A New Idea to Fix the Retirement-Savings Crisis

Guaranteed lifetime income is hard to find in the retirement-savings plans of most workers. Now, a prominent pension thinker is pushing for a new tier of savings accounts that could fix that

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The retirement-savings crisis in America is so acute that at least one prominent thinker on the subject is calling for a mandatory savings program above and beyond existing 401(k) and other pension plans.

“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% of preretirement earnings,” Alicia Munnell, director of the Center for Retirement Research at Boston College, told Bloomberg News.

Munnell is a former Treasury official and former member of the President’s Council of Economic Advisers. Her voice carries a lot of weight on pension matters, and her comments seem to open the door to a back-to-the-future kind of pension system.

Along with a new, additional type of savings program, Munnell wants to delay Social Security payments “a few years longer” and encourage people to stay at work to age 68 or 69 or later. She’d like to see 401(k) plans reworked so that autoenrollment and autoescalation of default contribution rates are required in every plan.

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She also wants to further limit opportunities for plan participants to cash out early — stemming what’s known as leakage, which has emerged as a serious flaw in 401(k) plans as a primary source of retirement savings. These steps, she says, would return the 401(k) “to its original purpose of providing supplementary income” as opposed to being a primary vehicle.

The eye-catcher in her proposed overhaul, though, is the new tier of mandated savings accounts. Numerous studies have shown that Americans are not saving enough for retirement. Even working longer isn’t a cure-all, Munnell suggests.

What’s needed is a new kind of account where a large enough kitty would build to replace 20% of preretirement income. This extra tier of savings along with Social Security benefits and other sources should be enough to get most people to 70% of preretirement income; that’s a level that many financial planners say is a minimum for a comfortable retirement.

How this new savings program would work is something of a mystery. Presumably, it would be incumbent on employers to make the accounts available to workers — and possibly even to fund them. Ideally, such a plan would earmark savings in this new tier for a guaranteed-lifetime-income product, like an immediate fixed annuity.

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With the dramatic shrinking of traditional defined-benefit pensions over the past 25 years, guaranteed income has surfaced as the sorest need in most retirees’ portfolios. Policymakers and plan managers have been exploring various ways to ensure an income component with moderate success. A new tier of retirement accounts that must convert to guaranteed income would advance this cause and move us one step back toward the kind of old-style pension that may have helped make your grandfather’s retirement financially secure.

43 comments
RosetteNebula
RosetteNebula

Who's going to employ all these 68 and 69 year olds when even people in their 20's with college degrees can't get a job? I ask that as a person in my 50's already feeling the crushing reality of age discrimination.

MichaelN_RS
MichaelN_RS

The landscape surrounding the whole notion of "retirement" is about to change so profoundly in the next 10-15 years, that we will need to completely rethink things. 

2 major changes are happening now and accelerating;  advances in medical sciences will result in much longer, healthier life spans (think 120+), AND technological creative-disruption will transform employment (think artificial intelligence and robotics). 

Yodan
Yodan

BrendaK00 has it right.  Congress has been raiding the SS system for decades to fund vote buying and proclaiming that the Deficit "Is'nt all that bad"  There is not any cash in the SS system.  Just US Government Treasury Bills, the ones that the Treasury cannot sell anymore because no one wants them so the Federal Reserve bank is the only buyer.  This is called a shell game.  The thing about shell games is, it is all mis-direction to take your eyes off where the money goes.  In this case, it goes to special interest groups who are pandered to by Congressmen who sell you out without a second thought so they can get re-elected, again, and again and again...  Then the Congressmen and the special interest groups call anyone who points all this out, every name in the book.. Racist, Sexist, Homophobe, Capitalist Hate-monger,  Child Molester.. The list goes on and on.  And now we have a veteran of the Welfare State bureacracy saying we just need to set up another shell game that we all are required by law to put money into.. so they can do the same thing all over again???  I say enough and NO?

BrendaK00
BrendaK00

By all means, force workers to pony up money into a government retirement scheme.  A government retirement scheme from which the pols can borrow to fund unrelated programs.  That's sure to work!

Oh, wait...

entrepreneur1989
entrepreneur1989

This article misses the real issue which is encouraging individuals to be more responsible for themselves. This is not going to be accomplished by forcing people to save more money, as saving money does not yield a sufficient return on investment to provide enough capital for people to  become independent. It's maddening enough that the government forces us to pay 6.2% of our income. If we were able to invest that 6.2% or pull from it to start a business we could all easily have control of our financial futures. Just another forced savings account will not solve a thing.  Creating laws that encourage investment and entrepreneurship will allow people to create a cash flowing business that produces income and will continue to do so and allow an individual to maintain their lifestyle.

lanbr3
lanbr3

Of course the welfare crowd doesn't have to worry about any of this when they "retire". They will continue to live in their subsidized housing with free heat and utilities and no property taxes.They will still be collecting their SSDI, SSI, food stamps, Medicaid, free cell phone, etc.

nickoftime1969
nickoftime1969

My wife and I have both worked for over 30 years and with our pensions and SS along with what we have saved will be able to retire in comfort. We have taken jobs we did not want to do but did so to make the money, we lived within our means and saved whatever we could. We paid for our son's college costs, the medical bills for 5 years of cancer treatment for me and just paid off our mortgage. It was not easy as we did without vacations and a lot of the luxuries our friends and neighbors seemed to think were mandatory. But now we are confident we can care for ourselves even if SS goes away and medicare becomes more costly. I wish everyone was as lucky and fortunate was we have been and hope that things change for the best so that all can enjoy the last years of life. God bless you all and our prayers for all.

renkinj
renkinj

What might fix this and help encourage saving is to require banks to actually give meaningful interest rates to saved money. They use this money to make huge profits through whatever investment scams they do, and now have been able to lower interest rates to vanishingly small levels. So if I save money, I lose money due to inflation and they are borrowing my money for free. Not much incentive there.

TeresaHamiltonKoch
TeresaHamiltonKoch

Excuse me, but don't we already HAVE a "forced"/mandated retirement savings plan?  I believe it is called "Social Security" - perhaps the esteemed Ms. Munnell has heard of that progam.

Here's how it works, Ms. Munnell - when a person is employed by a company, 6.2% of their income is forcibly taken from their paycheck and set aside in a retirement "account" which is "managed" by the government.  Their employer is forced to match those funds 100%.  When the person retires, that money is supposed to be there for them to live on the rest of their life.

While the government is SUPPOSED to be holding that money in an interest-accruing trust fund for each individual worker, the reality is that everything which comes in from current workers is immediately paid out to people who have already retired (I'll wait while you confirm that information, Ms. Munnell.....).  There is a name for a shell game like that, and in the private sector, people go to jail for long periods of time for knowingly cheating their clients out of their hard-earned money.

You will forgive me, Ms. Munnell, if I am not on board with your plan for what is just another government Ponzi scheme...... 

Leftcoastrocky
Leftcoastrocky

"encourage people to stay at work to age 68 or 69 or later."   And where are the jobs???


Revvys
Revvys

Oh great - a new insane way to try and force people to save money.
Here's a hot tip - right now, the reason people aren't saving much is because THEY AREN'T MAKING MUCH. I almost had my blood boil out my ears a month ago when my savings account at my bank was suddenly changed into a checking account, because I had made too many withdrawals from my account that month. I had my paycheck set up on a direct deposit line, 50% in Checking and 50% in savings. Most of the time I could leave my savings account alone, but it had been slow at my job and my hours had gone way down for the last few months, so I was making a lot of transfers from my savings.
I went to the bank to try and see if there was another type of savings account I could set up that had no such restrictions, because I couldn't ensure I wouldn't wind up in the same situation again. As it turned out, the limit on withdrawals was NOT a bank policy - it was a federal regulation to try and force people to save more. The end result being that because I couldn't reliably and regularly save my money, of which I have very little, I don't even get the chance to HAVE  a savings account.

This idea strikes me in much the same way - an idiot telling me that if I don't save my money THE WAY I'M TOLD, then I don't get to save money period. There is no profanity strong enough for my thoughts on this.

Bullfeathes
Bullfeathes

Excellent idea!  I can not think of a better idea for corruption and theft to occur.  Recently 401k management companies were found to be illegally inflating fees, Wall St. has collapsed the economy because of rampant stupidity closely coupled with greed and the IRS has instituted new policies to make identity theft and tax fraud much easier on the criminal.  Better yet, let's turn the US into a kleptauchracy (sp?) just like Russia and North Korea.

TobiasTook
TobiasTook

If the Federal Reserve wasn't holding interest rates at 0%, the retired might be able to make some money on zero-risk bonds.

TSReviewer
TSReviewer

What is needed is some kind of protection of the investment.  It doesn't matter if you save 50% of your income if a recession or stock market crash blows it away (which has happened to me twice in the last 10 years).  Why doesn't anyone talk about that?  I've been saving 15% of my income for the last 20 years and lost most of it in the last decade because of Wall Street greed.  Where can I put the money I'll be forced to save so that it'll be there when I retire?

StephanFlores
StephanFlores

The biggest flaw in this thinking is that once you put this new savings into the immediate annuity that the author recommends for additional retirement income, you are locking in the lowest all time interest rates in our lifetime. Annuities are based on interest rates and with the rates at almost zero, annuities are paying about 60% of what they were a few years ago. You will need well over $250K invested to get a paltry $1,000/mo/ payout for life.

DaveMills
DaveMills

I see where you're going here.  In order to have more for retirement, save more now.  I sense a nobel prize in economics coming.

nolasunshine926
nolasunshine926

Yeah, let's make people work longer.  Where's the research that says more people end up having to retire because their employer's do not want an aging work place.  They want the young, cheap labor.  That's great in theory but in reality, it ain't happenin' sistah!

WilliamHouse
WilliamHouse

tax the wealthy, raise wages, and shut these conservative idiots up

WayneGage
WayneGage

More mandantory nonsense from the progressives.

KelcyCole
KelcyCole

First, Social Security is already advancing to 67.   It took decades to agree to that and decades to implement.  I note that she did not say eliminate the option to begin collecting at a lower rate at age 62.

Second, mandatory savings but controlled by the private sector.  Euphemism for privatizing social security.  

I have been saving since 1980 at much higher rates that the average yet crash after crash after crash has trashed all my accounts.  They trashed my kids college accounts by over 50%..... poor planning on my part as they all went to college right after a crash it seems.  I was never savvy enough to invest in individual stocks so stuck with mutual funds but I did try to diversify over several with different goals to reduce the risk.  They all tanked each time.  Today they are worth only slightly more than what I actually put into them.  Bad luck to pick several poorly performing mutual funds or are the supposedly great growth only in actual stocks..... blue stocks.   According to the financial advisors over the years my funds should be worth over a million today.  I doubt they will be worth that much between my husband and I by the time we reach 67 in a decade.  So why should we privatize more savings?  

cautiousone
cautiousone

I think it's more simple than this, so, here's a theory. Let's implement sufficient safegaurds that discourage the bankers from stealing our retirement savings. I'm thinking folks would be much more likely to save for retirement if they had confidnece that the money wouldn't get stolen before they retire.

BenevolentObama
BenevolentObama

@Anne_R_u_Ok i picked up a tablet and cut the cost of my phone from 90 to 50 and im getting sim card with 4.5gb for tablet@TIMEBusiness

Gyrogearloose
Gyrogearloose

I'm perfectly capable of making my own plans for retirement and neither need nor want a government mandate that will limit my financial flexibility.  Keep your hands out of my pockets!!

ZoeyBrandia
ZoeyBrandia

Sounds like another social security account for the polticians to rip off.  We are ready have a mandatory savings account. It's called social security.  Now you want to add another forced savings accoount?  I think what we really need is to forced anyone who wants to run for public office or be ceo of a corporation to take a psychopath test. 

Psychopaths are on the verge of destroying the whole world.  Given the technology of  today where a psychopathic politician now has the powered to kill millions at the push of a button, it's about time that we demand that anyone who runs for office subject themselves to rigorous psychological testing.  We need leaders who have a balance of empathy and ambition.  We don't need another politician who lacks a conscience.  Let's stop blindly giving our power over to these idiots because they look good or sound good. Start paying attention to their actions. Learn all you can about personality disorders, it's now the only way  to minimize the damage these psychopaths are causing.

john.mcanally
john.mcanally

Work til 69? Absolutely no way in hell unless I choose to do so. I have been working full time since turning 21. Years worked and/or amount paid in should factor in the calculation. Working 41 years (if I can manage to retire at 62) is more than enough considering many government employees spend 20 years at work and draw half their salary for life.

martalli
martalli

I am 41 and whenever I hear these grand plans for social security, I tend to get a little steamed.  My generation already is paying into a program from which we will reap less than we put in.  Our lifespan may only average 75-80, so one less year of retirement is already knocking our retirement income down by 7-10%, and robbing some of any effective retirement at all.  I doubt my generation will be any more robust than the current generation.  Therefore, I would agree to a later retirement age only if it applies immediately.  Another advantage to an immediate increase in retirement age is that the savings would start right away.

I am suspicious of more spending in 401k's specifically, since this is often largely in the stock market.  Funneling more money into the stock market may only increase the amount of money made by fund managers.  If a trillion dollars is funneled into the stock market, then it will rise a trillion dollars, but the value of the companies may not have risen that much.  Essentially we will have inflated the market artificially, to the benefit of fund managers and no one else.

BrendaK00
BrendaK00

@nickoftime1969 I think that, in you and your wife's case, it's less about luck and fortune than about your own hard work and discipline.  Good for you!

WillBattern
WillBattern

@Bullfeathes The US is already on the list of kleptocracies. Social Security has effectively been stolen, for example. So will these new forced savings accounts, not that they'll be implemented since Social Security is already a forced savings account and the payments to those could just be raised by law if the rich want to steal more.

Neondancer
Neondancer

@TSReviewer Your mattress is one idea.  If you want reward, there will be risk.  Sometimes the risk turns around and bites you, but that's what diversification is, to spread the risk and try to avoid being bitten too badly.

TSReviewer
TSReviewer

@StephanFlores  And, since annuities are held/backed by insurance companies, what happens to your money if the company goes bust?

benjaminbaby
benjaminbaby

I would think that you should worry more about the government stealing your money more than " the bankers". ie Cyprus, mr O's recent proposal to limit retirement savings, I'd like to know just when you think " the bankers " stole your money?

benjaminbaby
benjaminbaby

401k's always offer a choice of an investment that is not correlated to the stock market, if you are uncoemfortable with the market, make that choice, it by law always exist, please don't buden us with your understanding of economics,

WillBattern
WillBattern

@martalli Bingo. And if you examine the donors to the Center for Retirement Research, you'll likely find those that benefit from an artificially inflated stock market. What better than a law forcing suckers to keep the world's biggest Ponzi scheme growing?

WillBattern
WillBattern

@benjaminbaby Even the safest of investments offered by 401k's are dependent on the US's ability to borrow ever more at low interest; i.e. they are still Ponzi schemes.