Can Washington Craft a Better Retirement Plan?
Senator Tom Harkin is fond of describing the U.S. system of retirement savings as a wobbly three-legged stool. Now, as the Iowa Democrat prepares to exit the Senate, he’s attempting to hammer on a fourth support.
Under a bill Harkin introduced on Jan. 30, the traditional three legs—pensions, personal savings, and Social Security—would be supplemented by a new kind of investment vehicle, called USA Retirement Funds. With no Republican support at present, the legislation has scant hope of passing. Even so, the approach may be a useful starting point for debate.
“When I started out in Congress, one of every two Americans had a pension,” says Harkin, who was elected to the House in 1974 and now chairs the Senate Committee on Health, Education, Labor, and Pensions. “Today it’s one out of five and getting worse.” Employer-sponsored 401(k) accounts aren’t making up the gap. Half of Americans have less than $10,000 in retirement accounts, he says.
Harkin’s funds are designed as a hybrid, offering some features of defined-contribution plans, such as 401(k)s, while delivering the pooled risk of defined-benefit plans. Under the bill, all businesses with more than 10 employees would be required to enroll them in either a 401(k) that offers a lifetime annuity or the new USA Retirement Funds. Employers’ responsibilities would end there. The funds would be pooled and managed privately, with oversight from the Department of Labor.
Pretax contributions would be set automatically at 6 percent of each paycheck, although workers would be allowed to raise, lower, or stop them altogether. Unlike with 401(k)s and individual retirement accounts, savers would face no “longevity risk”—the term for running out of money before you die. A monthly benefit would be guaranteed for life, with the dollar amount determined by how much an individual contributed while working.
Assets in USA Retirement Funds would be pooled and invested in a mix of stocks, bonds, and other securities. Plan administrators would be authorized to adjust payouts depending on market performance. “If the market goes down, everybody takes a haircut, but nobody takes a big one,” Harkin, 74, says. “And if the market goes up, you’ll get a little bit more.”
Harkin’s bill “appears to be one of the best approaches that I’ve seen,” says Helaine Olen, author of Pound Foolish, a 2012 book about personal finance. “I like that it takes, to some extent, the money management part away from the individual. The vast majority of us really do everything wrong when it comes to investments. We buy when we should sell; we sell when we should buy.”
Conservatives have been less favorable. “Harkin starts a really good discussion,” says Romina Boccia, a senior policy analyst at the Heritage Foundation. “The problem is it’s way too complex, trying to combine defined-contribution features with defined-benefit features.” She says she worries that if the plans become underfunded, because of inaccurate economic predictions or other reasons, the government could face pressure to prop them up at taxpayer expense.
Harkin announced in January 2013 that he will retire at the end of his term, in early 2015. He acknowledges that the likelihood of getting his bill through a gridlocked Congress and signed into law is not high; he holds out hope that it might be taken up during the lame-duck session after the November midterm elections, when “hopefully all this toxic nonsense will go away.” In an interview with the Washington Post last summer, Senator Mike Enzi (R-Wyo.) indicated that he might co-sponsor the legislation; he declined to do so amid a primary challenge from Liz Cheney, daughter of former Vice President Dick Cheney. A spokesperson for Enzi declined to comment.
Still, the legislation’s odds are not zero. “Very little [legislation] has any chance of passing, but this has a better chance than most,” says David Madland, managing director for economic policy at the Democratic-leaning Center for American Progress. “The solution is consistent with both parties’ values.”
Related efforts are being considered in more than a half-dozen states. Harkin has also introduced a separate Senate bill that would expand Social Security, in part by extending payroll taxes to the current cap of $113,700. “If trends continue, we will have many more people living closer to poverty in retirement,” Madland says. “That will lead to things that neither conservatives nor progressives like: more hardship and more drain on the social safety nets.”