Retirement Saving Takes Center Stage

Retirement saving policy took center stage Tuesday on Capitol Hill and in the policy world. The Senate Finance Committee held a hearing to discuss ways to improve savings incentives and policies, and Third Way proposed one way to do so.

The Senate Finance hearing featured five witnesses from a broad array of perspectives. All agreed that the current system could be improved. Many witnesses agreed on simplifying retirement account rules, expanding the number of small businesses that offer retirement plans, and promoting the benefits of auto-enroll plans where workers are automatically enrolled in their company's retirement plan until they opt out. Beyond that recommendation, witnesses and lawmakers had serious disagreements how retirement savings should be improved.

The witnesses were:

• John Bogle, Founder and former CEO of Vanguard
• Brian Reid, Chief Economist of the Investment Company Institute
• Scott Betts, Senior Vice President of the National Benefit Services
• Brigitte Madrian, professor at the Harvard Kennedy School
• Andrew Biggs, Resident Scholar at the American Enterprise Institute

Chairman Ron Wyden (D-OR) started the hearing by noting skewed tax incentives for retirement saving. As he explained, these incentives cost the federal government $140 billion per year, yet millions of Americans do not have adequate retirement savings. He noted that some taxpayers use the tax-free accounts to accumulate multimillion dollar balances, a practice that has attracted attention in recent years. Ranking Member Orrin Hatch (R-UT) described the bipartisan history of support for retirement tax incentives and hoped that lawmakers could continue without resorting to partisan slogans.

The witnesses disagreed on the effectiveness of current tax incentives.

Betts argued that the current system of private employer plans, and 401(k) plans in particular, have been successful in providing retirement savings for American workers. Reid pushed back on efforts to reduce tax incentives, arguing that policies ostensibly targeting high earners would complicate the system and have unintended consequences if some employers eliminate their defined contribution plans entirely. Both Reid and Betts expressed concern with limiting IRA balances or further lowering contribution limits, explaining that capping the tax benefits would lead to some taxpayers being taxed both when they contribute and when they withdraw from accounts.

On the other side, Madrian argued that tax incentives are "particularly ill-suited to generating financial incentives to save" because they are difficult for the average taxpayer to understand. Furthermore, many of the benefits are delayed tax deferrals, rather than immediate incentives. Instead, she preferred expanding auto-enrollment, providing simple and low-cost retirement plans for those who don't have them through their employer, and making it harder to withdraw funds before retirement. She also emphasized simplifying tax incentives to make them more effective, particularly the Savers' credit.

At the same time Senate Finance was discussing ways to improve the system, Third Way released a report  to do just that. Their proposal looks to fill in gaps in the current system, as they note that at least 31 million full-time workers do not have access to a retirement plan, and many others have insufficient savings. The Third Way proposed a "minimum pension" similar to the minimum wage that would require employers to contribute at least 50 cents per hour to a retirement account.

^{Source: Third Way}

Employers that currently offer plans wouldn't need to change their behavior, but other employers would either have to set up their own plans or make a 50-cent-per-hour deposit into their employee's auto-IRA accounts or a new type of privately-managed "SPUR" account with government oversight. For simplicity and to minimize costs, these accounts would have limited investment options. The authors calculate that a person with a 45-year working career would accumulate $160,000 in 2013 dollars even if they contributed no additional money. To ease transition, the plan would offer a temporary tax credit to businesses totaling less than $100 billion over ten years, offset with savings elsewhere in the budget to avoid adding to the deficit.

Ensuring Americans have adequate assets in retirement requires a multifaceted approach. Tax incentives and account policies can be part of the solution, but achieving Social Security solvency is also important. Luckily, lawmakers have plenty of options.