[Senate Hearing 115-19]
[From the U.S. Government Publishing Office]
S. Hrg. 115-19
THE CURRENT STATE OF RETIREMENT SECURITY IN THE UNITED STATES
=======================================================================
HEARING
before the
SUBCOMMITTEE ON
ECONOMIC POLICY
of the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED FIFTEENTH CONGRESS
FIRST SESSION
ON
EXAMINING THE STATE OF RETIREMENT SECURITY IN THE UNITED STATES
__________
APRIL 5, 2017
__________
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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
MIKE CRAPO, Idaho, Chairman
RICHARD C. SHELBY, Alabama SHERROD BROWN, Ohio
BOB CORKER, Tennessee JACK REED, Rhode Island
PATRICK J. TOOMEY, Pennsylvania ROBERT MENENDEZ, New Jersey
DEAN HELLER, Nevada JON TESTER, Montana
TIM SCOTT, South Carolina MARK R. WARNER, Virginia
BEN SASSE, Nebraska ELIZABETH WARREN, Massachusetts
TOM COTTON, Arkansas HEIDI HEITKAMP, North Dakota
MIKE ROUNDS, South Dakota JOE DONNELLY, Indiana
DAVID PERDUE, Georgia BRIAN SCHATZ, Hawaii
THOM TILLIS, North Carolina CHRIS VAN HOLLEN, Maryland
JOHN KENNEDY, Louisiana CATHERINE CORTEZ MASTO, Nevada
Gregg Richard, Staff Director
Mark Powden, Democratic Staff Director
Dawn Ratliff, Chief Clerk
Cameron Ricker, Hearing Clerk
Shelvin Simmons, IT Director
Jim Crowell, Editor
______
Subcommittee on Economic Policy
TOM COTTON, Arkansas, Chairman
HEIDI HEITKAMP, North Dakota, Ranking Democratic Member
PATRICK J. TOOMEY, Pennsylvania ROBERT MENENDEZ, New Jersey
DAVID PERDUE, Georgia ELIZABETH WARREN, Massachusetts
THOM TILLIS, North Carolina JOE DONNELLY, Indiana
JOHN KENNEDY, Louisiana
Brian Colas, Subcommittee Staff Director
Craig Ratliff, Democratic Subcommittee Staff Director
(ii)
C O N T E N T S
----------
WEDNESDAY, APRIL 5, 2017
Page
Opening statement of Chairman Cotton............................. 1
Opening statements, comments, or prepared statements of:
Senator Heitkamp............................................. 2
WITNESSES
Kent Conrad, former Senator from the State of North Dakota, and
Co-Chair, Bipartisan Policy Center's Commission on Retirement
Security and Personal Savings.................................. 4
Prepared statement........................................... 24
Walter Russell Mead, Distinguished Scholar in American Strategy,
Hudson Institute, and Chace Professor of Foreign Affairs, Bard
College........................................................ 7
Prepared statement........................................... 34
Additional Material Supplied for the Record
Bipartisan Policy Center's June 2016 report, ``Securing Our
Financial Future: Report of the Commission on Retirement
Security and Personal Savings,'' submitted by former Senator
Kent Conrad.................................................... 42
Illustrations presented by Senator Heitkamp during hearing....... 190
Prepared statement of J. Spencer Williams, President & CEO,
Retirement Clearinghouse, LLC.................................. 193
Prepared statement of the American Council of Life Insurers...... 223
Prepared statement of Catherine Weatherford, President & CEO,
Insured Retirement Institute................................... 228
Prepared statement of the Save Our Savings Coalition............. 240
Prepared statement of the Strengthen Social Security Coalition... 242
(iii)
THE CURRENT STATE OF RETIREMENT SECURITY IN THE UNITED STATES
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WEDNESDAY, APRIL 5, 2017
U.S. Senate, Subcommittee on Economic Policy,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Subcommittee met at 3:08 p.m., in room SD-538, Dirksen
Senate Office Building, Hon. Tom Cotton, Chairman of the
Subcommittee, presiding.
OPENING STATEMENT OF CHAIRMAN TOM COTTON
Chairman Cotton. The hearing will come to order.
I want to welcome you all to today's hearing. As you know,
this is the first hearing of the Subcommittee on Economic
Policy in the 115th Congress. I look forward to working with
our Ranking Member, Senator Heitkamp, and all of our Members as
we use this Committee to highlight the needs of working
families and what Congress can do to help them.
In my own State, more than half of Arkansans are living
paycheck to paycheck. But perhaps it might be more accurate to
say many are living on the edge. About one in five do not have
enough savings to pay for a routine visit from an electrician,
which would cost only $100.
It is even worse for more significant expenses. The vast
majority, about three in four, could not afford 6 months of
unemployment. The numbers look similar in other States. In
other words, most Americans are making just enough to get by
and nowhere near enough to get ahead.
It is precisely because of this that a growing number of
Americans are looking increasingly vulnerable as they reach
their retirement years, which is the subject of our hearing
today.
It is hard to overstate just how alarming the situation is.
Three basic items--housing, transportation, and food--make up
63 percent of the average household budget, and these things
are getting more expensive, not less. They are eating up more
of the family budget, even more than they did 20 years ago. It
does not take an economist to figure out that if you are
spending more money just to keep the lights on, you have got
less to set aside for retirement. And that is exactly what we
see today.
The number that sums it all up for me is this one: The
typical American aged 55 to 62 has only about $14,500 in
savings. That is it. And this is at a time when Social Security
is sinking further and further into the red.
But it is even worse than that. At the very moment that
people are seeing their expenses go up, they are also seeing
their retirement plan options go down. In 1979, at least a
third of our workers had defined benefit plans. Today it is
only 14 percent.
You might say to move from defined benefit to defined
contribution plans was inevitable. Overseas competition has
increased, and companies were feeling the pressure to become
more efficient. And that is fair.
But today fewer workers have access to any retirement plans
at all, defined benefit or 401(k). And then, even if you do
have a 401(k), you still may not be saving enough to retire in
comfort and security.
These are the facts. They call out for a rethinking of how
to achieve retirement security in America. We have to rethink
how Americans can save and plan for retirement if we hope to
maintain the kind of lifestyle to which so many Americans have
grown accustomed over the years.
Luckily, we have two distinguished witnesses to help us
think through how to tackle this problem. Our goal today is not
to solve the problem, but to answer a few basic questions. How
many Americans are prepared for retirement? What is holding
them back? And what can Congress do to make it easier for
working families to save?
First, we will hear from former Senator Kent Conrad, of
North Dakota, now a Senior Fellow at the Bipartisan Policy
Center, where he co-chaired a Commission on Retirement Security
and Personal savings. Senator Conrad has done excellent data-
driven work on the state of retirement security in the United
States, and we are fortunate to have him here.
Next we will hear from my good friend, Walter Russell Mead,
Distinguished Scholar in American Strategy, the Hudson
Institute, Chace Professor of Foreign Affairs and Humanities at
Bard College, and Editor-at-Large of the American Interest.
Professor Mead has been studying the change in the American
workforce over time and its ramifications for many years.
Professor Mead has testified many times about foreign policy
before Congress, and we are happy to welcome him to the Banking
Committee now to discuss economic policy.
I want to thank you both for taking the time to join us
today. I look forward to hearing your testimony, but first,
Senator Heitkamp.
STATEMENT OF SENATOR HEIDI HEITKAMP
Senator Heitkamp. Thank you, Chairman Cotton, and thank you
for being such a great partner in putting together this hearing
on such a critical and important topic. Our hearing today is
our first Banking Subcommittee hearing this Congress, and I am
very pleased that we are starting off exploring the issue of
retirement security.
You know, I wake up every morning thinking about the men
and women in rural America, especially in North Dakota, who
play hard, play by the rules, and try to earn an honest living
and save for retirement--in fact, their golden years. The
working class is the backbone of our country, and they should
not have to fear about their retirement future.
Unfortunately, the trends we are seeing suggest that
retirement security is far more uncertain today than it was
even 20 years ago. Only 22 percent of workers are very
confident that they will have enough money in retirement,
according to the Employee Benefit Research Institute, and 64
percent say they know they are behind in where they should be
in their savings.
In fact, somewhere between 60 and 70 percent of all working
Americans have access to a workplace retirement account or a
401(k). That leaves about 30 million full-time workers without
access to a workplace-sponsored plan. And among those who do
have access to a 401(k), a recent Census Bureau study
determined that up to two-thirds--let us repeat that again: Of
those that do have access, up to two-thirds do not put away
nearly enough to cover the cost of retirement. This should not
come as a surprise given the fact that about half of all adults
in our country would be unable to come up with $400 to pay for
an emergency expense. They would have to borrow that money or
sell a possession.
In my home State of North Dakota, about 41 percent of all
private sector employees--that is roughly 112,000 workers--work
for an employer who does not offer a retirement plan. These are
the truck drivers, the sales clerks, and the farm workers that
are working very hard to make ends meet, put their kids through
college, cover healthcare costs, and provide a better life for
their children, thinking they will just put off that decision
of their retirement
security until tomorrow.
We owe it to these men and women to strengthen our
retirement system. There is certainly no silver bullet, but we
need to think creatively to educate workers and expand access
to retirement vehicles so more workers can afford to save and
take advantage of the substantial benefits a sponsored
retirement plan can offer.
We also need to protect the men and women who still have
access to a defined benefit plan or a pension as we transition
to this new model. This means standing up against cuts to
private pension plans, like Central States Pension Fund, whose
members would economically be devastated if they lose access to
the pension benefits that they bargained for and that they
earned.
As we dive into these issues, I look forward to hearing the
testimony of today's brilliant witnesses--I said that just as a
moment of suck-up, ``brilliant witnesses''--Senator Kent
Conrad, my mentor and great friend, who has spent a lifetime
working to help the men and women of this country, and
particularly the men and women of North Dakota, achieve
economic success. And I am interested to explore some of the
proposals he has put together as part of his work as co-chair
of the Commission on Retirement Security and Personal Savings.
I am also very eager and grateful for Mr. Mead's testimony
and Mr. Mead's appearance. He has me doing some rethinking of
fundamental ideas that I have had about what we need to do with
pensions. There is no doubt that the new economy where work is
taking place in a series of one-off gigs presents challenges in
the retirement space. And we have to develop a model that is
realistic for today's economic model, especially at a time when
we are really uncertain about what the future of work will look
like.
So I want to thank both of you for, number one, your
enormous work that you have done in the past for our country,
in the case of both of you, and the thinking that you have done
about the future of the people of the United States of America
and how we can improve the economic outlook for them.
And so, Mr. Chairman, with that, I look forward to the
testimony.
Chairman Cotton. Thank you, Senator Heitkamp.
Both of our witnesses' written statements will be entered
into the record, as will a written statement from the American
Council on Life Insurers.
We will start with Senator Conrad. Senator Conrad, welcome
back. I am sure you are thrilled to be back.
[Laughter.]
Senator Heitkamp. I keep trying to get him to trade places
with me. He is not buying it.
STATEMENT OF KENT CONRAD, FORMER SENATOR FROM THE STATE OF
NORTH DAKOTA, AND CO-CHAIR, BIPARTISAN POLICY CENTER'S
COMMISSION ON RETIREMENT SECURITY AND PERSONAL SAVINGS
Mr. Conrad. Well, thank you, Chairman Cotton, Ranking
Member Heitkamp, Senator Kennedy. Good to see you as well, sir.
Senator Kennedy. Good to see you, too.
Mr. Conrad. Chairman Cotton, if you will permit me just a
moment of personal reflection, Senator Heitkamp succeeded me as
tax commissioner when I came to the United States Senate. She
succeeded me in the U.S. Senate when I went into retirement.
And I am so delighted to see her on that side of the dais.
And, Senator Cotton, my daughter I think went to college
with you and tells me that you are very smart. And I have a
very smart daughter, so when she says that, I listen.
So thank you very much for this opportunity to talk about
retirement security. For the last 2 years, as the Chairman
mentioned, I have been running a commission, along with Jim
Lockhart, now the co-chair of Wilbur Ross, who helped run
Social Security during the Bush administration. We were the co-
chairs of this Commission on Retirement Security. And the
numbers that both of you used are exactly what we found. I
brought this slide. This is from a Gallup poll of last year,
and they asked the American people what were their biggest
financial worries. And number one, was not having enough money
for retirement. Fully 64 percent of the American people said
they were worried about not having enough money for retirement.
The Urban Institute reported to our commission that the median
retirement assets of the age group 62 to 69 is $30,000. We have
got a problem.
Senator Heitkamp, you talked about the Federal Reserve
study that showed 46 percent of the American people would have
a hard time coming up with $400 for an emergency car repair. So
we have got issues, and one of the biggest is access to
retirement plans at work. Both of you mentioned this in your
opening statements, and this slide shows the gap between access
and participation. Access and participation. As you can see,
about half the country is participating in a retirement plan at
work, but fully half the country is not. Thirty-four percent do
not have access, 17 percent have access but do not contribute.
So to me there is a big opportunity here, and our commission
really fastened on this opportunity.
Just a word about the commission. Nineteen members, as I
indicated, co-chaired by Jim Lockhart, diverse backgrounds,
former Governors, Senators, Congressmen, Republicans, and
Democrats. We had thought leaders, business leaders. We had
both public trustees of Social Security, both the Republican
and the Democrat. So this was a very diverse commission.
At the end we had 18 of the 19 agree to the recommendations
of the commission, so after 2 years of discussion and study, we
were able to achieve agreement.
And we had the Chief Actuary of Social Security say if our
recommendations were adopted, Social Security would be solvent
for 75 years and beyond.
The top-line results of our work were this: that if our
commission recommendations were adopted, we would improve
retirement savings by 50 percent for middle-class Americans
once all policies are phased in; and that implementing those
recommendations would also reduce old-age poverty by one-third
from today's levels by 2035. I think those are significant
accomplishments.
We started with this whole question of retirement plans at
work, and we advocated creating a new vehicle, something we
called ``Retirement Security Plans.'' When we talked to small
business, they told us, ``Look, we would like to offer plans,
but it is too expensive. There is too much administrative
burden.'' I come from a small-business family, as Senator
Heitkamp knows well, and I found that to be absolutely true.
The administrative burden for small businesses, the cost, the
liability, just prevents them from doing something many of them
would like to do.
So we said let us cut away all the chaff. Let us make it
easy for companies with up to 500 employees to offer Retirement
Security Plans by having third parties administer them and take
on the financial responsibility. The only thing the employer is
asked to do is make payroll deductions and transfers. That is
the only thing they have to do.
We suggest, after that has been in place for several years,
that then we would recommend establishing a national minimum
coverage standard for all businesses with 50 or more workers.
Now, this is controversial, and we understood it is
controversial, asking businesses to take this on. But the
finding of the commission--and, again, this is on a totally
bipartisan basis--was if we are going to simplify it to the
point all they have got to do, all the employer has to do is
make a payroll deduction and transfer, it is not unreasonable
then to ask businesses with 50 or more employees to offer some
kind of plan. They can choose which kind of plan. They can
choose these retirement plans that we have constructed, or they
can offer something else.
We also allowed employers to automatically enroll employees
into multiple savings accounts so they could save for
retirement and also have a rainy-day fund, because one of the
things we found is--kind of surprising to me, frankly, but we
found that people are
saying to us, ``Look, yeah, I have got a retirement fund, but I
have got to go to that because I do not have any other savings
account because it is not offered.'' And you go to the employer
and ask why it is not offered, and there are all kinds of legal
problems constructing multiple accounts. We take away the legal
chaff that prevents employers from offering multiple accounts.
We also incentivized retirement savings for young workers.
I will just touch on the Saver's Match, a refundable credit of
up to $500 per individual or $1,000 for a couple, to encourage
younger workers, those 18 to 35, with lower wages to start
savings. The income limit for an individual is $30,000, for a
couple it is $60,000. But if they put away $1, it is matched up
to $500, age 18 to 35, with up to $30,000 of income for an
individual, $60,000 for a couple.
We also facilitated the establishment of a Retirement
Security Clearinghouse to improve portability. Many
individuals, when they go from job to job--and we are in an
economy where people go from job to job--they leave accounts
behind. In fact, the Government Accountability Office reported
that over the course of a decade, 25 million Americans changed
jobs and left at least one account behind.
Now, for those of you who serve in this body, I can attest
to the fact that when I left here, I had multiple accounts,
and, you know, it is hard to put them together. And managing
dribs and drabs here and there is a challenge. So it makes a
lot of sense to create these clearinghouse functions to allow
people to unite their
accounts.
We also encourage plan sponsors in general to integrate
easy-to-use, sophisticated, lifetime income features. One of
the things, if you talk to financial advisers, they will tell
you is a lot of people do a pretty good job in the accumulation
phase, but they are really flummoxed when it comes to
converting those financial assets into income. In fact, I was
just with a financial adviser in Florida who told me he just
had a multi-millionaire come to him and say, ``You know, I was
great at accumulating money. I have no idea how to turn it into
lifetime income.'' And this is somebody from one of the most
prestigious financial firms in America. If anybody does not
think this is a problem for people, the testimony before our
commission indicated it really does create an issue for people.
We also encouraged plan sponsors to do this through
automatic purchases of annuities over time, so-called
laddering, because as you know, the value of annuities is so
dependent on interest rates, and you do not want to get locked
in when interest rates are low. So we think to provide an
ability to ladder these investments to make them over time so
you are not taking on too much interest risk at any one time
makes a great deal of sense.
Finally, we think it would be wise to accurately reflect
retirement tax policy changes in the budget process. As a
former Budget Committee Chairman, I know how these things look
from a scoring perspective. Most of the costs of tax-deferred
accounts occur within the 10-year budget window. The costs of
Roth accounts occur outside the 10-year window. So there is a
tremendous incentive for policymakers to take advantage of that
budget window in terms of their tax policy. I would just alert
colleagues that could lead us down a road that we already have
serious problems with, and that is the budget outlook for the
United States.
Let me just close there and say it is an honor to be joined
by a professor and a scholar and an author of the repute of Mr.
Mead. Thank you.
Chairman Cotton. Thank you.
Professor Mead.
STATEMENT OF WALTER RUSSELL MEAD, DISTINGUISHED SCHOLAR IN
AMERICAN STRATEGY, HUDSON INSTITUTE, AND CHACE PROFESSOR OF
FOREIGN AFFAIRS, BARD
COLLEGE
Mr. Mead. Well, Chairman Cotton and Ranking Member
Heitkamp, thank you so much for inviting me here today. It
really is an honor to be asked to appear at this Subcommittee
and a privilege to sit next to Senator Conrad, who is one of
the leading lights in this whole field in the country and whose
commission I think has done ground-breaking work that we can
all learn from. So thank you.
I would also just like to commend the Members of the
Subcommittee for setting an example. This is the kind of issue
the American people need for their Congress to be working on,
and this spirit of bipartisan amity and pragmatism that you are
bringing to this process is an example of the way America can
solve its problems. Both of you are people who have roots, deep
roots in the lives of ordinary America. You do not come from
fancy backgrounds. And unlike some people who come from Middle
America and then go on to the fancy lifestyles, you have
maintained your commitment to the issues that matter to
ordinary people. So this is a good place, and you are doing
good work, and I just want to thank you both for that.
When I look at retirement and the real crisis that we are
in, I inevitably see this--maybe it is because I am a historian
and try to think in these terms--in the context of sweeping
changes that are not just affecting retirement but are
affecting every other part of our society. And we are now in
the middle of, perhaps in the early stages of a transformation
of human life that is as profound and as far-reaching as the
Industrial Revolution was. And if you think about how the
Industrial Revolution in 100 years changed the nature of the
family, of the state, of religion, of the economy, of the way
people earned a living, of the ideas that people used to
understand the world, it really was a revolution.
We are in the middle of one now, and more to the point, we
are in the most difficult part of that transition where the old
system no longer works as well as it used to, but we have not
quite figured out where the new system is going or how it will
work. And many of the Americans, I think, today who are coming
up to retirement without a clear path forward are people who
have been caught in this transformation. That is, if you went
back to the 1950s and 1960s, most people then thought that
defined benefit pensions were going to become a universal
feature in the workforce. And, in fact, starting in the 1970s,
for a whole variety of reasons, the change went the other
direction, and defined benefit pensions began to disappear. And
many of the companies that had made these
commitments went out of business, which created another set of
problems.
We then tried to improvise to some degree with programs
like the 401(k), IRAs, ways of trying to substitute for this
system. But, clearly, as we look at some of the statistics on
lack of availability and lack of participation that Senator
Conrad has drawn our attention to, the new improvised system
was not adequate. And we now have a couple of generations of
people who have been going through life without the kind of
solid pension and retirement set of policies and institutions
that people really need in a society as complicated as ours. So
I think we have the challenge of helping these bridge
generations manage the reality that they are approaching
retirement with very, very small retirement savings.
And at the same time, if we talk to Millennials and younger
people, there is a sense that the institutions we do have do
not work very well for them. If you have a part-time job and
you work for Uber some of the time and you rent out an extra
room in your apartment on Airbnb, you sort of do all of these
things, none of that is really connected to a retirement or
savings program.
Our system is focused on the employer as the nexus, because
in former times these large, stable corporate employers were
the places where Government could intervene. They in a sense
collected taxes for the sake of the Government, and they
administered benefits and other programs on behalf of the
Government.
Some companies are still able to do that, and still do it
very well, but in more and more cases, particularly younger
workers simply do not fall under the umbrella of this kind of
system.
So, without wanting to take more of the Committee's time, I
would just like to underline the reality that our retirement
system, like our entire society, is in a time of upheaval and
unpredictable change. Yet retirement of all the aspects of a
person's lifecycle is the one that is most affected when we are
not able to plan long term or think long term. So this
Committee's decision to make retirement a focus of its work in
this year I think, again, is commendable and vital, and I wish
you every possible success in what you do.
Thank you.
Chairman Cotton. Thank you, Professor Mead.
In your opening statement as well as your written
testimony, Professor Mead, you described the shift from the
agricultural economic model of the 18th and 19th century, what
you call ``the green model,'' into the industrial model,
especially the post-war model, what you call ``the blue
model,'' and the stresses that model is beginning to see. What
happened to stress the blue model, a model that seemed to work
so well in the immediate post-war period?
Mr. Mead. That is a very good question, Senator.
Chairman Cotton. Would you press your microphone, please?
Mr. Mead. That is a good question, Senator. And I think
what happened was that the nature of the world economy and
technology began to change so that, you know, before World War
II, for many years, as the Industrial Revolution was taking
place, we did not understand, our ancestors did not understand
that industrial economy very well. We would have financial
panics and crashes, depressions, and people did not feel they
had a reading on what caused these or how to prevent them. The
industrialization created huge new problems. In an agrarian
society, if there is a banking depression, people simply eat
what they grow on the farm. But if you are in an industrialized
city and there is some kind of banking depression and work
ends, you have millions of people with nothing to eat, no work
to do, no ability to heat their houses.
By the end, I think, of World War II, at least in this
country, we had a pretty good sense of how to use the wealth
that the industrial economy creates in order to address the
problems that it causes. We had a system of large national
champion firms. We had, you know, the three car companies, the
big seven oil companies, the one phone company. And these
pretty heavily regulated monopolies and oligopolies could
give--you know, when you had one phone company in the United
States, they could give somebody a job for life. Or when you
had only the Big Three auto companies making cars for the
American market without a lot of competition, again, GM, Ford,
Chrysler could offer stable opportunity, could work with
unions.
So after the 1960s, as Germany and Japan and other
countries began to recover from the devastation of World War
II, you had a more competitive economic environment. As the
financial system escaped the very, very tight, rather
unrealistic post-war constraints, and you began to get
international banking and offshore banking, interest rates
became more volatile. In the 1970s, we had the oil price
shocks; inflation rates went up. A massive inflation rate is
devastating to a company that is trying to operate a large
guaranteed benefit pension program.
So you had all kinds of new stress coming onto the system.
In order to respond, companies had to become much more nimble,
much more competitive. They could not say, ``Well, we are not
making much off of that factory, but it has really been a part
of our company for many years, and that city is an important
part of who we are.'' They were under much tighter pressure.
And at the same time, particularly as countries like China
and Japan came back into the market, you had a competition from
low-wage labor. You had automation. You had the development of
these global assembly chains. And so there was increasing
pressure on wages and salaries in the United States. The pace
of technological change increased, so we see today a company
like--oh, now I am trying to think of them, the video--
Blockbuster Video that you used to rent the tapes from. It rose
and fell in a very short period of time. Companies were no
longer able to provide lifetime employment. All of this means
defined benefit pension plans do not work as well and are not
offered as widely.
So the system has come under stress. Wages have come under
stress. And I suppose we should add that costs in certain
areas--health care and education--however, continued to go up.
So the basic needs of a middle-class family are getting more
expensive, but their ability to buy these goods is not
increasing over time. All of this stresses the retirement
system in many, many ways.
Chairman Cotton. Can the blue model be resurrected or
preserved? Or should we focus on transitioning to what the next
model will be?
Mr. Mead. My own sense is that you could not stop the
Industrial Revolution in its tracks, and you cannot stop this
transformation in its tracks either.
I would also say that for all the disruption and pain that
the transition causes, the Information Revolution, like the
Industrial Revolution, is going to enrich us. Since we are in
the presence of a flood, not the presence of a drought, you
know, we cannot manage the immense new capabilities. We like to
romanticize factory jobs today, and I certainly do not want to
take anyone's job away or do anything but honor people who work
hard. But do we really think that in an economy where 38
percent of the population is doing repetitive labor on an
assembly line 8 hours a day for 40 years of their life, is that
the highest possible use of human creativity?
So I actually think this transition, which is a difficult
transition, is one that opens the door to a much better life
for people, just as in the end the Industrial Revolution,
despite all of the commotion and upheaval that it caused,
brought people to a much higher level of living.
Chairman Cotton. Senator Heitkamp.
Senator Heitkamp. Thank you, Mr. Chairman.
I want to follow-up on all of that. You know, there has
been a series of reports about automation and about the future
of work. What does the future of labor look like? One report is
saying we are going to lose 47 percent of all of our jobs in
the next 20 years. I do not know if that is an exaggeration. I
think sometimes people write these reports so you can get a big
headline and get more attention to the report. But I will tell
you I think things are changing dramatically, as the professor
has outlined.
The question is: Without knowing the future of work and the
future of labor--and this is for both of you--can we really
design a retirement plan today that will address these
concerns? And how nimble do we have to be as we are going
through this transition? Let us start with you, Senator Conrad.
Mr. Conrad. You know, I listened with great interest to
Professor Mead's description of what has happened, and I
thought he was spot on. If you had to reduce it to a word, I
would reduce it to ``globalization.'' But it is really more
than that because it is this remarkable technological
revolution that we are going through. You and I have talked
about these long-term challenges. What is going to happen to
all the truck drivers of America when we have self-driving
vehicles? And this is not so far away. What are we going to do
to a whole series of other jobs that Professor Mead describes,
repetitive, in some cases back-breaking, difficult jobs that
people have that are being replaced by technology?
I do not know if you have seen the video of a new Tesla
plant. Five minutes, watch what happens there, how few people
are involved in the process of building a Tesla automobile.
So things are changing very rapidly, and it presents us
with a requirement to change how we envision retirement as
well. That is one reason we came to this idea of having
Retirement Security Plans to make it much, much easier for
those employers who want to offer them, who are small business,
because small business is going to continue to be one of the
chief job creators in our economy, make it infinitely easier
for them to offer plans.
I know from a business family, I remember these discussions
in our own family about offering retirement plans. And people
wanted to do it, but the administrative hassle and the
financial burden were just too great. I mean, it was not so
much the money that was involved. It was the liability that was
involved.
So, look, I think we are going to have to be much fleeter
in terms of our ability to react to these fundamental changes
in the economy, both here and across the globe.
Senator Heitkamp. Professor Mead?
Mr. Mead. Well, your concerns are spot on, Senator. When I
think about the jobs of the future, I do say sometimes, you
know, in the 1850s, when well over 50 percent of the workforce
earned its living farming, and you had said, well, now, suppose
in 100 years only 2 percent of the workforce will be in
farming, the question would be: What on Earth are all those
people going to do? And no one would have guessed, for example,
that there would have been a factory that made fuzzy dice that
hung down from car windows and that people would be making a
living in such a factory.
So there are ways in which we cannot imagine the future,
but I can think of things today--we are rich in goods as a
society. Any ancient king or emperor could only dream of the
stuff that even the average American family has today; but in
services not so much.
For example, my father lives in a retirement center not far
from here. Suppose there was somebody there who said to me,
``If you will pay me X amount a month, I will make sure your
father's computer is always working, he is always able to use
his email. And if there is some kind of issue with the printer
or something, we will be there to help him.'' There are lots of
services. We are seeing some of these proliferate. Certainly,
when I was a kid, only the Rockefellers had wedding planners.
You know, now that is a real profession, and it enhances the
quality of life, and people make a pretty good living helping
others celebrate these high moments in their lives.
Senator Heitkamp. If we look at kind of the need to have a
much more nimble retirement system--I am going to have Craig
just put up a chart because I love--I do this with high school
kids and college kids that I visit with. I say, ``What did
Albert Einstein say was the greatest invention of the 20th
century? Compound interest.''
And so we put together a chart that shows what happens if
people invest early and then stop investing compared to people
who delay that decision to later in life, and what does that
result in? And you can see that early investment makes all the
difference in the world if we could just get people to do it,
if we could just get people to make those investments.
But as they are struggling in this transition period of
time--you know, am I going to start my own small business? Am I
going to augment my salary or the work that I do with Airbnb or
with Uber? And what does that mean in terms of my retirement
and what are the economic challenges I have today? And this is
the challenge that we have as a country because one thing that
we have not talked about, which is this lack of savings, this
lack of retirement security, is not going to go without a cost
on the public fisc. You know, whether it is earlier involvement
of Medicaid dollars for assistance and whether it is food
assistance, whether it is Section 8 housing, whatever that is,
we are going to pay the price for the lack of retirement
security in this country.
And so I think what I am grasping with is I do not know
what the future, 20 years from now, the work world looks like,
so it is hard to design a retirement system around the
workplace. And I think, Professor, that is exactly what you are
telling us in your testimony, I think.
Mr. Mead. That is right. And this is why I was trying to
imagine this kind of one-stop account where you would set up a
specially designated account, and if you are working for Uber
and you are working for Airbnb and so on, this money goes into
that account, the financial institution does whatever
withholding and so on, but also it is at that point of that
account where the retirement programs can set in, where there
can be the point of--you move it away from the employer, which
is no longer the center of that person's economic life, and you
move it to the person in a sense.
Senator Heitkamp. But that person has to be literate.
Mr. Mead. Again, when we went from an agrarian society to
an industrial society, people had to get smarter. It is
actually harder to live in a city full of immigrants who are
different from you than to live in the country where everyone
is related to you and you know all the customs. And our school
system actually changed dramatically as a part of this shift.
So, yes, as individuals, as a society, we have to raise our
game so that we are producing young people who have the
financial literacy, entrepreneurial spirit, all of these
elements that can help them to flourish in this new kind of
complex environment that is coming into existence around us.
Chairman Cotton. For the record, I think the Ranking Member
and I would agree that it is not only easier to live in the
country but more enjoyable as well.
[Laughter.]
Chairman Cotton. Senator Tillis.
Senator Tillis. Thank you, Mr. Chair. Thank you both for
being here.
First, I want to underscore what has been talked about. I
come from the technology sector and spent a lot of time, most
of my time in the private sector, and these discussions about
how do we stem the tide of technological innovation and make
sure that the current job base exists really ignores the fact
that we work in a globally competitive economy, and that is the
surefire way to have us go to second or third or fourth in
terms of economic performance and prosperity if we do not
recognize that near-peer economies understand it, embrace it,
and have to deal with it. And there are unknowns, but every
time we have had these unknowns, we have found a way to move
from the agrarian to the industrial, and we will move through
the Information Age. The real question with respect to the
topic before us today is how do we also help better ensure that
people are creating some amount of wealth that help them as
they get further into their lives.
I actually made my first contribution into Social Security
in 1972 at the age of 12, $33 that year. One thing for
everybody who has not done it, you really need to go on the
Social Security
Administration website and see where you are today. And I have
not missed a year of contribution since then.
I think a part of what we have to do when we talk about
Social Security is be realistic about the reality, the lack of
indexing and the lack of foresight. I am not faulting anybody.
It is just the reality of the system today. We do not have a
sustainable system. And not unlike the defined benefit plans
that are out there with certain States, our State has a
relatively solid--I am from North Carolina--a relatively solid
plan. But as Speaker of the House, I was really urging
consideration of transition to a defined contribution plan so
that we could make sure that the variables that we do not know
about would not put those savings plans at risk, and I think
other States would be well advised to do that.
And, Senator Heitkamp, I could not agree more in terms of
financial literacy. A part of what we have to do is see this
multifaceted challenge. And one of the things that the States
need to do is make sure that they have curriculums that are
educating people at a very early age. We now have financial
literacy, something I did when I was back in the legislature,
in school at the appropriate time, and I think the workplace
needs financial literacy. I do it in my office. We have an
annual meeting where I tell these people what boneheads they
are if they are not maxing out the Thrift Savings Plan that
they have. I apologize to all of you who may not have maxed
out, but it is because of that miracle of compounding.
My daughter just went into nursing, and I told her, ``You
are about to get a major increase in compensation from school.
Set a different baseline for how much disposable income you
have, and you will see exactly what Senator Heitkamp has said
happens over a brief period of time.'' So financial literacy is
also important.
Now I want to get down to some of the policies that could
affect--that are right before us. The fiduciary rule probably
will get delayed, but we need to determine whether or not it is
going to be implemented. In your opinion, does that help or
hurt the people who have limited capacity to put into plans and
also limited capacity to pay for advice for those plans?
Professor Mead, we will start with you.
Mr. Mead. Well, Senator, thank you, and as someone who
spent many happy years as a kid in North Carolina, I am glad to
see the State is so well represented, and it is a time when all
true North Carolinians are very excited about the recent NCAA
championship.
Senator Tillis. Really, did we win a championship this
week?
[Laughter.]
Senator Tillis. It happens so frequently, it is hard to
keep up.
Mr. Mead. But, you know, when I think about this, I
actually think that one of the problems we have in a way is
that the current system, people have scattered plans, small
balances. There the costs sometimes of the fiduciary rule would
make it very difficult for them to operate, the cost structure
would be so high.
Senator Tillis. They would have an ``eeny, meeny, miny,
moe'' strategy for portfolio allocation.
Mr. Mead. You know, the thing to think about is, again, the
lifetime accounts that build significant balances where also
both for the financial institution that is issuing the account
and maintaining it, it is a more profitable approach.
Senator Tillis. I do believe that going to a worker-centric
versus workplace-centric model where things can move around
makes a lot of sense. It has a lot more prospects for
longevity.
As a matter of fact, I chair the Personnel Committee in
Senate Armed Services, and that is why we are moving toward
different pension options within Armed Services, allowing those
who want the pension plan as it currently stands to move in
that direction, but allowing others to be able to opt in to a
401(k) type of a model that I think makes sense.
My time has gone over, but, Senator Conrad, do you have
anything to add on the fiduciary rule or what has been
discussed?
Mr. Conrad. Well, let me just say our Commission did not
deal with the fiduciary rule. I would say personally I would
not go to a company advising me on wealth management that did
not have it because I think whoever is advising me ought to
have as their highest responsibility to be giving me advice
that is in my interest. And I am very concerned about people
giving advice that is in their interest and it is not revealed
to the person they are giving advice to.
Now, with that said, Professor Mead makes a very important
distinction here. You have got lots of people, as I indicated
in my opening remarks, who have very little money. In fact, you
know, when I talk about people with $30,000, 62 to 69, as being
the median retirement savings, one-quarter of those people have
nothing. Have nothing. So we may need a system that takes
account of people's different circumstances in terms of what
rules apply.
Senator Tillis. Thank you.
Thank you, Mr. Chair.
Chairman Cotton. Senator Warren.
Senator Warren. Thank you, Mr. Chairman. Thank you for
holding this hearing today, and Ranking Member Heitkamp.
As we have all been discussing, we know there is a
retirement crisis in this country, that across the board wages
are flat, fixed costs are going up, people cannot save for
retirement, pensions are disappearing, and that means more
reliance than ever on Social Security. For almost two-thirds of
seniors, Social Security makes up the majority of their income
in retirement, and for 22 million Americans, Social Security is
literally the only thing standing between them and poverty.
When a parent dies or is incapacitated, grandparents often
step up, and this can create a huge additional burden on the
family for people who are already struggling because of the
financial crisis. In these cases, Social Security is a double
lifeline for both the grandparents and for the kids. Today
about 98 percent of children in America are eligible for
survivors' benefits when a working parent dies.
So I want to ask you about this, Senator Conrad. You are
the principal author of the Bipartisan Policy Center's report
on retirement security, and in the report, you propose several
expansions of Social Security for low-income seniors. But you
also propose expanding Social Security survivors' benefits,
something not many people have talked about from this report.
Can you tell us a little bit about the survivors' program--how
it currently works and what your proposed expansion would
entail?
Mr. Conrad. Well, if we remember our history, until 1981 we
had a survivors' benefit in Social Security for kids who stayed
in college until they were 22. If they were in an approved
college, they would continue to get benefits. This also applied
to those who qualified for disability. And this made a major
difference to thousands, tens of thousands of kids who were
survivors, tens of thousands of people who had a disability,
that they were able, if they stayed in school, to get an
additional Social Security income. However modest it was, it
made a big difference.
In the work of this commission, we agreed on a bipartisan
basis--and, again, 18 of the 19 commissioners agreed with the
recommendations--that we ought to reestablish this benefit for
survivors and those affected by disability.
You know, if we think about the transition Professor Mead
has been talking about, quite rightly, others from the dais, we
are going through this dramatic economic change. We have got to
be sensitive to that. And, you know, I think about when we were
growing up, high school was a minimum requirement. Right? If
you did not graduate from high school, your prospects probably
were not very good. I have to say now we look at society, if
you do not have a college education, your prospects are not
very good. In fact, I have just been talking to some young
people who did not finish college. They cannot get a job
interview, even for things they are actually qualified for,
because they do not have that certificate. So I think this is
something we have got to adjust to.
Senator Warren. I very much appreciate that, and I want to
be mindful of the time, but I understand, Senator Conrad, you
were actually a beneficiary of this program?
Mr. Conrad. Well, I was. And, you know, when I was going to
school, I remember getting that check, and I tell you, it made
a world of difference. I was going to school out in California,
and I remember very distinctly that green check that would
arrive once a month and really made it possible for me to be in
college and complete school.
Senator Warren. And you think about overcoming the loss of
a parent is devastating for any child, but loss of the income
and savings should not also destroy a family's financial
security and a child's chance to go to college.
This is a problem that is going to get worse in the years
to come. Last year, for the first time since 1993, life
expectancy in America decreased. And there are a number of
reasons for that, but one is that tens of thousands of
Americans are dying of opioid overdoses every year. And many of
the victims of these overdoses leave children behind, and often
grandparents are the ones who step in to help.
So let me just ask one more question here. Senator Conrad,
it seems to me that given this decline in life expectancy and
the increase in deaths from opioid overdoses, shoring up the
survivors' program may be more important than ever. Do you
agree?
Mr. Conrad. Well, I do, and I made that argument to the
commission, and others on the commission made some of the
points that you are making now. It was very interesting. And,
again, one of the things that was most interesting was how
bipartisan this particular discussion was in the commission.
Some of the most prominent Republicans on the commission felt
strongly we ought to restore this benefit. And I was very
pleased that we agreed to do so.
Senator Warren. I am pleased that you did as well and glad
to try to highlight your good work on this. My view is we
should be talking about expanding Social Security across the
board. But we also ought to be able to agree that it is long
past time to expand survivors' benefits to age 22. Children who
have lost their parents need to have a chance to be able to
build a future for themselves without destroying the finances
of their surviving parent or of their grandparents and others
who step in to take care of them.
So thank you very much for your work. Thank you for the
report on this, and thank you, Mr. Chairman.
Chairman Cotton. Thank you, Senator Warren.
Senator Conrad, how many workers today participate in a
defined benefit plan? Do you have that handy?
Mr. Conrad. I do not. We all know what is happening to
defined benefit plans. I mean, in large measure, what we see is
a decline in defined benefit, a dramatic rise in defined
contribution. I have actually got that chart--did not bring it
with me--but would be happy to provide it to the Committee. But
these trends are very, very clear.
Chairman Cotton. So do you think there is anything that we
can do as a matter of policy to reverse that trend, or is it a
function of changes in the economy like we have been discussing
with you and Professor Mead and we simply need to make defined
contribution plans work better for all Americans?
Mr. Conrad. I wish I could look you in the eye and say, you
know, if we just had the will, we could reverse this, and we
could go back to a time when defined benefit plans were on the
increase. I do not think that is in the cards. I think because
of the things we have previously discussed, these fundamental
changes in the economy here and globally, that it is just not a
realistic prospect.
What is realistic is to deal with these changes in a way
that does expand access, that does expand the opportunity for
people to participate in a retirement plan at work. What is a
possibility, as we were talking about Social Security, is to
make Social Security solvent for the long term. And, yes, we
can have some expansions while we do that, but it will require
hard choices.
Chairman Cotton. Professor Mead, do you agree with that,
that defined benefit plans are going to continue to decline in
their usage in America?
Mr. Mead. I think they will, and this is in part because of
the choices that workers are making. That is, one of the
disadvantages of a defined benefit plan is often it is stacked
in such a way that it strongly rewards seniority and longevity
of service. So, you know, one of the tragic things for someone
who has been working for 18 years and is 2 years short of a
pension, if that factory closes, they suffer an immense loss.
But, also, let us look at the part of the economy where
defined contribution plans are still common, which would be
Government work, and especially in the State and local sectors.
We see, first of all, in many States and cities these plans are
in a state of real financial disrepair and are causing serious
risks to the well-being of communities. I think the city of
Chicago is trying to keep its schools open while it pays what
it needs to pay on its pension plan.
And at the same time, if you are a public employee and you
want after 10 years--you do not want to teach middle school
anymore after 10 years, and you want to move on, you take a hit
in the pension with a defined benefit program. So it locks
people into life choices.
Now, the good thing about defined benefit programs is they
did provide a certain kind of security and stability to income.
And as I say, we have failed as a society to replace the
defined benefit program with defined contribution programs that
accomplish the same objectives as well. And so our focus has to
be, I think, on making defined contribution plans work better,
make it easier for employers to offer them, find ways even
perhaps for the case, say, of low-income workers, a Government
match of some kind of contribution can also be possible. Again,
thanks the miracle of compound interest, if the Government is
going to have to support a low-income person in old age, it is
actually better to do that on the basis of long-term
contributions to retirement plans. It is cheaper to the
taxpayer that way.
Mr. Conrad. Can I just make a quick point----
Chairman Cotton. Senator Conrad.
Mr. Conrad.----on the point that Mr. Mead made? Because I
think it is so important. On defined benefit plans, if you look
at the chart that I discussed looking at defined benefit in
terms of firms offering, that is in decline. You know, at one
point it was growing rapidly back in the 1950s. Defined
contributions now are rising dramatically. But if you look at
defined benefit plans in terms of individuals covered, you see
a very different pattern between firms offering and individuals
covered, because what Professor Mead just talked about was a
very real thing that we have not sort of talked enough about;
that is, yes, companies offered them, but all too often, when
somebody got to the point of being qualified, they lost their
job.
And so there is a gap between firms offering and
individuals covered with respect to defined benefit plans, and
that was true long before these recent trends.
Chairman Cotton. You both, as you talk about what future
retirement models would look like, have proposals in your
written statements, but also you have said it today, Senator
Conrad, you have talked about Retirement Security Plans which
would have two elements: one, retirement savings, and, two,
short-term savings, especially for smaller businesses. And,
Professor Mead, you have spoken about American Mobility
Accounts, which would also include what you call Supplemental
Retirement Accounts and Human Capital Accounts. As you have
listened to each other here today, do those two concepts strike
you as similar or close to
identical?
Mr. Mead. I think we are both looking at the same sets of
problems, and there is a lot of parallels in the way we are
thinking. I think both sets of proposals are identifying the
need to move toward a more worker-centered approach. I would
guess we have not discussed it, but I think we are both
concerned that there is kind of a multiplicity of 401(k), four-
oh this, five-oh that. After a while, the average not only, you
know, person but the average supervisor, the average business
just looks at this and says, ``I cannot do this. This is too
complicated.''
So the issues that we are looking at are universality,
flexibility, and individual-centric. Then I think, again,
given, as we have all been saying in this hearing, that we
cannot really predict what the economy of 20 years will look
like, what jobs will look like in 20 years, we need an
architecture that is open to change because we do not want to
put the next generation in a straitjacket that does not fit.
And I think when you put all those things together, you end up
with--there is actually not that wide of a range of approaches
that would cover these bases.
Chairman Cotton. Go ahead, Senator.
Mr. Conrad. I would just say our Retirement Security Plans
and our Retirement Security Clearinghouses are responding to
the underlying dynamic that Professor Mead has done such a good
job in describing. You know, we got a circumstance in which
people just do not go to the same job for most of their careers
and have a pension. Those days are changing, and we need to
respond to this new dynamic, this new reality.
Chairman Cotton. And you both have spoken about the
administrative challenges that multiple accounts can cause,
especially small accounts of different types, and you are
speaking there not only of the individual who is trying to save
but also of the business that is trying to sell cars or sell
farm equipment or sell clothing, and it is not in its core
competency, and your concept in these accounts would be to get
that out of the hands of those businesses and into some kind of
third-party organization, whether it is a financial institution
or an administrator, somewhere where it is in their core
competency to manage those accounts.
Mr. Conrad. I think you have described it very well. You
know, here we have a circumstance where we have got 25 million
orphaned accounts. You know, what sense does this make? It does
not make any sense for the business who has got the orphaned
accounts. It does not make any sense for the employee who has
got maybe a string of orphaned accounts, which makes it very
hard to manage, very hard to keep track of. In some cases, they
completely forget that they have got them. I mean, we found
that in the work of the commission.
Chairman Cotton. Senator Heitkamp?
Senator Heitkamp. I think the component of all this--and it
is like you can lead a horse to water, but can you get it to
drink? And there are a couple complexities that we have not
talked about, one of which is choice. There has been a number
of sociological studies that say if you give people too many
choices, they will make no choice because it is overwhelming.
The other problem that I think is that we keep saying,
well, if this account or this, you know, opportunity performs
the way it has in the past, this is where you will end up, and
there is no certainty to that. So there is not this idea that
if I do this, then I am guaranteed that that is what it is
going to look like when I am age 65 or age 70, right?
So people have this insecurity, and they say, ``Live today.
I probably will not live long enough,'' or, you know, ``I am
not going to ever retire,'' which really is very problematic.
And so I want to talk about another vehicle that we have
not spent a lot of time talking about and get your reaction to
it, and that is low-cost guaranteed annuities. When we look at
the defined benefit plans, it is that you knew that at the end
of your work life there would be a guaranteed set sum that
would come every month, that you could count on, that was
predictable, that was taken care of. And my question to both of
you is: Do you believe that annuities--not annuities with big
front-end loads--you know, a product that reflects Senator
Conrad's statement that it should be fiduciary to them, it
should be for me, do you believe that annuities can fill the
gap for retirees looking to access some kind of guaranteed
minimum income in the years going forward.
Mr. Conrad. I would just say in this whole area of lifetime
income options, there is a tremendous opportunity here, and
there are lots of models. If you look around the world at what
other places are doing, lots of interesting ideas about how you
can give people lifetime income options and give them a choice
to make. You know, we talk about just-in-time choices. When
people are about to make those decisions, to get advice to them
at the critical moment that they have a decision to make. We
talk about capability. We talk about people having the basic
information. Well, hard to get them taught in high school to
prepare for what is to come 30 years from now. But when they
are at the moment of choice, getting them help in making those
decisions makes a lot of sense and is affordable.
Senator Heitkamp. But, Senator Conrad, if we look at--if
your choice is, you know, here is this high-yield fund, it has
got more risk, or this or that, you know, all of a sudden
people go, ``I do not know enough to make that choice. I am not
going to decide that. I would rather have that money today to
pay off the bills that I have rather than risking that that
will not ever come in the future.''
Professor Mead, what do you think about some kind of
product that would guarantee monthly income at a low cost?
Mr. Mead. Well, I think that it has a place in retirement
planning, and I think you are right that simplifying options is
important.
I think there are other elements of this sort of, you know,
hesitation about saving and investing, and I agree with you
that this is an important barrier, because we see that there
are these products that people are not--you know, there are
plans that they are not participating in, even though they have
the option.
One thing that I think is worth looking at is the Singapore
approach to this where there is an account which you can use--
you know, it is sort of you have to have an account, but you
can use it for different things, including some are really
annuity-type products. But you can also use it toward a
downpayment or even part of the principal payment of housing.
Senator Heitkamp. So, Professor Mead, is this structured as
a mandate or is this structured as an option in Singapore?
Mr. Mead. In Singapore, it is a mandate that you must have
this----
Senator Heitkamp. Like everything else in Singapore.
Mr. Mead. Exactly. And you must smile, yes.
[Laughter.]
Senator Heitkamp. And not spit on the sidewalk.
Mr. Mead. Please do not. Do not scratch cars with keys
either, I am told.
But, you know, they have a homeownership rate now of about
90 percent in Singapore because if you can--you have to put
this money away, but you can put it in different purposes.
People do have some freedom. So this is----
Senator Heitkamp. So it would include things that build
wealth for the family.
Mr. Mead. Exactly, and so the system is you have to
maintain a certain balance in your account before you can do
certain discretionary things, but you can count property value
against that core amount.
So I think we can actually be--we can think much more
flexibly about what we do. We are fortunate now. When the
United States started Social Security, there were some similar
examples, but it was a pretty simple menu of choices that
existed. Today a number of countries around the world have
tried very different approaches. So I think we might as well
benefit from the experience.
Senator Heitkamp. I just want to say I think this is
something that everybody needs--to check ideology at the door,
you know, all of this stuff, and look with very clear vision at
what is going to happen in the next 20 years as we transition
away from defined benefit plans to a society that is not saving
for retirement, and we need to look at what works, not what
fits within an ideology. And that is a critical component. But
we need to understand the human dynamic of choice and why it is
difficult for people to see value in making a choice of saving
for retirement.
But I look forward to learning more about the Singapore
plan and more about your reaction to Senator Conrad's report. I
think it sounds like there is some merging of ideas here, and
then how can we effectuate that either working with the private
sector to develop products or looking at--we do it typically
through tax incentives, but also taking a look at how we can
make this a social norm that we are saving for retirement and
not necessarily an anomaly, which we are beginning to see that
it is.
Chairman Cotton. Senator Toomey.
Senator Toomey. Mr. Chairman, Senator Heitkamp, thank you
very much for doing this hearing. I appreciate it.
Senator Conrad, it is good to see you again, and, Professor
Mead, thank you for joining us.
I apologize I was late. I was the presiding officer. I am
not going to ask any questions at this time, but I do look
forward to reading the testimony of the witnesses and looking
at the discussion that you had.
Chairman Cotton. Thank you, Senator Toomey.
And he replaced me, which is why I was late initially to
the Committee. I was the presiding officer. As Senator Conrad
remembers from his days as a junior Senator, it is very much a
duty and not an honor.
[Laughter.]
Chairman Cotton. Professor Mead, we talked a lot about a
lifetime of savings and how Americans save because it is so
important, as Senator Heitkamp pointed out, that you save from
the beginning of your life, even small amounts, to take
advantage of the miracles of compound interest.
But then there is how you live at or near retirement. One
point you have written about is the payroll tax on elderly
Americans who are still working. Could you elaborate on your
thinking there?
Mr. Mead. Well, I think, again, work is becoming, you
know--more and more of our workforce have jobs now that you do
not really need to leave at 65, and many people do not want to.
The work I do teaching is work I enjoy. And while I am able to,
I hope I can continue. But if I were a bricklayer or, you know,
doing hard physical labor, I would need to be able to retire at
a certain point.
So as we think about how our system works and how we can
make the system work for everyone, it does seem that, first of
all, it is in our interest that people defer taking out of the
system. Those who enjoy working and want to work continue to
work and are able to do so, we should say, yes, go ahead. We do
not need a one-size-fits-all approach to this. So if you have
someone who has paid up to Social Security and they want to
continue working, maybe you take the payroll tax off their
shoulders at the end. In the same way, I have suggested we now
require mandatory withdrawals from IRAs and other tax-deferred
investments to start, I believe, at 70 \1/2\ years, why not, if
someone is still working, let them postpone that, let their
assets grow a bit?
So I think there are very much--we penalize people who are
continuing to work while drawing Social Security benefits by
withholding some of their benefit. Again, we should be looking
at a system that allows Americans in very different
circumstances with very different sort of needs to be able to
design their own lives without penalty, and where their choices
actually help strengthen the system, we should be blessing and
encouraging and incentivizing those choices.
Chairman Cotton. Senator Conrad?
Mr. Conrad. Could I just say, I am very happy to hear
Professor Mead talk about these ideas. We tried to include some
of these ideas in our Social Security reform package, to
actually provide incentives in the system for people to
continue to work. You know, the way the Social Security system
works now, once you get your PIA, the primary insurance amount,
established, it is done by looking at 40 years or 37 years of
work--35 years of work, what we say is do it year by year, so
those additional years add to somebody's Social Security
payment.
We did a whole series of things in our Social Security
reform not to discourage people from working, but to encourage
them to continue working if they are able to do so. That makes
great economic sense for the system. It makes great economic
sense for the individual.
Chairman Cotton. Professor Mead, one final question about
living in retirement. You wrote in your statement and you have
written elsewhere about the possibility of retirement overseas
and the lower-cost options that some Americans who are looking
for warmer climes might have. Could you elaborate on those
ideas?
Mr. Mead. I am happy to do that, Senator. We should
remember that no matter what we do, there are Americans who are
approaching retirement with inadequate savings, and we cannot
change that, much as we would like to.
What I think we can do is think about ways where even--we
could help them stretch their dollars a bit, and it is
certainly true that in many countries living costs are lower
than in the United States. Originally, one of the reasons that
many people retired to States like Florida and Arizona was that
costs were lower there than they were in the States where they
were. So today someone could just stay on the plane a couple of
hours south of Miami and retire there.
One of the obstacles to this--and, by the way, many
Americans are already doing this in countries like Costa Rica.
Also, many immigrants who come here, work hard, retire
basically with Social Security, can go back to the country
where they came from where that retirement income stretches
farther. But one of the problems is that you cannot use your
Medicare insurance for most things outside the United States.
Now, since healthcare costs are often much lower outside
the United States than in it, some kind of system that allows
American citizens to access their Medicare benefits for
treatment in approved hospitals and facilities overseas would
simply give a lot more Americans more choice in retirement and
might provide some options that would help these bridge
generations who have grown up after the old system began to
fail but before we as a society have gotten a new system that
works for them, they still have choices. No one has to do it. I
suppose it is the opposite of what people used to say happened
in the far North, that you would put the old folks out on the
ice floes. Maybe we can send the old folks to tropical beaches.
That seems a bit more humane.
But, in any case, I think this is about--we need to think
creatively about giving people choices as they try to have a
good retirement when not all the circumstances are favorable.
Mr. Conrad. Mr. Chairman, could I just say that we would
welcome people from higher-cost jurisdictions to retire in
North
Dakota?
[Laughter.]
Mr. Conrad. Perhaps you would welcome them in Arkansas as
well. You know, it is amazing, the difference in cost between
these more urban areas and the more rural areas that we have
grown up in, and, really, a Social Security dollar goes a lot
farther in North Dakota than in the more urban places on the
east and west coasts. I am sure that is true of your home State
as well.
Chairman Cotton. Given the realities of the brutal winters
in North Dakota, we would be happy to welcome North Dakotans
who do not want to go all the way to Costa Rica to the Ozark or
Ouachita Mountains. It is very affordable.
Senator Heitkamp. And then when the mosquitoes get you in
Arkansas, we will welcome you back to North Dakota.
[Laughter.]
Chairman Cotton. Senator Heitkamp.
Senator Heitkamp. I want to just ask a question. You guys
have just been--you know, just thought-provoking testimony and
really quite an enjoyable hour and a half. I think both Senator
Cotton and I are deadly serious about this topic.
I want just a couple of pieces of advice from both of you
on if you were sitting not where you are sitting but sitting
back on this side of the dais. What would be your next steps?
And we will start with you, Senator Conrad.
Mr. Conrad. Well, organize and educate are always my two
notions of how you get something done around here. I think
there is just a tremendous opportunity here, and I really
applaud the two of you for doing this in a bipartisan way,
because as I learned, very little happens around here unless it
is done in a bipartisan way. Even less is sustainable unless it
is done in a bipartisan way. And these are issues that really
should not be partisan. There is no reason that it should be
partisan to expand opportunities for people to participate in
retirement plans at work. There is no reason that it should be
partisan to change the incentive systems that we have in Social
Security to encourage people to work longer. You know, there is
nothing partisan about it.
So I would say those would be my observations.
Senator Heitkamp. Professor Mead?
Mr. Mead. Well, I would second that, and I would add to it.
I would try to remind my colleagues, if I were in your
situation, that we see a lot of lack of trust today between so-
called elites and the folks in the grass roots. One of the
reasons that that is the case is because of the failures of
national systems like the retirement system. People do not
expect the Government to guarantee them affluence, but they do
expect to have a system that, if they play by the rules and do
their part, it brings them to a decent result. And the sense
that somehow something as fundamentally important to the lives
of the American people as our retirement system, we have not
yet put the kind of effort and diligence into constructing and
repairing that system, is a message from Washington to the
folks out there that we do not care.
So I would urge you to impress the importance of this issue
on your colleagues as a concrete kind of governance issue that
can help rebuild the faith of the American people in our
democratic system, and that is really something that we need to
do.
Senator Heitkamp. OK.
Chairman Cotton. Gentlemen, thank you both for your
appearance here today and your work on this important issue.
Thank you both to your organizations and your teams. We
appreciate the hard work they do. We know that those statements
do not write themselves, and the spread sheet models are not
created by themselves. So we appreciate very much also the
Bipartisan Policy Center, the Hudson Institute, and the
American Interest. We thank you again for your testimony.
This hearing is adjourned.
[Whereupon, at 4:31 p.m., the hearing was adjourned.]
[Prepared statements and additional material supplied for
the record follow:]
PREPARED STATEMENT OF KENT CONRAD
Former Senator from the State of North Dakota, and Co-Chair, Bipartisan
Policy Center's Commission on Retirement Security and Personal Savings
April 5, 2017
Good afternoon, Chairman Cotton, Ranking Member Heitkamp, and
Members of the Subcommittee. Thank you for inviting me here to discuss
the state of retirement security in America.
Millions of Americans are financially unprepared for their
retirement. Too many lack adequate savings, having set aside money at
insufficient levels. Even those who do accumulate sufficient savings
for retirement run the risk of outliving those funds, and others are
forced to raid their retirement accounts early due to a shortage of
short-term, emergency savings. Compounding these challenges is the fact
that Americans often lack the financial capability to take actions that
are in their own best interests. Meanwhile, the Social Security
system--the bedrock of retirement security in America--is facing a
serious shortfall, with its trust funds set to be exhausted by 2035.
The lack of retirement savings is eye-opening. According to
research from the Urban Institute's DYNASIM model, the median amount of
retirement assets held by Americans aged 62-69 stood at just $32,000 in
2015. More than one-quarter of households in this group had zero in
retirement savings.\1\ But this problem is not limited to older
Americans. Research from the Employee Benefits Research Institute
(EBRI) has found that more than four in 10 Gen-Xers are projected to
run short of money in retirement.\2\
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\1\ The Urban Institute. 2016. DYNASIM3.
\2\ VanDerhei, Jack. 2014. ``What Causes EBRI Retirement Readiness
Ratings to Vary: Results from the 2014 Retirement Security Projection
Model.'' Employee Benefit Research Institute Issue Brief, no. 396. Pp.
6-19. http://www.ebri.org/pdf/briefspdf/EBRI_IB_396_Feb14.
RRRs2.pdf.
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Part of this problem can be attributed to a lack of access and
contributions to employer-sponsored retirement plans. Modeling from
EBRI has found that 31 percent of civilian workers lack access to an
employer-sponsored retirement plan. Among those with access, many
choose not to contribute. In total, just over half of civilian workers
contribute to an employer sponsored-plan.\3\
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\3\ EBRI, Policy Forum #79. Basic Facts: Retirement, December 15,
2016.
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Given these disturbing statistics, it is little wonder that
Americans are concerned about their retirement. A 2016 Gallup poll
found that 64 percent of Americans are either very worried or
moderately worried about not having enough money for retirement, making
it their top financial concern in the survey.\4\ A recent study by the
Federal Reserve found that around half of adults say they would be
unable to come up with even $400 in an emergency without borrowing or
selling possessions.\5\
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\4\ McCarthy, Justin. 2016. ``Americans' Financial Worries Edge Up
in 2016.'' Gallup. http://www.gallup.com/poll/191174/americans-
financial-worriesedge-2016.aspx.
\5\ Federal Reserve. ``Report on the Economic Well-Being of U.S.
Households in 2015.'' May 2016. P. 1. http://www.federalreserve.gov/
2015-report-economic-well-being-us-households-201
605.pdf.
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The Bipartisan Policy Center's Commission on Retirement Security
and Personal Savings, which I had the privilege of co-chairing with the
Honorable James B. Lockhart III, former Principal Deputy Commissioner
of the Social Security Administration, identified six key challenges
associated with retirement security in America today:
1) Too few workers participate in a workplace retirement savings
plan. As described previously, just around half of private-
sector workers contribute to an employer-sponsored retirement
plan. One primary cause of this lack of access is that some
businesses find it too expensive and complex to sponsor either
a traditional ``defined benefit'' pension or a 401(k)-style
``defined contribution'' plan. Small businesses, in particular,
are often unprepared to take on what can be large
administrative, financial, and fiduciary burdens. In a recent
survey by the Pew Charitable Trusts, 59 percent of small- to
medium-sized businesses not offering a plan attributed that
decision to either the associated expense or the firm's
resource constraints.\6\ As a consequence, 53 percent of
workers at businesses with fewer than 50 employees do not have
access to a plan, compared to only 10 percent among companies
with more than 500 employees. Simply put, workers without these
plans are less likely to enjoy
retirement security. According to projections from EBRI, 56
percent of those without ongoing access to a DC retirement plan
will run short of money in retirement.\7\
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\6\ The Pew Charitable Trusts. ``Small Business Views on retirement
Savings Plans.'' January 2017. http://www.pewtrusts.org/en/research-
and-analysis/issue-briefs/2017/01/small-business
-views-on-retirement-savings-plans.
\7\ This result is for Gen-Xers (born between 1965 and 1974) who
are in the second income quartile (i.e., between the 25th percentile
and the median of the income distribution). For more information,
please refer to: VanDerhei, Jack. ``What Causes EBRI Retirement
Readiness Ratings to Vary.'' Employee Benefits Research Institute.
Issue Brief #396. February 2014. P. 7. https://www.ebri.org/pdf/
briefspdf/EBRI_IB_396_Feb14.RRRs2.pdf.
2) Many Americans lack the income or resources to save for short-
term needs, forcing them to raid their retirement accounts for
unexpected expenses. Usually called ``leakage,'' preretirement
withdrawals occur when savers withdraw their DC plan or IRA
assets before retirement. Research suggests that between 1 and
1.5 percent of 401(k)-plan and IRA assets are lost to leakage
each year.\8\,\9\ Individuals who pull savings out early tend
to withdraw a high percentage of their retirement assets,
averaging around 20 percent.\10\,\11\ Leakage can not only lead
to high fees and penalties, but it also directly translates to
a reduction in retirement assets.
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\8\ Munnell, Alicia and Anthony Webb. 2015. ``The Impact of
Leakages From 401(k)s and IRAs.'' The Center for Retirement Research at
Boston College. P. 1. http://crr.bc.edu/wp-content/ uploads/2015/02/
wp_2015-2.pdf.
\9\ Butrica, Barbara A., Sheila R. Zedlewski, and Philip Issa.
2010. ``Understanding Early Withdrawals from Retirement Accounts.'' The
Urban Institute. P. 23. http://www.urban.org/sites/default/files/
alfresco/publication-pdfs/412107-Understanding-Early-Withdrawals-from-
Retirement-Accounts.pdf.
\10\ Ibid.
\11\ Argento, Robert, Victoria Bryant, and John Sabelhaus. 2015.
``Early Withdrawals from Retirement Accounts During the Great
Recession.'' Contemporary Economic Policy. Vol. 33. No. 1. (January).
P. 14. http://onlinelibrary.wiley.com/doi/10.1111/coep.12064/epdf.
3) Americans are living longer and are increasingly at risk of
outliving their savings, but despite rising life expectancy,
the average retirement age has stagnated. Between 1962 and
1996, the average retirement age among men actually declined
from 65 to 63. Though the average retirement age increased for
women--along with workforce participation--it remains
relatively low, at 62 in 2013.\12\ To make matters worse, most
Social Security beneficiaries claim their benefits well before
the full retirement age (FRA). In 2014, roughly three-fourths
of individuals claiming Old-Age and Survivors Insurance (OASI)
benefits did so at an age below the FRA.\13\ Early claimers in
2016 saw their monthly payment reduced by up to 25 percent from
what it would have been if they claimed at the current FRA of
66. A diminished stream of income from Social Security
compounds the problem of having fewer years in the workforce to
save for retirement. This is especially concerning for the
large number of older Americans who depend on Social Security
for the overwhelming majority of their income.
---------------------------------------------------------------------------
\12\ Munnell, Alicia H. 2015. ``The Average Retirement Age--An
Update. Center for Retirement Research at Boston College.'' Pp. 3-4.
http://crr.bc.edu/briefs/the-average-retirement-age-an-update/.
\13\ Social Security Administration. 2015. Annual Statistical
Supplement, 2015. Table 6. B5.1. https://www.ssa.gov/policy/docs/
statcomps/supplement/2015/6b.html.
4) Home equity is an under-utilized source of retirement savings.
For many retirees, home equity represents a significant portion
of their assets. Americans own more than $13.3 trillion in home
equity--a sum that rivals the $14.9 trillion that Americans
hold in retirement savings.\14\,\15\ Just like retirement
savings, housing assets are built slowly over most people's
working life, making home equity a crucial stock of wealth for
many older Americans. Unfortunately, the past several decades
have seen increasing indebtedness among older Americans--driven
by increases in mortgage debt--which poses a unique threat to
retirement security. The share of older households holding any
form of housing-related debt has more than doubled since 1989,
from 15 to 32
percent.\16\ Federal tax policy worsens this problem by
promoting mortgage debt. Mortgage interest payments are usually
deductible for taxpayers who itemize. Ultimately, holding
mortgage debt in retirement limits retirees' ability to tap
home equity and is among the many considerations that Americans
need to understand as they make decisions about their own
savings and retirement.
---------------------------------------------------------------------------
\14\ See, Board of Governors of the Federal Reserve System.
Financial Accounts of the United States: Fourth Quarter 2016. P. 138.
March 9, 2017. http://www.federalreserve.gov/releases/z1/Current/
z1.pdf. Home equity is equal to total household real estate less total
home mortgages, as calculated by the Board of Governors of the Federal
Reserve System.
\15\ See, Investment Company Institute. 2016. Report: The U.S.
Retirement Market, Fourth Quarter 2016 (xls). Table 1. March 22, 2017.
https://www.ici.org/research/stats/retirement. Retirement savings
include assets in DC plans and IRAs.
\16\ Board of Governors of the Federal Reserve System. 2014. 2013
Survey of Consumer Finances. http://www.federalreserve.gov/econresdata/
scf/scfindex.htm. Housing-related debt is defined as debt secured by
one's primary residence.
5) Many Americans lack financial capability. Financial capability is
defined as the knowledge, ability, and opportunity of all
individuals to manage their personal finances. It is more
important now than ever, as workers are increasingly
responsible for their own retirement security. Unfortunately,
too many Americans struggle in this area. A 2014 study found
that 23 percent of Millennials and 19 percent of Gen-Xers spend
more than they earn, and only about one-third of each group has
set up a rainy-day fund.\17\ In addition, Americans fare poorly
on assessments of financial literacy.
---------------------------------------------------------------------------
\17\ Mottola, Gary R. 2014. ``The Financial Capability of Young
Adults--A Generational View.'' FINRA Investor Education Foundation.
http://www.usfinancialcapability.org/downloads/
FinancialCapabilityofYoungAdults.pdf.
6) Social Security is facing a significant financial shortfall and
needs modernization. Social Security is the foundation upon
which Americans across the economic spectrum build their
retirement. While the program continues to serve as an
essential safety net for nearly all American workers, its
financial troubles put that position at risk. Under current
projections by the program's trustees, the OASI Trust Fund--
which pays benefits to older Americans, their dependents, and
their survivors--is projected to be exhausted by 2035.\18\ At
that point, beneficiaries would face an across-the-board
benefit cut of 23 percent.\19\ While that may seem far off,
Social Security is already paying out more in annual benefits
than it collects in taxes. Waiting to address this shortfall
increases uncertainty for beneficiaries and makes the policy
fixes more difficult.
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\18\ The Congressional Budget Office expects the OASI Trust Fund to
be exhausted in 2029--six years sooner than the projection of the
trustees.
\19\ Committee on Ways and Means. 2016. ``The 2016 Annual Report of
the Board of Trustees of the Federal Old-Age and Survivors Insurance
and Federal Disability Insurance Trust Funds.'' U.S. House of
Representatives. 114th Congress. H. Rep. 114-145, P. 6. https://
www.ssa.gov/OACT/TR/2016/tr2016.pdf.
Though these challenges are indeed daunting, our commission put
forth a comprehensive package of recommendations to improve retirement
security for all Americans, focusing on the six broad challenges
described above.
To expand access and make it easier for individuals to save for
retirement, we propose several solutions. Generally, our strategy is to
reduce the burden on small businesses and simplify the process of
providing retirement benefits to employees, incentivize enrollment in
workplace retirement savings plans, and create a national minimum-
coverage standard that would require all businesses with at least 50
employees to offer their workers some form of workplace retirement
savings option. Our modeling shows that such changes would increase
savings among middle class Americans by 50 percent once fully phased
in.
Enhancing retirement saving opportunities is critical, but planning
for retirement should never be considered in a vacuum. Retirement
security is inextricably linked to everyday financial security
decisions during one's working years. Americans need to increase their
personal savings so that they are better positioned to handle
emergencies and major expenses, and when appropriate, purchase
insurance against the vicissitudes of life. Insufficient short-term
savings can lead workers to draw down their retirement accounts,
incurring taxes and (often) penalties. This ``leakage'' of retirement
savings--while it might address an immediate financial squeeze--
jeopardizes many Americans' long-term retirement security. To address
this issue, we recommend allowing employees to be automatically
enrolled in multiple savings
accounts--a standard checking account for short-term savings and a tax-
preferred retirement account. We would also reform the regulations
surrounding retirement
accounts to further deter preretirement withdrawals.
Once workers reach retirement, they face the daunting prospect of
making their savings last for the rest of their lives. With Americans
increasingly living into their 80s and 90s, this challenge has only
become more difficult. By clearing regulatory barriers to lifetime-
income options for retirees and encouraging Americans to claim Social
Security benefits later to maximize their incomes, our recommendations
would ensure that fewer retirees outlive their savings.
To diversify Americans' options for retirement income, our
proposals would make home equity more readily available for retirement
needs. We discourage the use of home equity for preretirement
consumption by removing the deduction for interest on second mortgages
and other lines of credit that reduce home equity before retirement. We
also recommend expanding awareness of Federal Housing Administration
(FHA)-insured reverse mortgages and establishing a low-dollar reverse-
mortgage pool, allowing retirees to tap into a smaller portion of their
home equity without incurring the large fees that accompany larger
loans.\20\
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\20\ Please see page 69 of our report for our full recommendations
on facilitating the use of home equity for retirement consumption.
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Increased use of IRAs, 401(k)s, and other defined-contribution
accounts means that today's workers have more responsibility for
managing their personal finances than previous generations. To improve
Americans' financial knowledge and better equip them to manage their
own finances, we recommend expanding personal financial education at
all ages and stress the importance of ``just-in-time'' interventions,
in which individuals are provided with important information at the
moment that they are making major financial decisions.
Finally, no discussion of retirement policy would be complete
without addressing the significant challenges that face Social
Security. Our package would avoid the 23 percent cut that is set to
take effect and give Americans certainty about what to expect in
benefits from the program as they prepare for retirement. The Chief
Actuary of Social Security found that our plan would achieve
``sustainable solvency,'' meaning that the program's reserves would be
increasing even after 75 years. We achieved this outcome through a
balanced package of revenue increases and benefit savings. Our policies
include gradually increasing the payroll-tax rate, raising the amount
of income subject to Social Security taxes, very gradually raising the
full retirement age, and using a more-accurate measure of inflation for
Social Security's annual cost-of-living adjustments. But what I am most
proud of is the enhancements that we were also able to make for the
most vulnerable beneficiaries, including surviving spouses and low-
income workers. These groups would see dramatic
increases in benefits, which is why the Urban Institute found that our
package would reduce elderly poverty by 30 percent in just 20
years.\21\
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\21\ Please see page 78 of our report for our full recommendations
on strengthening Social Security's finances and modernizing the
program.
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To achieve agreement, the commission voted on these recommendations
as a package, not as individual policies. My fellow commissioners and I
continue to believe that, taken as a whole, these policies represent
the most comprehensive, bipartisan proposal to reform U.S. retirement
policy for the benefit of all Americans.
Based on the interests of this Committee, there are a few policies
I would like to highlight that might be particularly ripe for near-term
action:
Establish simplified Retirement Security Plans for small
businesses. To expand access and make it easier for individuals to save
for retirement, the commission recommends creating new Retirement
Security Plans that would dramatically simplify the process of offering
automatic enrollment plans for small businesses.\22\ These plans would
allow employers with fewer than 500 workers to band together and form
well-run, low-cost retirement plans that defuse administrative
expenses. Responsibility for operating and overseeing these plans would
fall to a third-party administrator that would be certified by a new
oversight board designed to protect consumers from bad actors. A
similar proposal (entitled ``pooled plans'') was included in the
Retirement Enhancement and Savings Act of 2016, which was unanimously
reported out of the Senate Finance Committee on a bipartisan basis.
---------------------------------------------------------------------------
\22\ Please see page 39 of our report for more information about
Retirement Security Plans.
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Allow employers to enroll employees in multiple savings accounts.
To help ensure that retirement savings last until retirement, we
believe that employers should be able to automatically enroll their
employees into two accounts--one meant for retirement savings, another
for short-term savings. By building up these rainy-day savings,
individuals might be less likely to raid their retirement savings in
the event of an unexpected emergency.
Incentivize retirement savings for young workers. To help build a
culture of savings and improve the financial resilience of American
families, we propose a new Starter Saver's Match, which would replace
the existing Saver's Credit for individuals under the age of 35. The
current Saver's Credit reduces the income-tax burden for lower-income
individuals who contribute to retirement accounts, but the credit is
not refundable, meaning that individuals with no income tax liability
cannot benefit from it. The Starter Saver's Match would instead be a
refundable credit of up to $500 deposited directly into the claimant's
retirement account. This change would better encourage younger workers
with lower wages (those who are least likely to save on their own) to
start saving for retirement. It would also maximize the Government's
``bang-for-the-buck'' by allowing the invested match more years to
grow.\23\
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\23\ Please see page 53 of our report for more information about
our Starter Saver's Match.
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Facilitate the establishment of a Retirement Security Clearinghouse
to improve portability. Many savers face the problem of having several
retirement accounts scattered among their previous employers. For this
reason, we recommend the creation of a Retirement Security
Clearinghouse to ease the process of consolidating accounts.
Encourage plan sponsors to integrate easy-to-use, sophisticated
lifetime-income features. Including lifetime-income options can be a
complex endeavor that entails concerns about fiduciary liability; in
addition, businesses often have to invest significant time and
resources to develop lifetime-income features. We recommend providing
limited protection for fiduciary liability, modifying regulations, and
giving additional guidance to plan sponsors that wish to incorporate
lifetime-income options within a DC plan.\24\ These developments could
have a similar effect for lifetime-income solutions as the Pension
Protection Act of 2006 had for retirement plan auto-features. Removing
barriers to auto-enrollment and auto-escalation, as well as providing
limited protection from fiduciary liability for the use of qualified
default investment alternatives, increased substantially the number of
plan sponsors that implemented auto-features. The lifetime-income field
is ripe for comparable changes.
---------------------------------------------------------------------------
\24\ Please see page 61 of our report for our full recommendations
on Lifetime-Income Options.
---------------------------------------------------------------------------
Accurately reflect retirement tax policy changes in the budget
process. Last but certainly not least is an issue that I know well from
my years chairing the Senate Budget Committee. As tax reform
discussions progress, the tax treatment of retirement savings accounts
appears to be on the table. In particular, some have proposed moving
all traditional tax-deferred retirement plans (such as 401(k)s and
IRAs) to an after-tax Roth system in order to create ``budget savings''
in the 10-year window. However, the current scoring system
significantly overstates the costs of tax-deferred accounts and
understates the cost of Roth accounts. We recommend changing the
scoring of these tax provisions to a system that would score both types
of accounts on an equal basis.\25\ I would encourage caution among
policymakers when considering dramatic changes to retirement policy for
tax policy purposes. Hundreds of billions of dollars are saved in these
retirement accounts every year and the tax incentives play a
significant role in this system. While debating the merits and
structure of retirement tax preferences is certainly appropriate,
hastily overhauling them without due consideration for the impact on
American savers could serve to worsen the retirement security
predicament about which we are all concerned.
---------------------------------------------------------------------------
\25\ Please see page 51 of our report for more information about
our recommendation on changing congressional budget-estimation rules
for retirement tax expenditures.
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Conclusion
I am encouraged that the issues of savings and retirement security
have attracted bipartisan interest among not only members of Congress,
but also business leaders, the media, the Administration, and the
States, as well as from candidates seeking public office. I hope that
the work of our commission can inform these efforts and can contribute
to meaningful action by individuals, businesses, and governments to
improve the economic well-being of all Americans.
Thank you for inviting me to be here today, and I look forward to
answering your questions.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
______
PREPARED STATEMENT OF WALTER RUSSELL MEAD
Distinguished Scholar in American Strategy, the Hudson Institute and
Chace Professor of Foreign Affairs, Bard College
April 5, 2017
Good afternoon, Mr. Chairman, Ranking Member Heitkamp, and Members
of the Subcommittee:
It is an honor to be invited to testify before this Subcommittee
and its distinguished Members. Moreover, it is a privilege to testify
alongside former-Senator Kent Conrad. I congratulate the Subcommittee
on its interest in creating a sustainable and viable retirement system
for the 21st century.
My testimony today is divided into three parts. In the first, I
look at the history of Federal policy with respect to the economic
security of the American people, how that policy changed in response to
changing economic conditions, and how our current set of retirement
programs and policies emerged from these changes. In the second
section, I draw the Subcommittee's attention to the ways in which the
economic changes our country is currently undergoing are deep enough
and pervasive enough to require fresh thinking about economic and
retirement policy. Finally, I offer some suggestions that I hope will
assist the Subcommittee's distinguished Members as they work to craft
novel retirement security policies for an approaching economic order
while preserving programs like Social Security that remain essential to
the economic security of older Americans.
The American Dream & Government
Many believe that the Federal Government's promotion of the
economic security of the American middle class is a relatively recent
development, dating back to Franklin Roosevelt and the New Deal. This
is far from the truth. From the revolutionary period to the present
day, American presidents and congresses have worked to develop policies
and laws that promote the American Dream--to help the American people
build dignified and secure lives through hard work. Our understanding
of the American Dream has changed over the centuries, and successive
generations have changed the methods by which they seek to promote the
common welfare, but the prosperity and the security of the American
people has remained at the center of national policy from the time of
George Washington into the 21st century.
For much of our history, the majority of the American people earned
their living in agriculture. In the 18th century, farmers comprised
approximately 90 percent of the American labor force. Only in the 20th
century did the percentage of agricultural workers fall significantly
below 50 percent of the labor force. For both American citizens and the
immigrants drawn to our shores, the American Dream at this time meant a
freehold family farm; elected officials understood that the opportunity
to own a farm was what constituents most wanted, and they made it their
business to ensure that Federal policies supported that goal.
Politicians also understood that the independence and security of
family farming was the foundation of the American political system.
Political theorists like Thomas Jefferson believed that independent
free farmers made the American democratic system possible. Freed from
the servile dependency that characterized so much of peasant
agriculture in Europe, and trained in the habits of responsibility and
hard work by the requirements of property owning, American farmers
could be safely entrusted with the choice of elected officials. Federal
support for the independence and prosperity of farmers was not just in
the country's economic interest; such support strengthened the
foundations of American society in line with Jefferson's belief that
``Agriculture . . . is our wisest pursuit, because it will in the end
contribute most to real wealth, good morals, and happiness.''
Indeed, the Land Ordinance of 1785 and the Northwest Ordinance of
1787, both of which were adopted by Congress before the Constitution
was signed, already envisioned a future of independent, yeoman farmers
in early America. These ordinances helped create a system that
organized the sale of Federal land west of the Appalachians to private
citizens, and remain a basis of the Public Land Survey System and the
Bureau of Land Management that we know today.
The Federal Government continued to promote the establishment of
the family farm throughout the 19th century with a full range of
economic, diplomatic, and even military policies. President Jefferson's
Louisiana Purchase opened up over 800,000 square miles of land for
Americans to settle. The 1862 Homestead Act gave away millions of acres
of land to settlers who were willing to brave the treacherous westward
journey and settle in the interior.\1\ The early diplomatic emphasis on
gaining free access to the Port of New Orleans for western farmers,
like the later promotion of railroads to open up the vast western
territories, was designed to ensure that farmers in the remote American
interior were able to sell their goods on world markets. The
establishment of land grant colleges at the end of the 19th century
sought to both train young farmers and to conduct important research
into new farming methods. Taken together, these policies, among others,
formed what might be called the ``Green Model''--a coordinated
Government effort to provide Americans, who lacked opportunities to own
large tracks of farmland on the coast, with the ability to seize the
19th century American Dream if they moved to the interior.
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\1\ It is important to note that, although the Homestead Act
essentially provided free land to settlers, the westward journey
inflicted heavy physical, emotional, and fiscal costs on settlers. It
would be incorrect to view the Homestead Act as a handout.
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By promoting land ownership at low cost and encouraging
agricultural education, the Green Model sought to deliver for Americans
the unique financial and societal security that a family farm could
provide. Besides the revenue and sustenance from working the land,
family farming helped Americans accumulate wealth. Additionally, family
farms provided for retirement. Grown children could continue tending
the land while taking care of their elderly parents, or the family farm
could be rented or sold, providing an income for farmers who could no
longer work the land for themselves.
The security provided by the family farm began to erode in the late
19th century. As more settlers took advantage of Green Model land
policies, the remaining unsettled land became ever more marginal. At
the same time, a more competitive, large-scale, and capital-intensive
farming model emerged, which gradually made family farming riskier and
less rewarding. The share of farmers in the labor force declined from
approximately 64 percent in 1850 to 27 percent in 1920.
As the American economy shifted away from American agriculture and
toward factories and mines, Americans experienced growing inequality
and uncertainty between 1865 and 1900. Following the Civil War,
portions of American society clung to the Green Model way of life even
as the rural economy fell behind the manufacturing economy of the great
cities.
Farmers lobbied for Federal assistance to achieve `parity' with
urban workers, but the relative decline of the agricultural economy
continued. While pro-farm policies aimed to preserve Jefferson's
idyllic vision of a Nation of yeoman farmers, these policies were no
match for larger economic trends that were recasting American society
as well as the economy.\2\ It became increasingly clear that the Green
Model could no longer serve as the ordering principle for Federal
policy, but the dynamics of the new economy were not well understood
and its full wealth creating potential had not yet been realized.
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\2\ It is worth noting that a disproportionate number of policies
seek to aid American farmers today despite the fact that less than 2
percent of the American labor force works in agriculture. One can argue
that these policies harken back to Jefferson's vision of America and
the Green Model.
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As the twentieth century witnessed a clear transition from an
agricultural to an industrial era, a new version of the American Dream
appeared and a corresponding Federal policy model began to take shape.
Teddy Roosevelt capitalized on widespread calls for reform and ushered
in a new kind of politics. Past presidents made history by opening new
land for settlement; Theodore Roosevelt made history by protecting
Federal lands from settlement and establishing our system of national
parks. Franklin Roosevelt's New Deal policies further advanced the
evolution of a new system tailored to an urban society with a
manufacturing economy.
The process of transition was a slow one, with many setbacks and
upheavals, but by the 1950s, a new and stable social system had
emerged. Americans had learned to manage the forces of industrialism,
to regulate the power of finance, and to use the vast resources which
an industrial society creates to address the unprecedented social
problems that the rise of the modern city and the modern factory system
brought into being. In post-World War Two America, both blue-collar and
white-collar workers increasingly had stable, lifetime jobs in a
growing economy. Within this new economy, high school graduates were
essentially guaranteed lifetime employment in a job that, at a minimum,
provided a comfortable, lower middle-class lifestyle. Likewise, college
graduates could expect an equally secure future with an even greater
standard of living.
The new economy led to a new American Dream. Americans no longer
dreamed of owning a family farm, rather they dreamed of owning a
suburban home accompanied by a consumer lifestyle. To ensure that
Americans willing to work for it could have that dream come true, the
United States Government created a novel policy system during the 1950s
and 1960s--a set of policies and practices sometimes called the ``Blue
Model.'' New transportation measures, like the Federal Aid Highway Act
of 1956, aimed to link cities and employment centers with cheap,
suburban housing, so that geography would not prevent Americans from
achieving the new American Dream. Likewise, 30-year mortgages with low
interest rates allowed lower- and middle-class Americans to own
suburban homes and accumulate wealth. Tax advantages for the municipal
bond market allowed American cities and towns to build the
infrastructure the new suburbanites wanted at an affordable cost.
The United States Government demonstrated its commitment to
promoting opportunities for working Americans. While Blue Model
policies differed significantly from those of the Green Model, both
models aimed at the same goal--to provide as many Americans as possible
with the opportunity to realize the American Dream in accordance with
the economic and societal conditions of the time. Neither model sought
to accomplish this goal through `handouts' or guaranteed outcomes.
Rather, they provided Americans with the ability to accumulate wealth
through hard work.
Sadly, both the Green Model and the Blue Model developed policies
to the exclusion or even the detriment of American minorities and
particularly African Americans. American slavery and the share-cropping
era under Jim Crow meant that free black farmers were virtually absent
from the independent yeoman-farmer vision of Jefferson and his 19th
century successors. In the 20th century, red lining prevented many
African Americans from attaining the financial security and
independence of home ownership, while New Deal programs often excluded
domestic workers, wait-staff and farm-hands--occupations that were
disproportionately held by minorities or women. Nonetheless, for a
large majority of Americans, these policies contributed to the enormous
growth of economic prosperity of 19th and 20th century America.
Retirement policy was one of the areas in which policy had to
change in response to new conditions. Factory jobs did not provide the
same kind of economic security that farm ownership did. Especially in
the early years of the factory system, and again during the Depression,
many ordinary working people lacked the ability to save for retirement,
but the factory system was unforgiving.
Like the Green Model, the Blue Model began to fail over time. As
foreign manufacturers recovered from the devastation of World War II,
German and Japanese companies challenged complacent American firms.
In this new and often more challenging environment, companies had
to become more flexible. Industry became more competitive, private-
sector managers shed bureaucratic habits of thought, and defining
characteristics of the economy, like lifetime employment and defined
benefit pensions, began to disappear. Additionally, the combination of
low-wage competition from the developing world and automation in
advanced country manufacturing began to cut into manufacturing
employment in the United States. The process of change started in the
1970s; in subsequent decades it became clear that the global economy,
and the American economy with it, were caught up in a process of
transformation as dramatic and far reaching as the industrial
revolution itself.
A New Economic Revolution
Americans today are caught up in a whirlwind of change, and most
basic assumptions on which our social policy are based are coming under
challenge. Old jobs and old industries are disappearing, and new ones
are sometimes frustratingly slow to emerge. Wages for many workers have
stagnated as well paid jobs, especially in manufacturing, become
scarcer. The percentage of nonfarm workers in manufacturing has
declined from a World War II-high of approximately 38 percent to
approximately 8.6 percent in 2016, and many clerical jobs have also
disappeared.
New technology and competition also have pushed out, and will
continue to push out, many legacy 20th century employers and the jobs
and job security they provide. For example, nearly 88 percent of the
employers featured on the 1955 Fortune 500 list did not make the 2014
Fortune 500 list. The rise and fall of companies like Blockbuster
highlight the pace and intensity of change in the 21st century economy.
In addition to the decline of stable companies and the lifetime
assurance of stable employment that they brought, the traits that
define jobs today vary significantly from the traits that defined mid-
20th century jobs. Workers today are no longer guaranteed long careers
with a single employer or within a single industry, nor do many of them
want to be confined by a lifetime job, and the percentage of the labor
force employed by the same company for 20 years or more continues to
decline.
Workers today, especially millennial workers, are more likely to
``job hop'' than past generations. According to the employment-based,
social networking website LinkedIn, ``the number of companies people
worked for in the 5 years after they graduated [from college] nearly
doubled'' from 1.6 jobs in 1986 to 2.85 jobs in 2010. Polling data has
also shown that millennials view job hopping more favorably than other
generations. Gallup found that 60 percent of millennials are open to a
new job opportunity (as compared to 45 percent of nonmillennials) and
that millennials are the ``least engaged generation in the workplace.''
The advent of the technologically facilitated gig economy also has
added to the high level of ``churn'' in the workplace today. The
McKinsey Global Institute estimates that between 20 and 30 percent of
working-age Americans currently participate in the gig economy. As apps
and websites like Uber, Lyft, Airbnb, TaskRabbit, Ebay, and Etsy have
become commonplace in our society, there has been a growing acceptance
of gig jobs. Indeed, out of the 68 million independent workers in the
United States, McKinsey estimates that 72 percent of them chose to be
independent workers. As technology continues to engrain gig work into
the ethos of American workers--especially younger workers--I believe
that gig work will contribute to an increased restlessness in the
future workplace and could well become a defining characteristic of the
information era.
The structural employment changes that have taken place in the
information era have coincided with important societal changes.
Americans have a dramatically different concept of retirement than
previous generations. American living standards and life expectancy
have increased. (In 1935, American average life expectancy was 61
years; by 2016 it had risen to 78.) Now, Americans need enough
retirement income to facilitate an active lifestyle defined by travel
and leisure. Historically, many people saved to avoid poverty in old
age; Americans want more out of their later years--but neither as
individuals nor as a society are we making the choices that can sustain
these expectations.
At the same time that Americans expect to spend more years, and
more active years, in retirement, they are increasingly delaying their
entry into the world of work. In 1900, many Americans went to work
after eight or even fewer years of formal schooling; more and more
young Americans today spend 16 or more years in education before they
begin their life's work. In 1935, many Americans entered the workforce
at 15, stopped working at 60, and died soon thereafter. Today, many
don't enter the workforce until they are almost 30, retire between 65
and 70, and live for 15 to 25 years longer. In 1935, Americans spent
almost 75 percent of their lives in the workforce; today, we are only
in the labor force for about 50 percent of our lifespan, but the income
from those years must support the costs of child-raising and the costs
of a long retirement. As a people, our savings patterns do not reflect
these realities.
In the long run, this pattern cannot be sustained. We must either
save more, work longer, or consume less in retirement. Yet even as we
contemplate this uncomfortable reality, many Americans feel their
choices are constrained. Stagnant or falling wages make it harder for
many families to save. The costs of college continue to rise, and
`degree inflation' means that more students must spend more years in
school--during which time their parents, instead of saving to fund
their own retirement, must struggle to support their children in
school. Rising healthcare costs
continue to press on family budgets. As employers shift insurance costs
onto the workforce, and as more gig workers and self-employed people
buy insurance in the individual markets, Americans often have a harder
time setting money aside for old age.
Two-hundred-fifty years of American history tells us that the
Federal Government cannot and will not remain indifferent to the
difficulties of the American middle class. But in both agrarian and
industrial America, the Government found ways to give an assist to
hardworking Americans seeking to build stable and prosperous lives,
rather than providing handouts and creating dependencies. Providing a
policy framework so that young people could clear the land and start a
farm is very different from creating a lifetime income entitlement;
supporting the development of a financial system and transportation
network so that young families could buy their own homes is very
different from offering each citizen a housing voucher.
The question for retirement policymakers in this time of transition
isn't, or shouldn't be, how to give Americans a retirement that they
can't afford. It is how to set up a system that makes it possible for
hardworking Americans to build the kind of future they want through
their own efforts.
A New Vision for Retirement
Today, we are caught between an old system that is getting less
effective and a new one that is still developing. This is not, of
course, just true for the retirement system; it is true of the economy
and society at large. But the retirement crisis is rapidly becoming one
of the most serious and damaging consequences of the decay of American
social order, and the outdated assumptions on which the retirement
system relies make matters worse. To put it simply: Our three-legged
retirement system--public savings (i.e., Social Security), employer-
provided retirement plans (e.g., pensions)--and private savings and
investments--are failing Americans.
It is important to remember that Social Security was never intended
to serve as the only source of retirement income for older Americans.
Social Security payments were to be supplemented by employer pensions
and from individual savings and investments. While Social Security
faces some financial challenges, the real problem we see today is that
the other two legs of the system are in much worse shape. Increasing
numbers of American workers face a future in which Social Security is
their only significant source of income in retirement; this places a
burden on Social Security, and on the Federal treasury, that will be
difficult to bear.
In the Blue Model era, the idea was that for more and more workers,
employer-provided pensions would supplement Social Security. From the
1930s to the 1960s, the percentage of workers covered by employer-
provided pensions tied to length of service tended to rise. This system
fit the needs of a workforce that looked to stable, long-term
employment from big business and stable nonprofit employers like
hospitals and State and local governments. But as the economy began to
change, the private pension system came under increased stress. The
percentage of workers covered by employer plans began to decline, and
the plans themselves tended to become less generous and less secure.
At the same time, the third leg of the stool, personal savings and
investments, is also under stress. Stagnating wages and the rising
costs of raising children make it hard for families to save. As
Americans delay starting families and raising children until later in
life, parents are older when their children start college, and there
are fewer `empty-nest' years in which parents, free at last from the
financial responsibility of raising their children, are able to focus
on funding their own retirements.
Policymakers have, of course, been aware of these problems, and the
last few decades have seen a number of initiatives, like the rise of
401(k) programs and the IRA system, to strengthen private pensions and
personal savings. Thanks to these programs, a significant number of
Americans have more assets for retirement than would otherwise be the
case. But those programs have not lived up to the hopes that were
placed in them. Only 58 percent of workers today, for example, have
access to employer-based retirement plans. Of that 58 percent, fewer
than half participate in these plans. At the same time, only 10 percent
of workers contribute to private savings plans like IRAs, which were
meant to help augment employer-provided retirement plans and Social
Security.
As a result, we now face a retirement problem that is both serious
and complex. More and more Americans are approaching retirement age
without having the savings needed for the kind of retirement they want.
Moreover, the millennial generation is currently set on a dangerous
course that would make this generation even less well prepared for
retirement than their parents and grandparents.
Clearly, our programs for employer-based retirement systems and for
encouraging private savings have not accomplished what we hoped they
would do. We must think more deeply and act more decisively to create a
system that will work in the new economy taking shape around us. The
paradigm is shifting and we must shift with it. Just as policy made at
the end of the 19th century could not fully account for the needs of
the 20th century economy, our new policy model will have to adapt to
the profound changes we now face.
While these failures owe something to larger social challenges
(hard pressed families are less likely to set money aside for future
needs even if such savings are tax-advantaged), there are some ways in
which our retirement programs don't align well with the emerging new
economy. In particular, the link between the employer and the
individual was at the center of Blue Model era social policy. Firms
were expected to provide defined benefit pension plans and promote
personal savings, even as firms were expected to handle health care,
tax collection, and a variety of other social missions.
With the end of lifetime employment and the shift to a job hopping
and gig economy--to say nothing of the decreased stability of many
larger firms in an era of global competition and rapid technological
change--the employer is losing the capacity to act as the intermediary
between the individual worker and Government, while simultaneously
being the locus for Government mandates, tax collection, and social
policy. For retirement policy especially, the focus needs to be on the
individual rather than the employer. Employees will have many employers
over the course of a career and, often, many income streams at the same
time. The same person may simultaneously be a full-time employee in one
job, a part-timer in another, while moonlighting as an Uber driver,
renting out a spare bedroom to travelers, or selling goods on eBay.
Such a worker still needs to think about retirement, and still has
taxes to pay, but there is no single employer who plays a role in this
person's life comparable to that of, say, General Motors in the heyday
of the old industrial
system.
Small businesses and the self-employed are particularly poorly
served by the current system. These businesses and workers often do not
have the time or resources needed to scour the marketplace to find the
savings plans best suited to their needs. Nor do employers have the
capacity or resources for the complex and often expensive work needed
to comply with various Government mandates about how retirement plans
work. This has created a perverse economic reality, in which saving for
retirement has become a perceived benefit of working for a large
corporation that is less attainable for small businesses and the
independently employed.
At the same time, we need to understand that the retirement crisis
is part of a larger problem of savings. Young workers may not be
focused on retirement savings because more urgent needs preoccupy them:
student loan repayment, savings for a down payment, healthcare costs,
and so forth. We cannot look at retirement savings in isolation from
the other economic challenges facing Americans today.
What I propose below is intended to stimulate new thought on the
Committee and elsewhere as a new generation of Americans rethinks the
foundations of our social contract and economic system. After looking
at what a new approach to retirement and related issues might look
like, I also offer some suggestions about how we can help members of
the `bridge generations,' people caught up in the transition from the
old system to a new one, cope with the challenge of retirement given
the financial issues they face.
There are, I believe, two basic things we need to do: first, to
begin shifting the tax collection onus and the retirement savings
apparatus from employers to private-sector financial institutions. At
the same time, we need to blend retirement savings with other forms of
savings, so that Americans have multiple, clear-cut avenues toward
wealth accumulation in the information era. The creation of a flexible
and multifaceted retirement savings system that better aligns with our
current and near-term economic conditions and can adapt to the unknown
economic conditions of the future will be critical to the 21st century
success of the United States.
One way to move toward this goal would be to offer every American
citizen and Green Card holder the ability to open an account known as
an ``American Mobility Account'' (AMA).\3\ These `one-stop-shop'
accounts would be managed and administered with a financial
institution, in which employers or independent workers would deposit
gross, pre-tax income. Financial institutions would collect and
withhold the variety of different taxes that businesses and contractors
are currently required to withhold, thereby shifting the tax collection
onus from employers and the self-employed to third-party financial
institutions. In addition to managing tax collection and withholding,
financial institutions would be able to provide a variety of
Government-regulated and tax-advantaged financial options within AMAs
that promote retirement savings and human capital formation.
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\3\ ``American Mobility Account'' and the other, subsequent account
names are merely descriptive placeholders. Ideally, these programs
would be swept into a simpler package, as the proliferation of programs
with complicated names, rules, and eligibility requirements itself
becomes a disincentive for individuals to participate.
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With the introduction of AMAs, our tax regime would be better able
to accommodate the increasing amount of gig work and job-hopping that I
believe will take place in the future. Since all earned income would be
deposited into one AMA, an individual could earn income from a variety
of different employers, and have a streamlined accounting process. For
example, instead of multiple employers filing a collection of W-2 and
1099 forms on behalf of an employee working several gigs, the financial
institution would be responsible for compiling all streams of earned
income and filing a single reporting form on behalf of the worker.
This system would benefit employers, workers, and Government. On
the employer end, AMAs would largely shift the accounting and
compliance burdens from employers to financial institutions: an
important change that would be particularly beneficial for small
businesses, the self-employed, and startups. Additionally, AMAs would
help workers comply with tax laws and simplify the task of tax
preparation while ensuring that they receive all benefits and credits
to which they are entitled. Finally, Federal, State, and local
governments would benefit from the increased transparency and
accountability that AMAs would provide them. As part-time work and
multiple sources of income proliferate (e.g., combined income from Uber
driving, eBay sales, Airbnb rentals, etc.), tax collection will become
more difficult and less fair without reforms along these lines.
The ability to better accommodate self-employed workers who may
play a defining role in the 21st century innovation economy is another
benefit of an AMA-centered system. In many ways, our current retirement
system hinders self-employment since self-employed workers have to pay
the regressive Self-Employment Tax of 15.3 percent, which covers both
the employee- and employer-end of the payroll taxes levied against
traditional businesses and their employees. While this high tax rate
discourages many individuals from pursuing self-employment
opportunities, it incentivizes others to avoid taxes altogether. Making
AMAs cheap and easy to understand for the self-employed population,
enabling the holders of these accounts to benefit from various tax
savings and other programs, and increasing penalties for those who pay
self-employed individuals outside of the financial system will improve
tax collection and reduce monitoring and enforcement costs for the
Government. (Such accounts will also make it easier for the self-
employed and gig workers to demonstrate their creditworthiness by
documenting their income, an important consideration for promoting home
ownership).
Additionally, to promote retirement savings, a Supplemental
Retirement Account (SRA) would be embedded within an AMA. A certain
percentage of an AMA-holder's monthly income would be deposited
automatically into the SRA. The deposited income could only go toward
saving for retirement, with all SRA holdings initially defaulted into a
Roth IRA savings plan. AMA-holders would be able to opt out of their
monthly SRA deposits, change to a different retirement savings plan
with different tax preferences (e.g., a traditional IRA), or further
diversify their SRA holdings into several different savings plans.
An SRA would solve the issue of workers lacking access to employer-
supported retirement plans. Moreover, employers could be given tax
incentives to encourage contributing toward employee SRAs, thereby
addressing some of the major issues with current individual retirement
savings accounts. Further, SRAs would reduce costs for employers since
they will no longer need to maintain retirement plans of their own,
thereby leveling the competitive playing field for small businesses and
startups. Means-tested Government programs to promote retirement
savings for low-income workers could also be more effectively and
transparently administered through the use of these accounts.
Finally, AMAs would promote human capital formation to augment the
financial security provided by retirement savings. For example, much
like an SRA, a worker could choose to deposit a certain percentage of
his or her paycheck into an embedded Human Capital Account (HCA). In
turn, individuals could spend HCA monies on certain items deemed
important to enhancing individual financial security (e.g., job
training, professional licensing, college education, etc.) in a tax-
free or tax-preferred fashion up to a lifetime maximum limit.
The formation of human capital will be vital to growing wealth in
the future. Giving Americans the opportunity to use savings to take the
future version of today's coding class, for example, will be imperative
to both their success and to the success of the Nation, and is in line
with past social policies like the creation of land grant colleges
during the Green Model years. Following the example of the very
successful Singaporean Central Provident Fund, the accounts can also
contribute to wealth creation. Through its public social security
scheme, which allows Singaporeans to finance the purchase of homes with
retirement savings, the Singaporean government has increased home
ownership to 90 percent. A simple homeownership savings account option
would encourage financially sustainable homeownership and wealth
accumulation in the United States. During the housing bubble, well-
intentioned lawmakers and officials tried to promote better access to
home ownership by relaxing the criteria needed to qualify for a
mortgage. It would be much better policy to encourage home ownership by
helping more people to qualify legitimately under existing, prudential
rules.
In sum, the introduction of AMAs would better fit the current and
future direction of our 21st century economy. The transition would not
happen overnight, and a variety of regulatory mechanisms and changes
would need to be put into place to make sure that this plan would
benefit all Americans in a fair and transparent way. Finally, there
would need to be incentives to encourage the adoption of AMAs among
employers, workers, and financial institutions, as an outright mandate
would be too disruptive in the near-term.
Reducing the Costs of Retirement
While the introduction of AMAs would help transition the United
States from an outdated, employer-based system and increase saving for
retirement, the reform is primarily geared toward younger and future
generations of workers. In order to enhance retirement security for
Americans, policymakers must enact reforms that help older generations
of workers successfully retire during the transition.
On the front end, we should allow workers later in their careers to
accelerate their savings. It is human nature to postpone thinking about
retirement, and, in any case, younger people often have more immediate
needs, whether this involves paying off student loans, buying a home,
or caring for their children. Older workers often have more
discretionary income, fewer calls on their resources, and a greater
focus on the need to save for retirement. Government policy should aim
at creating more tax deferred savings opportunities for these people.
It is good social policy to encourage savings, and greater savings
equate to retirees being better prepared to handle retirement costs.
Current policy allows older workers to accelerate their contributions
to retirement plans; those allowances should increase.
Many seniors today are not only physically capable of working
longer, but they also want to work longer as they find work fulfilling
and intellectually stimulating. Advances in medicine and in technology,
such as driverless cars and enhanced telework capabilities, will make
it easier for older generations of Americans to continue to work well
into old age. To encourage more capable seniors to work longer, the
Government should eliminate the Social Security Payroll Tax for seniors
and delay the age requirement (generally 70 \1/2\-years old) that
triggers mandatory withdrawals from retirement savings plans. To
increase the attractiveness of tax deferred savings plans to lower
income Americans--those who have the hardest time saving for retirement
and most need the financial security that those savings provide--income
from tax-deferred investments below a certain (low) threshold should
also be tax free.
Government could also enhance the menu of retirement options
available to seniors who cannot or do not want to work longer.
Promoting retirement abroad, where income that can barely cover a
trailer home in Florida can equate to a luxury condominium in Costa
Rica or Mexico, is an easy way to give seniors comfortable retirements.
Today, Medicare does not cover health care received abroad, except for
in an extraordinarily limited set of circumstances. This lack of
healthcare coverage is a major barrier to retiring abroad. Though
health care and prescription drugs can be far cheaper in Latin America
and the Caribbean (LAC), serious illness is a financial issue anywhere,
and, as younger and active retirees become older and more frail, they
often have to return to the United States to obtain better services,
which hinders permanent and/or semipermanent retirement abroad.
Helping seniors move to countries where costs are low could reduce
Medicare costs and give seniors more choices during the transition from
the Blue Model retirement system to a new retirement system. To that
end, the Federal Government should smooth the path for seniors looking
to retire abroad. Congress should pass legislation to allow Medicare to
cover eligible seniors using certified, inspected, and qualified
providers. Medicare payments should be lower to these providers,
reflecting different cost levels.
Conclusion
Much as they did during the transition from the Green era to the
Blue era, Americans find themselves at an important, historical
inflection point. Like the Industrial Revolution, the Information
Revolution has disrupted the economy in unpredictable, complex, and
far-reaching ways. Not all of the changes to come can be predicted or
understood today, but there is an immediate need to craft policies to
account for those changes we can discern before the consequences of the
failures of the current system become unbearable. Adopting a system of
retirement policies that shifts the burden of taxation and collection
from employers to financial institutions while protecting the
retirement security of those caught in the gap would do much to promote
the emergence of a dynamic new form of the classic American Dream in
the 21st century.
Additional Material Supplied for the Record
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