Averting a retirement crisis in the U.S. requires fresh thinking, not to mention political will. Ideas range from a restructuring of Social Security to beefing up employer-sponsored retirement plans to creating a new tier of mandated retirement accounts. Vanguard Group founder Jack Bogle, Senior Adviser to the Treasury Secretary Mark Iwry, former SEC Commissioner Harvey Pitt and others share their thoughts on what needs to be done.
Set Up a 'Federal Retirement Board': Jack Bogle, Founder, Vanguard Group
Bogle is founder of the Vanguard Group and president of Vanguard's Financial Markets Research Center.
Retirement security for at least half of our citizens is going to come from Social Security only. They can't possibly save enough of their meager incomes. Bringing up a family is expensive.
So, whether we like it or not, Social Security is where we've got to begin. The best way to improve the security of Social Security is to do some simple things to fix the system. A good example would be raising the retirement age. Our lives have gotten much, much longer since the Social Security Act was passed in the early 1930s. Secondly, do a small adjustment to the cost-of-living adjustment. Finally, there could be some limited means-testing on the receipt of Social Security at the highest levels of income and wealth.
Now the private system is really pretty easy to fix but, again, there's no will to do it. The solution is entry requirements for offering funds in the defined-contribution [401(k)] field. We need some kind of a gatekeeper -- let's call it a Federal Retirement Board -- that should and would focus on index funds. I know a lot of people don't want that much government, but the way things are going now, we need something.
As investors wake up to the shoddy deal they get, they're going to move to a place where they get the market return.
I'd like to say we ought to require index funds, but I don't think the world is ready to do that. As investors wake up to the shoddy deal they get, they're going to move to a place where they get the market return. Investors aren't going to be stupid forever. Since time is money in this business, let's give them a much better shot at doing the right thing now.
'Create a Stronger, More Powerful 401(k)': Mark Iwry, Senior Adviser to the Treasury Secretary
Iwry is senior adviser to the U.S. Secretary of the Treasury and deputy assistant secretary for retirement and health policy.
Tens of millions of working families in this country have no access to an easy, convenient way to save on a tax-favored basis. They are not eligible for employer-sponsored programs, such as pensions or 401(k) retirement plans. The President has proposed a major expansion of retirement savings coverage. The proposal for "automatic IRAs" would extend the power of automatic enrollment to those employees who don't have access to a 401(k), by letting them use their employer's payroll system as a conduit to channel their savings through automatic enrollment into individual retirement accounts (IRAs).
Most of us will probably need to contribute 10 percent or more of our pay every year.
We can also improve the current system. One key step is to create a stronger, more powerful 401(k) by automatically enrolling newly hired employees plus existing employees who are not participating. (Employees are always free to opt out.) You can raise the initial default contribution to 5 or 6 percent of salaries, and it can escalate so that the percentage automatically goes up every year.
Not everyone can make double-digit contributions to a retirement account. But we can help people understand that most of us will probably need to contribute 10 percent or more of our pay each year -- in addition to employer matching contributions -- in order to achieve adequate retirement savings.
End the 'Governmental Ponzi Scheme': Harvey Pitt, former SEC Commissioner
Pitt, chief executive officer of consulting firm Kalorama Partners, served as chairman of the Securities and Exchange Commission under President George W. Bush from 2001 to 2003.
People defer planning for retirement security. If you ask them, “Are you immortal?” intellectually they would say, “Of course not.” But by not planning for their retirement, emotionally they’re saying, “Maybe I am immortal.” The first step is to educate people about why it’s crucial to take steps to protect themselves. It’s a problem that kids in elementary school and middle school are not constantly being educated about the need to self-fund their own retirement.
Many people rely on a governmental promise -- we call it Social Security. The truth is that Social Security is insufficient, and there are significant questions about whether everyone will be able to receive Social Security.
Give people an option to be bought out from their Social Security entitlements at an earlier time on a tax-free basis.
One thing the government can do is try to winnow out as many people from the current system as it conceivably can. Give people an option to be bought out from their Social Security entitlements at an earlier time on a tax-free basis; that would give them the right to reinvest the proceeds and self-direct what happens with their retirement funds. There are people opposed to that because they take a more paternalistic view. But that’s why the first aspect of my solution is: There has to be education. People have to understand what the risks are.
Although they could be bought out, people near the end of their gainful employment should be able to receive the full benefits they’ve been promised. For people who do not really have much of an investment in the Social Security system, the need is to shut it down. Replace it with a viable alternative that doesn’t strain the government’s ability and resources. Money of new or relatively recent participants could be funneled into private-sector accounts.
Part of the difficulty is, because you need the funds of younger people to finance the obligations to the older ones, you’ve effectively created a governmental Ponzi scheme. People who work their entire lives can’t suddenly be told: “We’re sorry, we can’t live up to our promise.” But we don’t have to perpetuate the difficulties. We can substitute Social Security with something that gives people a retirement benefit but takes the burden and pressure off the government.
'The Nation Requires a New, Mandated Tier of Retirement Accounts': Alicia Munnell, Director, Center for Retirement Research
Munnell is director of the Center for Retirement Research at Boston College and Peter F. Drucker Professor of Management Sciences at Boston College's Carroll School of Management.
Improving Americans’ retirement security requires a three-pronged approach: work longer, preserve Social Security and save more.
The most potent lever would entail people working a few years longer –- until their late 60s, on average. Monthly benefits received at age 70 are 76 percent higher than those received at age 62.
Those extra working years also allow workers to avoid tapping their 401(k)s, earn additional interest on those balances and make further contributions. Finally, additional years of work shorten the period over which households must stretch their retirement nest eggs.
In addition to working longer, we need to maintain Social Security as the base of support. With the extension of the retirement age already taking place, the replacement rate -- benefits as a percent of preretirement earnings -- for the average earner at 65 will decline to 36 percent. Once the trust fund is exhausted in the early 2030s, the program will be able to pay only three-quarters of that amount, a level not seen since the 1950s. Clearly the program needs an infusion of revenue.
The 401(k) system needs to be fixed so it can return to its original purpose of providing supplementary income to middle and high earners.
Finally, everyone will need retirement savings in addition to Social Security. This need cannot be met by a voluntary employer-based system. The nation requires a new, mandatory tier of retirement accounts -- initiated by the federal government but managed by the private sector -- that will replace about 20 percent of preretirement earnings.
On top of this new tier, the 401(k) system needs to be fixed so it can return to its original purpose of providing supplementary income to middle and high earners. Fixes include making auto-enrollment (and auto-escalation of default contribution rates) mandatory, clamping down on leakages, controlling fees and facilitating the drawdown of assets.
'Require a True Fiduciary Standard': Harold Evensky, Evensky & Katz Wealth Management
Evensky is a certified financial planner and president of Evensky & Katz Wealth Management.
Require anyone providing investment advice to be held to a true fiduciary standard. As Phyllis Borzi at the Department of Labor points out, there will be trillions of dollars rolling out of pensions, where the funds are professionally managed by fiduciaries, to IRAs, where the primary legal relationship is “caveat emptor.”
Planning well in advance of retirement is the only way many may avoid financial disaster.
Also, based on the success of professors Shlomo Benartzi and Russell Fuller’s behavioral finance “Save More Tomorrow” structure, mandate that 401(k) plans move from “Opt-In” to “Opt-Out” along with automatic contribution increases. And recognize the reality of Pascal’s Wager. It’s not just the probability that matters but also the consequences. It’s easy to say, “The chance I’ll live to 90 is slim, so I figure I’ll only need to plan to 85,” and ignore the consequences of being wrong -- i.e., alive at 86 with no money.
Finally, educate the public so people recognize that the three-legged stool of Social Security, pensions and personal savings is morphing into one-and-a-half legs -- some Social Security and your money. So planning well in advance of retirement is the only way many may avoid financial disaster.
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