As it becomes clearer just how seriously the financial crisis and recession have hurt Americans' retirement savings, the issue is taking on new prominence in Washington. The result: a growing number of likely legislative proposals that would make it easier or more attractive for individuals to sock money away for their golden years.
Many of the concepts have circulated in Washington for years, but the dramatic decline of the stock market and other measures of household wealth over the past year and beyond have added new urgency to these initiatives. In 2008 alone Americans saw their net worth fall by 18%, or about $11 trillion, the Federal Reserve reported on Mar. 12. Part of that decline has been in workers' 401(k) plans, which lost some $600 billion, also about 18%, in 2008, according to the Employee Benefit Research Institute—and that figure is conservative, since it counts new retirement-plan contributions as offsetting market losses. Fidelity has said its 401(k) accounts fell 27% on average last year.
Little in the way of actual legislation has been introduced—it's still early in the legislative calendar, and both Congress and the Administration have been preoccupied with the broader issues of financial crisis and recession. Still, the ideas under discussion on Capitol Hill offer a sense of the changes workers could see down the road.
The most concrete proposals out there are two items in the Obama Administration's budget proposal that have garnered broad support among Democrats in the past. Neither one has been introduced as legislation yet.
Benefits for Lower Earners
The first expands the "savers' credit," a tax break designed to spur more retirement savings by middle- and lower-income Americans with a tax credit of 10% to 50% (for the lowest earners) of the amount they save. Currently, couples earning $55,500 a year or less are eligible. The proposal would raise that cutoff to $65,000, and it would make the tax credit refundable, so even workers who earn too little to owe income taxes could benefit. It would also raise the credit to 50% of contributions for all recipients.
The budget's second retirement provision would require most employers to let workers contribute to an Individual Retirement Account through automatic payroll deductions—a concept shaped in part by Peter Orszag, now Obama's budget chief. Companies in business under two years or with fewer than 10 employees would be exempt; so would employers that already offer retirement plans.
Both ideas have gained the support of the AARP. The American Benefits Council, an employers' lobby, supports the broad goal of expanding savings but says it has concerns about the specific proposals. Competing legislation is likely to surface in coming months.
Default Set of Funds
Several other proposals emerging on Capitol Hill have similarities to the Obama proposals. Some variations on the automatic-IRA proposal, for example, would establish a default set of investment funds akin to the choices government workers have under the federal retirement-savings program.
Another concept, sometimes referred to as an automatic 401(k), would require employer matching contributions, or establish a government-funded match for lower-income workers. Senators Edward M. Kennedy (D-Mass.) and Jeff Sessions (R-Ala.) came close to hammering out a bill along those lines during the last session, and a similar bill may surface again this year.
Employers generally support the goal of getting workers to save more but tend to resist proposals requiring a set level of matching contributions. And they warn that major new mandatory savings programs could make employers less likely to sponsor 401(k) plans and other existing retirement benefits. "We don't want to just shift savings, we want to generate new savings," says Lynn Dudley, a vice-president of retirement policy for the American Benefits Council, which represents employers.
Retiree advocates, by contrast, argue the U.S. retirement system leaves workers too much at the mercy of volatile financial markets, particularly as they near retirement, and does little for those who don't earn enough to save much toward retirement.
A Different World
Tweaks to 401(k) plans and new IRA proposals are "still about individual risk and individual contributions," says Karen Friedman, policy director of the Pension Rights Center, a retirement advocacy group. "It's a different world now. We can't just have the same incremental solutions to the problems we have."
One outcome could be the addition of guaranteed benefit options under automatic-IRA or similar programs, as an alternative to market-dependent mutual funds, Capitol Hill staffers say.
But calls are also growing to supplement Social Security with something less risky than a 401(k) and more available to lower-income workers. Representative George Miller (D-Calif.), chairman of the House Committee on Education & Labor, has held three hearings on retirement security since last fall and has said he is considering options to expand benefits beyond existing 401(k) plans.
One proposal that could form the basis for future legislation comes from the Economic Policy Institute, a generally liberal think tank, and would establish "guaranteed retirement accounts" to hold mandatory contributions from employees and employers that lack equivalent workplace benefits. A $600 tax credit—refundable to low-income workers who pay little or no taxes—would help offset the expense, and the government would guarantee a 3% annual return plus inflation. While employees would have individual accounts composed of their own and their employers' contributions, the funds would be managed centrally, to try to take advantage of lower fees and the better investment returns that big pension funds generally receive compared with most individual investors. (More details on the EPI's proposal are available at http://www.sharedprosperity.org/bp204.html)
While the ultimate shape of any change Washington makes to the way Americans save for retirement remains unclear, it's a safe bet that investors—including the huge baby boomer cohort now in, or about to enter, its golden years—will be watching the developments carefully.