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.