Few Americans today know much about Studebaker or Packard cars. Classic car enthusiasts remember their sleek and innovative designs, but the brands are also a reminder of another bygone era: the traditional defined benefit pension.
Studebaker and Packard merged in 1954 and later closed. Their pension plans were cut, leaving thousands of workers without their expected benefits. This, along with the failures of other pension plans, spurred efforts to make retirement savings more secure, culminating in federal legislation that has shaped much of the current retirement benefit landscape.
The Employee Retirement Income Security Act, or ERISA, which was signed into law in 1974 by President Gerald R. Ford, marks its 50th anniversary this year.
The law protected private-sector pensions by establishing funding requirements, employee eligibility rules, and fiduciary standards that required plan sponsors to act only in the interests of its participants. He also created the Pension Benefit Guaranty Corporation, a federally sponsored insurance fund that stops failed pension plans.
But these stricter requirements and costs have led many employers to stop offering traditional pensions and the rise of 401(k) plans and Individual Retirement Accounts and their dominance in the private sector today.
Pensions never covered all US private sector workers — 62 percent were covered in 1983 compared to just 18 percent in 2022, according to the Center for Retirement Research at Boston College. But workers who had them benefited from automatic participation, professional investment management and guaranteed income for life.
In their place, IRAs and workplace savings plans like the 401(k) have amassed a staggering $25.4 trillion in wealth. But most of this wealth is held by higher-income households, and coverage is far from universal. Additionally, there are large gaps in retirement account ownership and participation by race, gender, and ethnicity.
As ERISA turns 50, the New York Times asked experts for a wish list of ways to improve retirement security and make the system fairer. Here are their ideas.
1. Expand your 401(k) coverage.
The biggest problem with 401(k) accounts? Not enough people have them, experts say. Only about half of private-sector workers in the U.S. are covered by an employer-provided retirement plan at any given time, largely because small businesses are less likely to offer the plans.
Most retirement savings are generated by automatic payroll deductions, and the lack of access to plans helps explain why so many Americans are nearing retirement with little savings. The average retirement account holding for workers ages 55 to 64 was $185,000 in 2022, according to the Federal Reserve, and the amounts saved by low-income workers have actually declined in recent years. There are also persistent disparities in savings by race and ethnicity, with black households saving just 14 percent as much as white households, and Hispanic households only 20 percent as much as white households.
“We have a really large group of people who are going to retire on Social Security alone,” said Alicia Munnell, director of the retirement research center at Boston College. Social Security is designed to replace only 40 percent of pre-retirement income for middle-income earners — a far cry from the 70 to 80 percent goal most retirement planning experts recommend.
Seventeen states, including California, Illinois and Maryland, have stepped in with legislation creating “auto-IRA” programs designed to automatically enroll employees who don’t have a workplace savings plan. Contributions are sent through a payroll deduction to a state-sponsored plan that manages investments, but there is no matching contribution from the employer.
So far, eight states have started their programs, and combined assets total $1.5 billion.
A variety of national auto-IRA plans have also been proposed, and some experts have even suggested a similar government contribution — essentially, a national 401(k) plan.
Some policymakers say such a proposal could cannibalize workplace 401(k)s.
“Employers who sponsor plans may decide to save the cost of employer contributions by dropping their plans because they can shift their employees to the public plan,” said Mark Iwry, who helped develop the proposals for retirement savings in the Clinton and Obama administrations. “Instead of giving up on the private pension savings system, we should continue to reform it and expand its coverage,” he added.
2. Make your 401(k) more like a pension
Some want to improve 401(k)s by making them a little more like traditional pensions. This means importing features such as automatic participation, professional investment management and guaranteed income streams during retirement.
Great 401(k) plans are already out there. Three-quarters of large plans now automatically enroll new employees by default (although they can opt out). For example, in plans administered by 401(k) giant Vanguard, the percentage of employee enrollees increased to 82 percent in 2023 from 75 percent in 2013.
Federal legislation in 2019 and 2022 contained dozens of changes to workplace retirement plans, including new investment options. Critics argue that most of the benefit has flowed to the financial services industry and high earners, but a notable exception is a redesigned savers match that offers a matching government contribution of up to $1,000 a year for those with lower incomes.
Another objective: Help retirees convert nest eggs into predictable income streams. “It just doesn’t work to say, ‘Here’s your money, have fun,'” said David John, a nonresident senior fellow at the Brookings Institution.
To that end, some 401(k)s are beginning to integrate annuities — a financial product that can guarantee fixed income for life — into their offerings.
3. Provide better IRA investment advice
In employer plans, employees benefit from ERISA’s fiduciary protections. But Individual Retirement Accounts fall outside this rule because they are not managed by employers, and IRAs hold more money ($14.3 trillion in the first quarter of this year) than defined contribution plans ($11.1 trillion), according to the Institute of Investment Company.
“Congress left the barn door open and the IRA are getting away with the show,” said Mr. Iwry.
Most money in IRAs is rolled over from workplace plans, and the Department of Labor recently finalized a rule requiring more financial professionals to act as fiduciaries when advising people about investments rolled over from workplace plans into IRAs— Retail investing in securities is already covered by a “best interest” rule adopted by the Securities and Exchange Commission, but this new rule adds fiduciary duty to investment advice in other areas, such as commodities. and real estate.
“The essential conditions of the rule are that you do not lie to your clients, do not overcharge them, put their interests first and give prudent advice,” said Ali Khawar, deputy assistant principal secretary of Department of Labor. Employee Benefits Security Administration. “And you must accept that you are acting as a fiduciary.”
The new rule takes effect in September, although some financial services companies have vowed to fight it in court.
4. Rework the system to make it fairer
The tax-deferred features of 401(k) and IRA accounts are designed to encourage saving. But it is a benefit given mainly to high-income families.
The Treasury estimates that employer-sponsored retirement plans and IRAs reduced federal income taxes by up to $189 billion in 2020. A study by the Center for Retirement Research found that 59 percent of that tax deferral took advantage of the fifth most of earners, compared to just 3.7 percent for the bottom 40 percent of earners.
“People need workplace retirement plans because the money that comes out of a paycheck is the only way people save,” said Dr. Munnell, of the retirement center. But “what we really need to do is focus on the unfortunate people who don’t have the retirement savings to supplement Social Security.”
Dr. Munnell and her study co-authors, including Andrew Biggs, a conservative economist and senior fellow at the American Enterprise Institute, conclude by offering this bold proposal: End the savings tax deferral — or at least limit it. that. Then use that tax revenue to help fund Social Security. This change could close a significant portion of the shortfall that Social Security currently faces.
“If we have scarce resources, I’d like to see those dollars go to people in the bottom half of the income distribution,” said Dr. Munnell said.
5. Expansion of Social Security with new sources of income
Progressive advocates would go further than just addressing Social Security’s shortfall. They argue that a significant expansion of benefits is the only meaningful way to close the retirement income gaps facing low- and middle-income people.
Shifting retirement savings tax subsidies to Social Security is just the beginning, said Nancy Altman, president of Social Security Works.
“Let’s also take the tax breaks away from the fossil fuel industry and use those savings to fund Social Security,” she said. It will also lift the cap on the amount of wages subject to payroll taxes and tap into other sources of revenue.
The new revenue will be used to eliminate the Social Security shortfall and expand benefits. The targeted increases would go to pensioners with very low incomes, but Ms. Altman would also strengthen Social Security controls across the income spectrum, to provide up to 80 percent of pre-retirement income for low-income earners and up to 72 percent for high-income earners. average.
“The question,” she said, “is what level of economic security do we want to provide ourselves collectively through this structure?”
#trillion #retirement #savings #system #fixing
Image Source : www.nytimes.com
