual contributions or changing the before-
tax nature of employee and employer contributions in exchange
for a Government-matching contribution. In September of 2011,
the Senate Finance Committee held a hearing that focused to a
large extent on the second type of proposal. EBRI presented
preliminary evidence at that time of the possible impact of
such a proposal on future 401(k) accumulations.
In recent months, results from two surveys have allowed
EBRI to more precisely model these effects in view of a
specific proposal, and last week, we published our new results
showing the average percentage reductions in 401(k) account
balances at retirement age due to expected modifications of
plan sponsors and participants in response to this proposal.
Figure 17 in my written testimony shows a 22 percent reduction
in 401(k) balances at retirement for those currently 26 to 35
in the lowest-income quartile, and those are the ones who are
most at risk for insufficient retirement income.
The results are even more dramatic for small plans. Figure
18 in my testimony shows the average reduction for the lowest-
income quartile in the two smallest plan size categories are 36
and 40 percent.
In conclusion, given that the financial fate of future
generations of retirees appears to be so strongly tied to
whether they are eligible to participate in employer-sponsored
retirement plans, the logic of modifying either completely or
marginally the incentive structure of employees and/or
employers for defined contributions plans at this time needs to
be thoroughly examined. The potential increase of at-risk
percentages resulting from either employer modifications to
existing plans or a substantial portion of low-income
households decreasing or eliminating future contributions to
savings plans needs to be analyzed carefully when considering
the overall impact of such proposals.
Thank you, and I look forward to your questions.
Senator Tester. Thank you, Dr. VanDerhei.
Mr. Rickards.
STATEMENT OF JAMES G. RICKARDS, SENIOR MANAGING DIRECTOR,
TANGENT CAPITAL PARTNERS, LLC
Mr. Rickards. Mr. Chairman and Mr. Ranking Member and
Members of the Subcommittee, thank you for inviting me to
testify today, and I appreciate this opportunity to speak to
you on a subject of the utmost importance to the U.S. economy.
A significant portion of income security for retirees comes
from earnings on savings. While savings themselves are
important, it is the earnings on the savings compounded over
decades that makes the difference between a comfortable
retirement and barely getting by. Since retirees properly favor
safe investments, such as certificates of deposit and money
market funds, over risky investments, such as stocks, it
follows that Federal Reserve interest rate policy is a key
determinant of the adequacy of retirement income security.
The Federal Reserve lowered interest rates to zero in
December 2008 and rates have remained at that level ever since.
The Fed has declared an intention to keep short-term interest
rates near zero through late 2014. Keeping rates near zero for
6 years is unprecedented. It should come as no surprise that an
unprecedented policy should have unprecedented results.
There is evidence that the Fed's policy is leaving the U.S.
economy worse off when compared to a more normalized interest
rate regime. Some of these deleterious effects on retirement
income security include the following.
The zero rate policy represents a wealth transfer from
retirees and savers to banks and leveraged investors. The zero
rate policy deprives retirees of income and depletes their net
worth through inflation. This lost purchasing power exceeds
$400 billion per year and cumulatively exceeds $1 trillion
since 2007.
The zero rate policy is designed to inject inflation into
the U.S. economy. However, it signals the opposite. It signals
the Fed's fear of deflation. Americans understand this signal
and hoard savings, even at painfully low rates.
The Fed's zero rate policy is designed to keep nominal
interest rates below inflation, a condition called ``negative
real rates.'' This is intended to cause lending and spending,
as the real cost of borrowing is negative. For savers, the
opposite is true. When real returns are negative, the value of
savings erodes. This is a non legislated tax on savers. The
Fed's policy says to savers, in effect, if you want a positive
return, invest in stocks. This gun to the head of savers
ignores the relative riskiness of stocks versus bank accounts.
Stocks are volatile, subject to crashes, and not right for many
retirees. To the extent many are forced to invest in stocks, a
new bubble is being created.
Solutions are straightforward. The Fed should raise
interest rates immediately by one-half of 1 percent and signal
that other rate increases will be coming. The Treasury should
signal that they support the Fed's move and support a strong
dollar, as well. The Fed and Treasury should commit to
facilitate the conversion of savings into private sector
investment by closing or breaking up too-big-to-fail banks.
This will facilitate the creation of clean new banks capable of
making commercial loans to small businesses and entrepreneurs.
The result over time would be to replace a consumption and
debt-driven economy with an investment-driven economy that
rewards prudence and protects the real value of the hard-earned
assets of retirees. It is false to suppose that monetary policy
is a choice between encouraging savings, which reduces
aggregate demand, and discouraging savings to increase
aggregate demand. In a well-functioning banking system, savings
can be a source of real returns for savers and a source of
aggregate demand through investment.
As late as the 1980s, money-center banks operating through
syndicates made 7-year commercial loans to finance massive
private sector investments in projects like the Alaska
pipeline, new fleets of Boeing 747 aircraft, and other critical
infrastructure. These projects were financed with the savings
of everyday Americans, including retirees. Savers received a
positive return on their money.
Today, the United States does not have a well functioning
banking system because of regulatory failures by the Fed. The
conveyor belt between savings and investment provided by the
banks is broken. With the repeal of Glass-Steagall in 1999 and
derivatives regulation in 2000, the door was opened to break
down traditional lending functions and allow banks to become
leverage machines for securitization and proprietary trading.
Securitization breaks the bond between lender and borrower
because the bank cares only about selling the loans, not
collecting on them at maturity. This destroys the incentive to
allocate capital to the most productive long-term uses.
Productive private sector investment and capital formation have
been the victims.
It is not too late to turn back from the Fed's inflationary
policies and restore the link between savings and investment.
The path to improved income security for retirees consists of
raising interest rates in stages to provide positive real
returns to savers, breaking up too-big-to-fail banks that pose
systemic risk, offering real price stability. Two percent
inflation is not benign, it is cancerous.
The United States is mired in a swamp of seemingly
unpayable debt. In these circumstances, there are only three
ways out: Default, inflation, and growth. The first is
unthinkable. The second is the current path that the Fed is
pursuing in stealth. The third is the traditional path of the
American people. Growth does not begin with consumption. It
begins with investment.
America's retirees are ready, willing, and able to provide
the savings needed to fuel investment and growth. All they ask
in return is stable money, positive returns, and a friendly
investment climate. The Fed's policy of money printing and
negative returns is anathema to investment and growth. Until
the Fed's war on savers is ended, income security for retirees
will be an illusion.
Thank you for this opportunity to testify and I look
forward to any questions.
Senator Tester. Well, thank you, Mr. Rickards. I thank you
and thank all of the panelists for their testimony and
insights. It is very much appreciated.
I would ask the Clerk to put 7 minutes on the clock, if you
might. I think we will have enough time to get through most all
the questions that folks have.
I am going to start with a 30,000-foot perspective of the
problem of retirement security and it goes to all of you, to
help us get a broad picture of the savings deficit. Clearly,
one of the biggest challenges is the fact that so many
Americans are not asking themselves the question about how much
am I going to need when I get to retirement. And they may not
be asking other questions along with that as they go forth. And
so ignorance may be bliss, but I doubt it. How can we get
Americans to start asking themselves the question about
retirement savings and how much are they going to need for the
future, and we will start with you, Mr. Calabrese.
Mr. Calabrese. Well, of course, education----
Senator Tester. I need you to turn your microphone on.
Thank you.
Mr. Calabrese. OK. It is. One thing, and I am sure Dr.
VanDerhei will speak more about it, there has been an effort in
the private sector to do an education campaign, which I think
has been very useful, but, of course, it is not reaching far
enough, obviously.
The better way would be to start in the schools, that
really, we should find a way, and I do not know exactly how to
do this, given the local character of education, whether there
is some sort of Federal impetus for this or not, but we should
really be building these days into middle and high school
education some sort of financial literacy because there have
been recent surveys done that show that the majority of
American adults do not comprehend compound interest at all,
cannot even calculate interest in many respects.
And so people just need to really understand these concepts
better, and this is a much different world now than, say, 50
years ago, where you really do need to understand some of these
things as a basic, you know, just to get by in life. And so I
think building that financial literacy into a high school
education would be a really important first step, in addition
to the things that Jack had mentioned that the private sector
is doing.
Senator Tester. Dr. VanDerhei.
Mr. VanDerhei. Well, I certainly agree with that. I do
think it is very important, though, that the kind of
information that people who have to make those decisions
today--while I completely agree that for people still in the
educational modality, they should get that type of training,
but we have a situation today where only 42 percent of
individuals that we have surveyed virtually every year for the
past 20 have even attempted to make a guess at what they need
for retirement.
This is becoming a very difficult type of assessment for
many individuals as you realize. When people primarily had
defined benefit plans and Social Security, it was relatively
easy to figure out whether or not they were on track. Today, as
more and more of them are going to defined contribution, they
are ending up with a lump sum account balance and many of them
have great difficulties trying to make the calculation of what
would that lump sum buy me in terms of monthly income when I
hit retirement age.
There are several proposals available as far as how one
could go about doing that, but until we get to the point where,
indeed, the vast majority of individuals do have that financial
literacy, I think it is incumbent upon employers, providers,
people in the public policy research section to try to come up
with relatively easy to operate Web sites that could very
quickly let somebody know whether or not they are on track, if
they are not on track, how much more do they need to start
saving each year, and let them do the ``what if'' scenarios
between should I push back retirement age, should I increase my
contribution today. Get something that is easy for people to
understand so they will actually go and use it and start asking
more questions.
Senator Tester. OK. Mr. Rickards.
Mr. Rickards. Senator, the fellow panelists have mentioned
various measures to encourage savings and design features to do
that, such as automatic enrollment, and I applaud that. But
your question, which is very straightforward, how much am I
going to need, there are tried and true methods for calculating
that. You go to your financial advisor. They say, how old are
you? They come up with some life expectancy. They make some
assumptions about returns, et cetera, and they can tell you how
much you need to save to reach those goals.
The problem is, most of those assumptions are extremely
flimsy, and to illustrate that point, imagine we are back in
1999 and asking your question, Senator, and someone who put
their money in stocks and a 401(k) plan, and let us say someone
else, not as financially literate, bought gold. The person who
bought gold made 700 percent. The person who bought stocks made
zero. Now, I am not projecting that into the future. I just put
that point out there to illustrate that it is all in the
assumptions, and until we have stable money and better Fed
policy, I do not see how any investor can answer the question
intelligently because we do not know what the dollars are going
to be worth.
Senator Tester. Good point. I just want to follow up just a
little bit. You said that the models are out there, and this
can apply to all of you because you know I am a farmer in my
real life and I am not sure I would know how to determine how
much money I am going to need when I retire, to be honest with
you. Living in Big Sandy, Montana, is a whole heck of a lot
different than living in Washington, D.C. And the costs it
would cost me to live there and Washington, D.C., are
different.
Are there actually models out there that if somebody was
just out of college, and assuming they are going to live in the
same area--which is a tough assumption right out of the shoot--
that could tell you what is going to happen, because there are
so many varying factors out there. There is inflation. There is
energy prices. I mean, my goodness, there is just variance
after variance and how can you predict somebody who is 21-years
old, what they are going to need when they are 45 years down
the road? Do you have any insight into that?
Mr. Rickards. The short answer is you cannot predict
exactly, Senator, but you can engage in portfolio construction,
pick assets, and diversify the assets in such a way that over
long periods of time, they tend to track or perform well
relative to various outcomes, some stocks, some bonds, some
precious metals, some hard assets, et cetera. So you do not
know the answer, but you try to prepare for all weather, so to
speak.
Senator Tester. Got you. All right. Would anybody else like
to--Dr. VanDerhei.
Mr. VanDerhei. Senator, I certainly agree with that. The
important point, though, is you do not want to bury the
individual in so much uncertainty that they are frozen from
doing anything in the first place.
Senator Tester. Right.
Mr. VanDerhei. You want to get them into a situation where
they start contributing, and hopefully as they get further down
the process, get a much more accurate assessment of where they
need to be.
Senator Tester. OK.
Mr. Calabrese. I would just say that what may be most
important is if we could get this sort of automatic savings
system, you know, if everybody had an automatic enrollment into
a payroll deducted saving plan with the right defaults, because
if your employer and the Government are saying--because they
are defaulting you, they are saying, now, here is what you
should be doing. So even if you are 23, they are starting you
at 6 percent of your pay and escalating you, say, to 10
percent, well, that is giving you an idea that, yes, that is
what the experts think you should be doing. And you may not
know whether your income is going to double or triple over the
next 30 or 40 years. You may not know where you are going to
end up living. But if you can hit that benchmark which you
ought to be defaulted into, you will be in pretty good shape.
The other thing which I should have mentioned earlier is
another good starting point would be to reinstate the annual
statement from Social Security, because we used to at least
see, you know, get the thing in the mail each year, which we
are not. And what would be a nice thing is if they could begin
sending that either in addition or alternatively by email, they
could include links to things like the Choose to Save
retirement calculator that EBRI sponsors, because then you
could actually connect people directly to these engines where
they can begin doing these calculations.
Senator Tester. Very good. Thank you.
Senator Vitter.
Senator Vitter. Thank you, Mr. Chairman, and thank you all
again.
Is it clear that this problem is worsening long term when
you factor out the recent recession and the current really sort
economy? I assume that is an immediate factor. But to talk
about long-term trends, you sort of have to back that out. So
is it clear once you back that out that the problem is getting
worse?
Mr. VanDerhei. If I could, we did our first national
assessment back in 2003 and updated it in 2010 and found
actually a significant reduction in the percentage of
households who were at risk, even though we had just gone
through the 2008-2009 financial market crisis. The number one
reason for that, and I realize this is something one needs to
think about for a second, is that what group is most at risk?
It is the low income.
There was something very, very valuable that happened
between 2003 and 2010 and that was the Pension Protection Act
in 2006. What it did was make automatic enrollment types of
401(k) plans much more popular for plan sponsors to adopt. And
if you go back and look at the participation rates for the low-
income individuals, again, the ones most at risk, you find
situations where they virtually double, from being in the 40
percent range to the high-80 or low-90 percent range. What that
one factor alone has done in projecting out future retirement
income for the low-income has been absolutely phenomenal.
So if you go back pre-PPA, pre-2006, you have seen a marked
improvement because of what the employers have done to help the
low-income. But I will agree, if you go back and look just at
the 2008 and 2009 years by themselves, certainly, the financial
market and the real estate market crises have anywhere from 3
to 14 percentage points increased those that are considered to
be at risk.
Going forward is actually dependent almost more than
anything else on what happens with respect to uninsured health
care in retirement. Nursing home costs, as I am sure you are
aware, are a very, very large exposure. Families that get to
retirement age with what seems to be an appropriate amount of
financial resources, after one or two spells of expanded times
in an expensive nursing home can very easily chew through those
amounts.
Senator Vitter. Quickly, because I do not want to use up
all my time, do you all have any other responses to my first
question?
Mr. Calabrese. Yes. Just to back up what Jack said is that
the biggest change in participation in an employer plan over
the past 30 years has simply been--you can see it almost
percent by percent, is the shift from defined benefit to
defined contribution, right, from traditional pension to
401(k), because what has happened is that although the overall
participation rate at about 50 percent has been relatively
level, the participation rate among the lowest third by income
has fallen by about ten to 12 percentage points, and that is
because when employers had traditional plans, they
automatically put everybody into it and saved on their behalf.
Now, you need to choose to save, and so the lower-wage workers
are not doing that as much and that is really hurting the
overall picture.
Senator Vitter. OK.
Mr. Rickards. And I would say Dr. VanDerhei's projections
are certainly correct about the benefits of automatic
enrollment. It increased participation, increased savings. I
take far less comfort than he from how that will play out,
because it all depends on long-term growth assumptions. Your
savings do not do you any good if you are not going to get
returns, and in sort of a hostile business environment, there
is no reason to expect the future returns will match the past,
and I think the 12-year stretch in the stock market from 1999
to 2011 bears that out.
Senator Vitter. OK. That sort of goes to my next question
for Mr. Calabrese and Dr. VanDerhei. Have you done any
calculation or do you have any comments about the impact of the
Fed's zero interest rate policy, which is unprecedented,
certainly, in terms of its longevity, on this problem?
Mr. VanDerhei. Actually, right after we did our 2010 study,
the Wall Street Journal called me up and asked me almost
specifically the same question. Our baseline rate of return
numbers were relatively high in a nominal sense compared to
what you have today, 8.9 percent for equities and 6.3 percent
for fixed income on a stochastic basis. The Wall Street Journal
asked if we could lower that to a nominal 6 percent for
equities and 2.4 percent for fixed income.
At that time, our at-risk percentages were 47 percent.
Putting in this new low interest rate scenario that they wanted
modeled increased the percentage of early Boomers from 47
percent all the way up to a situation where 59 percent of them
would be at risk. So there would be a very large increase in
those households that we would consider to be at risk because
of that particular policy.
Senator Vitter. So that, you could say from that rough
calculation, has roughly grown the problem 25 percent?
Mr. VanDerhei. Correct.
Senator Vitter. OK. Mr. Calabrese, do you have any comment?
Mr. Calabrese. Yes. I have no independent data on that. I
would just note that, of course, a low interest rate policy
would have a very differential effect depending on whether you
are already retired or saving, particularly the older workers
shifting assets into fixed income, because folks who are
already retired, of course, have benefited from a bull market
in bonds. But those who are shifting assets and new saving into
fixed income, of course, are feeling that pinch.
Senator Vitter. OK. And probably the final question, this
help, this improvement in terms of the changes that were made
that encouraged a lot more automatic enrollment, what does that
suggest about a logical next step to reasonably encourage even
more automatic enrollment or similar gains in participation?
What policy would reasonably be the next step?
Mr. VanDerhei. It may be that you are in a period now where
employers are still sorting out from a cost-benefit standpoint
whether or not they want to go with automatic enrollment. The
one thing you have to remember is that although the good news
is you increase participation rates, the downside for employers
is if you have a matching contribution, that means it is going
to cost them more. And I think there are a lot of employers who
are still waiting to see, perhaps looking at their competitors,
perhaps looking at what these participants actually end up
doing, whether they think automatic enrollment is correct for
them from a business standpoint.
Mr. Rickards. Senator, I would add, when you say automatic
enrollment, my question would be, enrollment into what? I
applaud automatic enrollment and the incentive to save, but if
you are just going--and plan sponsors are extremely reluctant
to offer any alternatives or any investments other than
traditional stock/bond portfolios, and if those are going to
be--if we are in the middle of another stock bubble, and my
view is we are, that is another disappointment for investors.
So unless there are some other things they can invest in,
prudently managed, but precious metals, pools of hedge funds,
things that are a little nontraditional, then they could just
be setting up for another fall. All that savings and all that
wealth could be wiped out in a stock market crash.
Senator Vitter. Thank you.
Senator Tester. Thank you, Senator Vitter.
Senator Akaka.
STATEMENT OF SENATOR DANIEL K. AKAKA
Senator Akaka. Thank you very much, Mr. Chairman, for
holding this hearing. I would like to say aloha and welcome our
witnesses to the hearing today.
As defined benefit pensions become less common and many
families have little retirement savings, I am very concerned
that many senior citizens will face financial insecurity as
they age.
The current retirement system, signed by President Reagan
in 1986, has served as a model for modern pensions, combining a
small defined benefit, a 401(k)-style plan with matching
contributions, and Social Security. Since that time, private
sector pension participation has fallen dramatically. In my
view, Congress must focus on addressing the nationwide
retirement savings gap, shoring up systems that provide some
guaranteed benefit to workers, and promoting individual
savings.
As a longtime advocate for enhancing our Nation's financial
literacy, I believe it is critical to ensure that people have
the knowledge and support to effectively save for retirement.
We must work with employers and the financial industry to
educate employees and also to make it easier for the average
American to save for his or her retirement.
This question is for Mr. Calabrese and Dr. VanDerhei. It is
often a challenge to encourage employee participation in any
retirement savings plan, especially for younger and lower-
income employees. In 2009, Congress passed legislation to
automatically enroll Federal employees in the Thrift Savings
Plan unless they opt out. You both mentioned automatic
enrollment in your testimony. I would like to hear more about
how automatic enrollment helps individuals save for retirement.
Mr. Calabrese. OK. Well----
Senator Akaka. Mr. Calabrese.
Mr. Calabrese. Right. I will start, and I know that Jack
will be able to give an update on the data since they run a
database of 401(k) plans that keeps track. But the most recent
data I had seen was that of the roughly 45 percent of 401(k)
plans that use automatic enrollment, they were seeing an
improvement of about 30 percentage points in the overall
participation rate. And of course when you are picking up
people, you are picking up disproportionately the middle to
lower range because the affluent have a very high participation
rate to begin with. So it is very, very helpful.
There is a bit of a controversy, though, about the initial
contribution rate, where it should be set, because about--the
Wall Street Journal, for example, I think about a year ago had
basically criticized the fact that the initial contribution
rates for the majority of plans were set at 3 percent, and this
was encouraged, in effect, by the Pension Protection Act, which
in allowing this while giving a safe harbor cited 2 to 4
percent as the range. And so, really, we would agree with the
Journal that 6 percent as an initial default contribution is
much better, because actually, at 3 percent, a majority of
workers, even if they are consistently saving, would not reach
even 80 percent of their target for retirement income adequacy.
Senator Akaka. Dr. VanDerhei.
Mr. VanDerhei. Well, I certainly agree with most of that.
We have seen a tremendous increase in the overall projected
accumulations for 401(k) balances when they move from the old
style voluntary system to the automatic enrollment.
I think the other question one wants to focus on is
basically if you do start them at those relatively low default
contribution rates, is there another procedure, such as
automatic escalation, that is going to be valuable in getting
people back to where they need to be long-term. There is,
unfortunately, as mentioned, the upside that the participation
rates especially among the low-income and the young increase
substantially, but because of inertia, which works to the
benefit of many employees--because once you put somebody in
they are very unlikely to opt out--once you put somebody in at
a particular contribution rate, they are also very unlikely to
move from that on their own. And you have had this anchoring
effect, and, in fact, many individuals on the upper income side
would have been contributing at a higher rate had they
voluntarily made that election as opposed to the automatic
election.
But in terms of what is going on in the private sector
among large sponsors, we now find 58 percent of large 401(k)
sponsors have now moved to automatic enrollment and the other
nice advantage about automatic enrollment in many cases is you
get around the problem of allowing participants to necessarily
direct their own investments. You find a substantial proportion
of young individuals who will not put anything in equities. You
find a substantial portion of the older people who have very,
very high equity allocations. And you find still today, even
after Enron, some people who will basically have almost all of
their portfolios in company stock.
The reason automatic enrollment has worked so well, in
addition to defaulting them in and defaulting their
contribution, you also in most cases default them into usually
a target date fund which is professionally managed and will
have an age-appropriate asset allocation, and as the markets
fluctuate, put them back to where at least professionals think
the correct asset allocation should be.
Senator Akaka. Thank you very much for your responses.
Thank you, Mr. Chairman.
Senator Akaka. Thank you, Senator Akaka.
This is a question for Mr. Calabrese. Your testimony
highlights what the challenges are facing employees that work
for small businesses. They may not have the staff, the
resources, the time to craft, manage retirement plans for their
workers like the larger companies do. Montana being a small
business State, 75 percent of our workers work for companies
that have less than 100 employees and many of those need to
take retirement into their own hands.
The question is for you, and the other two can respond if
they would like. How are small business employees and
proprietors saving for retirement, or are they just simply not
doing it?
Mr. Calabrese. Yes. So, currently, the GAO had identified
the categories of workers that are participating at very low
rates, and in addition to the very young, very low income is
people who work at small business. So a majority of small firms
are not sponsoring these qualified retirement plans, and that
is the reason that, you know, we have been suggesting that the
automatic IRA concept is a very good one, because particular if
you--you could exempt businesses that have fewer than, say,
five or ten employees, but certainly anybody bigger than that,
almost--more than 90 percent are using payroll services, for
example. And we found that there are empty fields. They do
paycheck deposit automatically, and it is just as easy to
automate at marginal cost a saving into an automatic IRA
without having to go jump through any of the regulatory hoops.
You do the sponsor, an actual qualified plan.
Senator Tester. So, and maybe I do not understand the
automatic enrollment. I assume what you just said was automatic
enrollment would happen for businesses over five or ten
employees. The question I have, I guess, revolves around if
there is extra money laying around, it usually goes to health
care in a business, to try to provide them with that benefit.
Would this have--look, we have got two problems here, and they
may be like this. The automatic enrollment and the opportunity
for increasing savings from retirement, all three of you said
will work, assuming that the investment is put in the right
spot. I guess the question is, has anybody done any analysis to
see if this would have a negative or positive impact on a job
market with it being another benefit? I hate to play the
devil's advocate, but----
Mr. Calabrese. Right. Right. Oh, sure. Well, it would
depend what you require. The automatic IRA concept actually
does not require employers to make any contribution.
Senator Tester. OK.
Mr. Calabrese. So there would really be no cost to them,
and, in fact, the bipartisan bills that have been put in
typically provide a small tax credit even to cover the payroll
accounting expense----
Senator Tester. Got you.
Mr. Calabrese.----to the extent that there is one. And, in
fact, some proponents of the automatic IRA would preclude
employer contributions, although we think that employers should
at least have the option to contribute.
Senator Tester. Absolutely. OK.
I guess if you were going to--and you may repeat yourself
on this, and that is fine--give me the top one or three things
that you would do if you were sitting in my chair to help solve
this problem, what would they be, and we will just go down the
line. You first, Mr. Calabrese.
Mr. Calabrese. OK. Well, the first, and this may not,
unfortunately, not be squarely under your jurisdiction, is this
notion of a universal automatic payroll deposit saving program
that is accessible to every American worker. So, in other
words, if your employer--you could exempt employers who are
eligible, actually eligible to participate. So, for example,
they have worked the year at a firm that sponsors a qualified
plan, like a 401(k). But everyone else should be able to get
into one of these portable career accounts, the automatic IRA
idea.
Second, I mentioned children's savings accounts. I think if
we start--and that would speak toward the literacy issue, as
well. New America had a proposal which has been introduced as
bipartisan legislation over the years, the ASPIRE Act for
children's savings accounts. It starts them off with a $500
contribution. Ideally, you would have some tax incentives for
families to contribute with the idea that that could grow by
age 18 to really help pay for at least a State-level college
education or to invest in a first home or to seed retirement
saving.
And then the third thing is I think we need more
initiatives to help bank the unbanked. So there was the
proposal--there have actually been trials that began out in San
Francisco, Bank on USA, for example, which the Treasury
Department--the Obama administration had proposed to fund for a
larger demonstration project. I do not believe that has
happened yet. But that sort of thing is good to get people into
the system.
Senator Tester. OK. Dr. VanDerhei.
Mr. VanDerhei. Well, I will give you three suggestions in
no particular order. The first two deal with automatic
enrollment, and almost by historical accident, we have ended up
where we are today with respect to default contribution rates
with automatic escalation being around 3 percent. If there was
something the Government could do to help employers understand
that going above 3 percent not only is more likely to help
employees reach their goals, but is going to be sort of a safe
harbor in terms of plan design, I think that would be ideal.
Another thing is with respect to automatic escalation. We
did not really get a chance to go into that, but if you start
people at a relatively low three or 6 percent and then put them
in a program where automatically their contribution rates go up
1 percent per year until a specific level unless they opt out.
Unfortunately, under today's safe harbors, the maximum you can
allow that to go to automatically is 10 percent. I would dare
say most financial professionals would say 10 percent from the
employees plus perhaps a 3-percent match from the employer
still is not going to be sufficient, especially in the low rate
of return environment. And if you could allow those automatic
escalation programs to continue beyond 10 percent, I think that
would be great.
Third, risk management techniques at retirement. Again, I
think so many individuals just use sort of a 50-50 chance of I
will be OK if I have X dollars when I hit age 65. You have got
longevity risk and you have got catastrophic health care risk
that needs to be dealt with. There are many, many reasons, some
legitimate and some perhaps not, that employers do not want to
become involved in helping employees with the longevity risk.
If you could have situations in which, for example, annuities
or longevity insurance could be provided through the plan and
employers would feel safe doing that, I think you would reach a
situation where people have a much better cap on what they
would need in terms of a prolonged lifespan.
Senator Tester. OK. Mr. Rickards.
Mr. Rickards. Senator, I have three suggestions. The first,
simply call upon the Fed to give us sound money, and the
importance of that is money is how we count and make all these
other decisions. We have heard talk today about target date
funds, portfolio diversification, et cetera, and these all
involve price signals and those price signals go into these
complicated calculations. But without sound money, the price
signal, the input and the output is all meaningless. So I would
start there.
The second is a broader set of investment options. I
certainly applaud automatic enrollment and things we have heard
about today, but we need to get beyond traditional stocks and
bonds because they are vulnerable to these bubble environments,
and the way you prevent that is with some other hedges, such as
precious metals, alternatives, real estate, perhaps.
And the third, I agree with my co-panelists, financial
literacy is critical. I have enormous confidence in the ability
of the American people to make smart decisions about their own
money, but financial expertise is no different than any other
expertise. You need some training and some familiarity with it.
Senator Tester. Well, I want to thank you. Actually, we are
going into another area that is something that I, quite
frankly, think about personally, and that is the impact on my
inability to save enough money is going to impact me working
longer, which is going to impact the job market, which is going
to--when I sell off what investments I have, what impact is
that going to have on the investment markets, and the list goes
on and on and on. And if I am in that boat, there are probably
a lot of other folks that are in that boat, too.
I just want to thank you all for your testimony today. I
very much appreciate you coming in and giving us your insights
and your perspectives about retirement savings and security
issues facing this country. I think the picture is clear from
each one of you. It is concerning in each different area, and
unquestionably, I think, much needs to be done to communicate
facts and data that you folks have provided here today, along
to those preparing for retirement, and I hope this hearing will
raise an awareness of this challenge and facilitate education
to improve this Nation's retirement preparedness, confidence,
and security. There are bills out there that I am hopeful will
surface to the top and get written up that we can flesh out and
really address some of these issues.
And so I look forward to working with you all in the future
to discuss some of these issues and hopefully do some things
that will be good to help move the country forward as far as it
goes through retirement security.
The hearing record will remain open for 7 days for any
additional comments and for any questions that might be
submitted for the record.
Once again, thank you all for being here. This hearing is
adjourned.
[Whereupon, at 3:34 p.m., the hearing was adjourned.]
[Prepared statements and additional material supplied for
the record follow:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]