Lawmakers are debating how to protect 401(k)s from from market swings and ensure workers don't outlive their savings
The repercussions of the financial crisis will be felt for years in the retirement accounts of millions of Americans. Those who saved industriously have watched their account balances crumble, and the recession has set back that half of employees who lack even basic savings options such as 401(k)s.
In Washington, long-simmering debates over how to improve, or even replace, the country's patchwork retirement system have taken on a new urgency. Past efforts have focused largely on helping more workers get into retirement plans or increasing the amount people may stash in them and still receive tax breaks. Now, though, policymakers are looking at ways to mitigate the effects of market cycles and ensure that retirees don't outlive their savings, among other things.
Advocates for both retirees and employers say the crash highlights the flaws of the savings plans, including 401(k)s, that dominate U.S. retirement planning. As a publication of the Society of Actuaries put it: "While these plans are magnificent savings vehicles, their effectiveness in providing predictable retirement income is being questioned."
As a result, the search is on for ways to shore up traditional "defined benefit" pensions, which guarantee a stream of income from retirement until death, or to apply some of the most attractive features of pensions to savings plans like 401(k)s, including lifelong income and protection from market swings.
One approach is simply to make it more attractive to convert retirement savings into annuities. Representative Earl Pomeroy (D-N.D.) has proposed waiving taxes on up to $5,000 a year of annuity payouts from an IRA or 401(k). Supporters say it will encourage savings and annuitization, but critics say it would mostly benefit those who already have the means to save substantial sums for retirement.
Barack Obama's picks for top retirement policy jobs suggest a willingness to try fresh approaches. The nominee to head the Labor Dept.'s Employee Benefits Security Administration, George Washington University health-policy professor Phyllis C. Borzi, has warned that employees tend to tap retirement accounts for emergencies or borrow from them to pay medical or other expenses, a move that can erode savings. J. Mark Iwry, a former Clinton Administration tax official named deputy assistant Treasury Secretary for retirement and health policy, has studied ways to encourage retirees to receive their savings over time, instead of as a lump sum that soon can disappear. One option: Have part of a worker's contribution automatically go toward an annuity that would pay a fixed income at retirement. Another would make it easier for employees to buy relatively inexpensive "longevity insurance" to prevent depletion of their savings.
For now, Obama's budget proposes expanding a tax credit for middle- and lower-income Americans who save for retirement. In part that would happen by raising eligibility to couples earning $65,000 or less, from $55,000, and requiring most companies without other retirement plans to let workers contribute to an IRA via paycheck withholding.
At the same time, employers are pushing lawmakers for relief from rules requiring them to make up for investment losses by putting more cash into traditional pensions, which benefit some 21 million workers in the private sector. Key Democrats have been receptive. But employer and retiree advocates say lawmakers may prevent businesses from reducing pension benefits for several years, and might not offer relief to companies that have stopped workers from accruing new pension benefits in their plans.
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