Our Savings Crisis Must Be Solved
What should Congress do to ensure private retirement security?
>We have a savings crisis in this country. We aren’t saving enough as individuals, and we aren’t saving enough as a society. A little more than a decade ago, the personal savings as a percentage of disposable income was nearly 9 percent. Our personal savings rate went negative in 2005, almost reaching negative 2 percent in the third quarter of the year.
Many Americans worry about saving for retirement, but few actually take the steps they need to secure their own future. According to a recent survey, 61 percent of Americans age 55 or older have saved less than $50,000 for their retirement, while 39 percent have saved less than $25,000. To maintain a standard of living that is close to what we have in our working lives, the conventional wisdom is that we need at least 60 percent of our working income. We are simply not getting the job done.
Even as we fail to prepare for the future individually, we also fail to prepare as a society. Our budget deficit has risen dramatically over the past six years — including the three largest single-year debts in our nation’s history — and we have been borrowing money to pay for tax cuts. Our national savings rate fell below 1 percent in 2005. We have to find a way to strengthen Social Security, while we find new ways to supplement that essential program with private savings.
In 2001, then-Rep. Rob Portman (R-Ohio) and I saw our legislation to help workers save for retirement signed into law. “Portman-Cardin” increased the limits on annual contributions to Individual Retirement Accounts and 401(k)s. It included a “saver’s credit,” a targeted tax credit for low- and middle-income savers who contributed to a retirement savings plan. It also provided new portability rules that will allow workers who change jobs to take their retirement savings with them, and it offered a “catch-up” contribution to workers over age 50 to allow them to save more for retirement. The bill provided new incentives for small businesses to create and maintain a qualified retirement plan for their workers.
Last year, Congress took further steps to bolster individual retirement savings by enacting the Pension Protection Act. I was encouraged by the extent to which the defined contribution proposals in this bill, most notably permanence of the Portman-Cardin retirement provisions, reflected bipartisan consensus. Retirement policy should be predictable, and permanence of these popular and widely used provisions is essential to provide Americans stability in their savings system. In particular, the saver’s credit has made a difference to more than 5 million people in both 2002 and 2003, and yet was set to expire five years earlier than the rest of the pension provisions. I would like to see the credit reach even more Americans by becoming refundable.
Another important aspect of the Pension Protection Act is its inclusion of Portman-Cardin provisions encouraging automatic enrollment. One way to address the savings gap is by making saving the default policy. Automatic enrollment does this — it ensures that people will save, unless they actively opt not to do so. Automatic enrollment enjoys broad-based, bipartisan support as a way to create new savings by making saving the default option in defined contribution plans such as 401(k)s.
The combined effects of these important measures should help increase the American savings rate, but there is much more to do. We have found that one of the most effective ways to encourage savings is to make the whole process as easy to administer as possible.
We know that defined benefit plans are more likely to provide professional, excellent investment strategies. The most popular policy ideas in the defined contribution area make defined contribution plans more like defined benefit plans — by providing automatic enrollment and automatic investment. Moving toward greater individual risk is not the way to increase American savings.
There are four major ways to increase savings. First, we must ensure that every American has access to an employer-sponsored pension plan. In 2005, only 42 percent of workers, or around 65 million of the 151 million total American workers, participated in employer-sponsored retirement plans. This problem is particularly acute for people who work for small businesses. In a 2003 study, only 28 percent of full-time workers in small businesses participated in a retirement plan.
Second, we must give Americans greater, more effective information. Congress can help workers seek out useful information by providing pre-tax savings for independent financial advice for employees.
In an era when Americans are living longer, we need to rethink the age at which we require withdrawals from retirement plans. I support an increase in the age for minimum required distribution and an exemption for modest savings accounts from these onerous rules. The current law was adopted in 1962, at a time when life expectancy was 70.1 years. Today, life expectancy for Americans has increased to 77.6 years.
Finally, federal retirement savings policy must encourage annuitization to protect the long-term security of retirement assets during retirement. There has been an alarming increase in lump-sum distributions of retirement savings. To ensure that people do not outlive their savings, we need to encourage Americans to take annuitant retirement. By offering incentives for taking retirement savings as an annuity, we can provide more Americans with a guaranteed income throughout retirement.
We have made it easier for people to save in this country, but we still have work to do. We must do more to protect pensions and make it easier to save. I hope that the process of crafting pension legislation will continue to be bipartisan, and bicameral, and will yield positive results. It needs to be a priority for action in the 110th Congress.
Sen. Benjamin Cardin (D-Md.) serves on the Foreign Relations, Environment and Public Works, Judiciary, Budget and Small Business and Entrepreneurship committees.