Senator Harkin’s new report, “The Retirement Crisis and a Plan to Solve It,” was released on July 27, 2012, and is based on a series of hearings in the Senate HELP Committee that highlighted the state of retirement security and attempted to provide a better understanding of how the system can be improved. (Diane Oakley, the Director of the National Institute on Retirement Security (NIRS) testified at once such hearing.)
The report begins by documenting the nature and degree of the problem. As Senator Harkin puts it, the retirement crisis is real and it will have significant repercussions. “As older Americans transition out of the workforce, either voluntarily or involuntarily, many will find that they cannot afford basic living expenses,” the Senator warns. “They will be forced to make the difficult choice between putting food on the table and buying their medication,” according to Harkin’s findings. In short, “the retirement crisis will put an enormous strain on our families, our communities, and our social safety net,” he concludes.
Senator Harkin believes that his hearings have provided a clear picture of the kinds of changes needed to ensure the retirement system can work for everyone. These changes can be reduced to what he terms as four basic principles:
1. The retirement system should be universal and automatic.
2. The retirement system should give people certainty that they will have a predictable stream of retirement income that they cannot outlive.
3. Retirement is a shared responsibility among individuals, employers, and the government; it is unfair for any one player to shoulder the burden alone.
4. Retirement assets should be pooled and professionally managed.Based on these principles, Senator Harkin has suggested one possible solution with two components.
USA Retirement Funds
The first component is what he calls Universal, Secure, and Adaptable (“USA”) Retirement Funds, a new, privately-run, hybrid pension plan that incorporates many of the benefits of traditional defined benefit pensions. Each USA Retirement Fund would be overseen by a board of trustees consisting of qualified employee, retiree, and employer representatives, and its assets would be pooled and professionally managed.The USA Funds would be based on automatic payroll deductions. Employers that do not offer a workplace retirement plan with automatic enrollment and a minimum level of employer contributions would be required to automatically withhold a portion of their employees’ pay and remit such amounts to a USA Retirement Fund. Employees would be automatically enrolled at a specified contribution level, but they could increase their contributions, decrease their contributions, or opt out of automatic enrollment at any time; employers would receive a credit to help off-set any payroll withholding administrative costs. Harkin stresses that employers that already have pension plans or DC Plans with automatic enrollment and a match “would not have to change anything.”
USA Retirement Fund participants would earn a benefit paid out over the course of their retirement, with survivor benefits, based on contributions and investment performance over time. These benefits would also be completely portable. They could be reduced (or increased) if market conditions so warranted. Since Harkin believes that it is “nearly impossible” for low-wage workers to save enough for retirement, these employees would be eligible for refundable retirement savings credits that would be contributed directly to these new USA Retirement Funds.USA Retirement Funds are intended to eliminate virtually all risk to employers by spreading them across large groups of employees and retirees. Employers’ only responsibility would be to automatically enroll employees, ensure that employee contributions are processed, and make modest contributions. Harkin underscores that employers would not “guarantee” the USA Retirement Funds or have any residual responsibility to provide additional funding or make up shortfalls.
Finally, Senator Harkin offers reassurances that these new Retirement Funds are not intended to supplant DC plans, but rather to supplement them. His report makes it clear that employers could offer both a USA Retirement Fund and a DC plan for their employees.
Social Security Reform
The second component of Harkin’s proposal deals with Social Security. The Senator proposes modifying the Social Security benefit by increasing the amount of earnings covered by the first income level of the existing formula. Currently, this formula replaces 90% of a person’s first $767 of average indexed monthly income. The Senator would, over a 10 year period, increase the $767 by 15%. “Although the increase is modest,” Harkin’s report states, “it will have an especially profound effect for those in the middle and at the bottom of the income distribution for whom Social Security has become an ever greater share of their retirement income.”Senator Harkin also would change the way the Social Security Administration calculates the COLA by tying the annual adjustment to the Consumer Price Index for the Elderly (CPI-E). Currently, the CPI for all Urban Wage Earners (CPI-W) is used, but it is based on a basket of goods that Harkin believes does not adequately track the purchases of seniors. “Making this change ensures that Social Security benefits keep pace with the rising costs of essential items for seniors, including health care,” Harkin argues.
Finally, Senator Harkin would address the solvency of the trust fund by phasing out over 10 years the cap on wages subject to the payroll tax; this cap is currently $110,100. Furthermore, he would create a new replacement factor of 5% for income over the current wage cap “to ensure that people receive a benefit for every dollar they pay into the system,” he explains.
NCTR Letter of Support
Senator Harkin notes that his proposals “are intended to be a starting place” in the national debate he envisions. In his letter to Senator Harkin, Meredith Williams notes that Harkin’s framework that the Senator believes is necessary to ensure that the retirement system for the private sector can work for everyone echoes the design features that NCTR supports for the public sector. “While we may take a different approach on some aspects of a specific plan to provide for retirement security, your basic concept for rebuilding pensions is compatible with the policy positions of NCTR,” Williams assured the Senator.
Senator Harkin concludes that the retirement crisis is simply too big to ignore, and that “it is time for us to roll up our sleeves and get to work.” “We agree,” writes Williams, “and your report provides a solid basis for an evolving national discussion on how best to address this crisis.” Furthermore, the NCTR letter stresses that governmental plans’ record of success in offering protection from financial risk and providing a guaranteed stream of income for life “is worth careful study.”Harkin says that over the coming months, he plans to bring together business and labor leaders, policy experts, advocates, and his fellow lawmakers to implement necessary reforms. “Please count us in,” Williams tells the Senator. “NCTR stands ready to roll up our sleeves and work with you over the coming months on this most important undertaking.”
OutlookSenator Harkin’s report has been generally well-received to date. For example, Karen Friedman, policy director for the Pension Rights Center in Washington, is quoted in a press release as saying that “Senator Harkin’s bold report identifies the causes of the retirement crisis and proposes imaginative and realistic solutions to address the crisis.” Pensions and Investments (P&I) conducted a poll and found that of 612 respondents, 73% supported Harkin’s concept of a new private retirement system offering universal coverage through automatic payroll deductions with professional money management. Even Andrew Biggs, an economist with the American Enterprise Institute, is quoted as saying that he is “glad it is out there,” although, as he correctly points out, the devil is always in the details.
However, others were more cautious. A spokesman for the American Benefits Council (ABC), representing private sector employers and other organizations who sponsor directly or provide services to retirement, health and compensation plans covering more than 100 million Americans, is quoted in P&I as stating “We stand ready to work with Sen. Harkin and other lawmakers to improve retirement coverage and adequacy.” But the spokesman went on to also note that ABC’s first priority “is making the existing employer-sponsored system more flexible and administrable for companies competing in a challenging global economy.”
Senator Harkin does not yet have specific legislative language ready to introduce in Congress. Nor have detailed estimates of the economic impact to employers, employees or the Federal government been developed. Given that the devil is, indeed, always in the details, the future of Harkin’s specific proposal is therefore still unclear. Nevertheless, as Ms. Friedman pointed out to P&I, the proposal should create new business for financial institutions and money managers, and should therefore garner their support.When announcing his report, Senator Harkin is quoted as saying that “I am under no illusions that we're going to get anything done this year, but I want to be ready to go in with this next year.” When he does, NCTR will be there.