Iowa senator pitches retirement fix
Jennifer Jacobs, The Des Moines Register 11:31 a.m. EST January 30, 2014
Tom Harkin's plan would create new private pension system to promote saving.
Workers across the USA would be enrolled automatically in a new private pension system that would help them stash 6% of their pay each year in a proposal that an Iowa senator announced Thursday.
The legislation would deal with the "retirement crisis" — the fact that half of Americans have less than $10,000 in savings, according to a written description of the plan from Sen. Tom Harkin shared Wednesday with The Des Moines Register.
The Iowa Democrat, who announced last year that he won't run for a sixth term, wants to create USA Retirement Funds and require businesses to enroll their workers unless the employer already provides a pension.
Employers wouldn't have to contribute any money unless they wanted to, but they would handle the payroll deductions. The government would have no obligation for contributions to the privately run plans. And employees could choose to opt out.
Harkin's proposal is one pitch in what is shaping up to be a major debate over retirement savings. President Barack Obama introduced his MyRA plan in his State of the Union address, and other federal lawmakers intend to craft their own ideas. The legislation would have to pass a sharply divided Congress before getting to the president's desk.
Harkin said his plan would complement the president's but would be more comprehensive because Obama "has limited tools."
“A wide body of research indicates that saving automatically via a payroll deduction enables more working Americans to prepare for retirement.”
— Diane Oakley, National Institute on Retirement Security
With the USA Retirement Funds, the government wouldn't guarantee the money. But low-income workers would be eligible for a "refundable savers credit" that would match contributions with a direct deposit to their savings fund of up to $2,000 a year, a summary of the plan says.
Workers won't be forced to participate, the plan says. But Harkin believes that if the system is "opt-out instead of opt-in, millions more people will begin to save."
"If it's voluntary, it's hard to argue with," said Mike Ralston, president of the Iowa Association of Business and Industry. "Another option is a positive."
Harkin will argue that his idea is good for business, partly because present plans require employers to be responsible and liable for management of retirement funds they offer. USA Retirement Funds would relieve employers of that burden; the funds would be managed by an independent board of trustees, the summary says.
But one economist who studies retirement reform isn't cheering.
"I don't want to be too negative about what appears to be a well-intentioned attempt to improve the retirement security for more Americans, but it's important to note that this is an overly complex solution to a problem which has a very simple solution," said Duncan Black, a liberal political blogger with a doctorate in economics from Brown University.
Black said the retirement income crisis is real: As the burden of retirement saving and planning has shifted onto individuals, the era of the golden retirement has disappeared for most private-sector workers.
"The 401(k) experiment has been a failure," said Black, a former economics professor at the University of California-Irvine.
If people haven't been accumulating enough money in 401(k) plans or Individual Retirement Accounts (IRAs), a slightly better and more inclusive 401(k) system like USA Retirement Funds is unlikely to succeed either, he said.
More than that, the retirement crisis is looming now. At best, the USA Retirement Funds would improve the retirement outlook for current 20-somethings, Black said.
Black thinks a great way to ensure that people of retirement age have adequate income is Social Security.
"It's cheap to administer, and with slightly more generous benefits, it would be the simplest way to achieve the goal of retirement security for all," he said.
Harkin also wants to increase Social Security benefits with his Strengthening Social Security Act of 2013, but in the current political climate, beefing up entitlement programs is likely off the table.
Principal Financial Group, one of the leading pension administrators in the world, applauded several provisions in Harkin's bill but emphasized its preference for expanding the current employer-based retirement system.
“We believe the best way to expand retirement security for Americans is expanding access to voluntary work-site retirement plans.”
— Greg Burrows, Principal Financial Group
Greg Burrows, senior vice president of retirement and investor services, noted that employer-sponsored 401(k) plans and similar offerings have helped millions of workers save trillions of dollars.
"We believe the best way to expand retirement security for Americans is expanding access to voluntary work-site retirement plans and encouraging plan designs that increase participation and savings for future retirees," he said.
Gretchen Tegeler, executive director of the Taxpayers Association of Central Iowa, said it's good to see attention on the issue of retirement security.
"But perhaps something simpler, less pervasive and better meshed with the current industry configuration should be tried first," she said.
Tegeler said this proposal appears to mandate a kind of quasi-defined benefit structure: In a severe economic downturn, benefits could be decreased by as much as 5% per year, but that same limit doesn't apply for benefit increases when a fund is doing better than expected.
"This is precisely what has led to problems with public pension plans — over-promising when times are good, and no adjustment of benefits when losses occur," said Tegeler, who was Iowa Gov. Terry Branstad's budget director for eight years.
Another analyst called the proposal "a significant leap forward."
"A wide body of research indicates that saving automatically via a payroll deduction enables more working Americans to prepare for retirement," said Diane Oakley, executive director of the Washington-based National Institute on Retirement Security.
And the plan would offer a lifetime benefit that won't run out while allowing people to pool their resources and share risk, Oakley said.
Save about 10 times your current income before you retire; that's the general rule of thumb.(Photo: Liliya Drifan, Getty Images)
Basics about Harkin's plan
• The problem.45% of working-age households have no assets in retirement accounts, according to data from the Federal Reserve Bank. And others with retirement plans haven't saved enough.
• One solution. Privately run USA Retirement Funds would give people the opportunity "to earn a safe and secure pension benefit for life," said Sen. Tom Harkin, D-Iowa.
• How it would work. Every business would be required to enroll their workers automatically in a USA Retirement Fund, a privately run retirement plan.
• Exceptions. Employers who already offer a defined benefit pension or a 401(k) retirement plan with automatic enrollment and a lifetime income option would be exempt.
• Contribution rate. Workers would contribute 6% a year but could choose to raise, lower or stop their contributions.
• Maximum limits. Workers could chip in up to $10,000 a year pretax, and employers also would be able to contribute up to $5,000 per year for each employee, provided the contributions are made uniformly.
• Benefits. Participants would earn a benefit paid out over the course of their retirement with survivor benefits and spousal protections — like a traditional pension. The amount of a person's monthly benefit would be determined based on the total amount of contributions made by or on behalf of the participant plus investment performance over time.
How much do you need?
When sizing up one's retirement nest egg, a very general rule of thumb is to have 10 times the amount of annual income before retirement.
So someone making $50,000 would need $500,000 in combination with Social Security to adequately fund retirement, said Terri Hale, a spokeswoman at Principal Financial Group, which is one of the leading pension administrators in the world.
A good way to get caught up is to be sure you are saving enough to get the matching contribution from your employer, Hale said.
Those who are older than 50 years can take advantage of catch-up contributions, which allow them to defer an additional $5,500 into their work-site retirement plan.