As traditional pensions are declining and individuals are increasingly responsible for planning and managing their own retirement savings accounts, the Federal government should introduce and strengthen policies aimed at ensuring that Americans have adequate retirement incomes, a special report to Congress released by the Government Accountability Office (GAO) recommended.

The report, “The Nation’s Retirement System: A Comprehensive Re-evaluation Is Needed to Better Promote Retirement Security,” was published in October 2017. Its findings were drawn from prior work and the research of others, as well as insights from a panel of retirement experts on how to better ensure a secure and adequate retirement for all Americans.

The authors noted that over the past 40 years, changes have occurred to the nation’s current retirement system, which is made up of three main pillars: Social Security, employer-sponsored pensions or retirement savings plans, and individual savings. They warned that many of these changes have made it harder for individuals to plan for and effectively manage retirement.

The authors pointed out that Social Security’s retirement program is projected to be unable to pay full retirement benefits beginning in 2035, which could cause future benefits to be reduced or delayed. They described this situation as highly problematic given that many Americans have come to rely almost exclusively on these benefits in retirement: in 2015, 34% of households aged 65 or older received 90% or more of their income from Social Security.

Meanwhile, researchers observed, outside of employer-sponsored plans, individuals’ retirement savings are often low or nonexistent. According to the report, the personal savings rate in the United States trended steeply downward between 1975 and 2005, from 13.9% to 2.2% of disposable income; and has since recovered somewhat, but has not yet reached its pre-1975 level.

Turning to private employer-sponsored plans, the authors noted that there has been a marked shift away from employers offering traditional defined benefit (DB) pension plans to defined contribution (DC) plans, such as 401(k)s, as the primary type of retirement plan, and that this shift has increased the risks and responsibilities for individuals in planning and managing their retirement. They also cautioned that many DB plans are at risk because the Pension Benefit Guaranty Corporation (PBGC), which insures most DB plans, has substantial liabilities, especially in its multiemployer program.

In addition, researchers pointed out that many individuals still lack access to an employer-sponsored plan, or are not saving enough in these plans to provide an adequate retirement. They observed that while around 66% of private-sector workers were offered coverage in an employer-sponsored plan in 2016, participation in such plans varies greatly by sector and by income. For example, they noted, in 2016, 89% of workers in information services had access to an employer-sponsored plan, compared with 32% of workers in the leisure and hospitality industry. They also cited an analysis of 2012 data showing that 84% of workers in the highest, but only 40% of workers in the lowest income quartile had access to an employer-sponsored plan.

The researchers emphasized that DC plan participants face other barriers to saving, such as high retirement plan fees; difficulties navigating complex financial decisions to plan for and manage their accounts; and a substantial risk of losing all or a portion of their savings when other needs arise or their life circumstances change, such as when leaving an employer mid-career.

Drawing on the input of the expert panel and previous research, the authors identified five policy goals for a reformed U.S. retirement system: promoting universal access to a retirement savings vehicle, ensuring greater retirement income adequacy, improving options for the spend-down phase of retirement, reducing complexity and risk for both participants and employers, and stabilizing fiscal exposure to the Federal government.

From Benefit Trends Newsletter, Volume 60, Issue 11

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