As appeared in Morning Consult, September 10, 2018
Over the past two decades, many Americans have faced two types of retirement challenges. The most obvious one has been a “savings” crisis, where many Americans are under-saving for their retirement.
The second but equally important challenge has been a retirement “income” crisis. Too many hard-working Americans who have saved for retirement don’t realize that they are unprotected, with no source of guaranteed lifetime income other than Social Security.
In many ways this dilemma has been triggered by the shifting burden of retirement planning from companies to individual workers. Pensions have virtually disappeared, leaving a mere 15 percent of private sector workers who have pensions today.
They’ve been replaced almost entirely by popular 401(k)s and similar plans. For those who are using these plans, the retirement system is working quite well. Sixty-five percent of U.S. households are on track or nearly on track to be financially secure. But our system could use an upgrade to ensure as much access to retirement products for as many people as possible.
Consider the following:
There are 16 million independent contractors in the gig economy. Many of these independent contractors work for small employers – small employers who often lack the resources to offer retirement plans to their employees on their own. Two-thirds of millennials either have no employer-sponsored retirement plan or don’t participate in their employer’s plan, according to Pew Charitable Trusts.
This reality may not be for an employee’s or employer’s lack of trying. As it stands, many small employers are blocked from offering retirement plans like 401(k)s to their workers.
That’s likely to change thanks to a few actions on the horizon. An executive order from President Donald Trump issued over Labor Day weekend will require the Labor and Treasury departments to investigate those rules. House Ways and Means Committee Chairman Kevin Brady signaled he plans to include retirement security provisions in his upcoming Tax Reform 2.0 package.
And the bipartisan Retirement Enhancement and Savings Act is gaining steam.
The timing couldn’t be better for action. The Employee Benefit Research Institute reports that only 17 percent of workers are very confident in their ability to live comfortably in retirement. Moreover, 10,000 Baby Boomers are reaching age 65 every day and many are still building their retirement savings.
RESA provides solutions to the concerns of millions of Americans. In fact, it represents the most significant and widely-supported retirement security legislation since Congress passed the Pension Protection Act in 2006.
A key provision tackles the retirement income challenge. It does this by addressing concerns in the employer community – especially among mid-size companies and established small businesses – about compliance with annuity provider selection rules. These concerns have thwarted annuities’ wider use in retirement plans. Annuities are the only financial product in the marketplace that can guarantee lifetime income. They can act like those old fashioned “defined benefit” pension plan in providing a paycheck for life to retirees. RESA clarifies the current annuity provider selection rules, which should help fuel their use. Only 9 percent of plans currently use annuities, according to a study by the Society for Human Resource Management.
RESA also contains a provision reflecting Trump’s executive order. It encourages small employers to join together to take advantage of economies of scale to offer workplace plans.
Employer-sponsored plans have become a vital link to Americans’ financial security in retirement. Finding new ways to create retirement plans is critical.
RESA also addresses another important part of retirement security: consumer financial education. Federal workers already have access to helpful features, like illustrations that show exactly how retirement savings translates into monthly income. RESA would extend this important information to all private-sector workers.
RESA would go a long way toward helping Americans plan and save for the future. It’s just smart public policy.