U.S. Senate Subcommittee on Social Security, Pensions, and Family Policy
Ghilarducci presented the following testimony before the US Senate Committee on Finance Subcommittee on Social Security, Pensions and Family Policy on May 21, 2014. Watch her testimony here and read it here.
Summary
Independent experts agree that most Americans will not have enough retirement income to maintain their standard of living into old age. They agree that the next generation will do worse than their parents and grandparents; that more middle and lower income elderly will look for work to make ends meet; and that Social Security will become an even more important source of income to elderly households. The individual-directed, commercial, voluntary and tax subsidized employer system has not and will not become an important source of income for most older Americans. American workers need a tier of advanced-funded retirement accounts that have many features of the Social Security system. Americans need a mandatory, universal, advanced funded retirement account that is professionally managed, is appropriately tax-subsidized and pays out annuities.
The lobbying organization for the mutual fund companies, the Investment Company Institute, ICI claim that despite pessimistic research the ICI finds that retirees are doing better than their previous generations and that more retirees receive more income from private sector retirement plans and that $23 trillion earmarked for retirement are at record levels. They also claim government statistics undercount the income retirees receive from IRAs.
Current retirees are doing better than previous generations, we can’t overlook our success, but baby boomers will have less security than their parents and grandparents because they have more debt; need to look for work at advanced ages; have less secure retirement asserts; and the assets are skewed toward the very highest income retirees. Though IRA assets are growing the system is irrelevant for most people; the top 20% of baby boomers own 72% of all retirement assets.
The current system of self directed, voluntary, commercial accounts subsidized by tax deductions -- not tax credits -- that allow preretirement withdrawals is stacked against most workers for 4 major reasons:
1Middle income and below are more likely rationally take loans from their 401(k) or withdraw monies from their 401 (k) or IRA. The federal government collected 37% more from early withdrawals than it did in 2003. Low income workers early withdraw at twice the rate high income IRA and 401(k) holders do. Younger workers cash-out rate more. 40% of workers aged 20-39 years old cash out to a large loss -- a 30-year-old who cashes out a $16,000 account will be losing an estimated $471 a month at age 67.
Tax breaks are higher for high earners so middle and high income workers saving the maximum are treated differently. The high earner gets a higher after tax rate of return.
Middle and below income savers rationally have more conservative portfolios which earn less;
Middle income and below savers pay higher fees proportionately because they don’t receive the best advice and because their accounts are smaller;
This means the wealthiest savers receive a higher rate of return just because of the structure of the system. The built-in increase in the net of tax and fees rate of return after just a few years yields huge gaps and even the same level of an account, by a minimum 15% difference.
The government system should help people in like situations the same and not make wealth distributions more regressive. All workers need a supplemental retirement plan that invests their savings efficiently with low costs, earns a secure and sufficient rate of return, and preserves savings for retirement. Therefore, the policy challenge is to expand access to individual account- based retirement plans and to address the critical failures in the existing system by making a new retirement savings vehicle available that meets three key criteria for retirement income security:
Helps workers make adequate retirement account contributions and prevents early withdrawals.
Provides low-cost, quality investment vehicles that are professionally managed and helps shield individual workers from investment and market risks.
Provides a lifetime guaranteed stream of income at retirement.
Creating a nationwide, individual retirement plan that incorporates the goals of adequate contributions, safe and appropriate investments, and lifetime income, would efficiently and practicallysolvetheupcomingretirementcrisis.Butifthenation’spolicymakerswon’tact,each state can tailor a State Guaranteed Retirement Account plan—which meets all of the above criteria for an efficient and adequate retirement savings plan—to meet their unique needs and to secure retirement income for each state’s workforce. 10 states are well on their way to creating such a system,