Today’s budget proposals include several retirement-related provisions, most notably an auto-IRA and a cap on benefit levels. While neither of those ideas seems likely to become law in the short term, the proposals point to a shifting outlook for the U.S. retirement system.
If we step back from the details of the proposals to the historical currents of which they are evidence, we see that the U.S. retirement system as currently structured is under growing pressure to change.
A recent paper by my colleagues Justin Owens and Josh Barbash documents the early growth and subsequent evolution of corporate defined benefit plans. Major changes did not occur without cause. ERISA¹ came about largely because of a realization that fairer eligibility rules and better safeguarding of benefits were required. PPA² has its roots in inadequate funding and unease regarding the PBGC’s long-term sustainability.
Today’s proposals are a response to two concerns that are widespread among legislators. The auto-IRA proposal is an attempt to address concerns about coverage. According to a 2014 White House fact sheet, about half of all American workers do not have access to an employer-sponsored retirement plan. Many who do have access do not participate in the plan.
The proposal to cap benefits, meanwhile, is driven by a concern that retirement tax benefits for the very wealthy go too far. The same fact sheet notes that “an estimated two-thirds of tax benefits for retirement saving go to the top 20% of earners, with one-third going to the top 5 percent of earners.” Of course, the top earners pay a large proportion of taxes, but at a time when the budget is tough to balance, the retirement system—and in particular, the retirement savings of the wealthiest—has become a target.
These are not the only pressure points: the public pension system has funding challenges; the multi-employer system is reeling; savings rates in the 401(k) system are frequently inadequate; questions around the PBGC’s sustainability remain; employers are weary of the costs, risks and administrative burden of pension provision.
It is worth reminding ourselves that the U.S. retirement system has, by most measures, been very successful. The idea of an active retirement as a right is—as Don Ezra, Matt Smith and I noted in the opening sentence of The Retirement Plan Solution—relatively modern: “We expect to retire from work rather than die with our boots on… we want some fun before we go and we expect the money to be available to pay for it.”³ The system—for all of its imperfections—has made that possible for tens of millions of Americans, and it has done so fairly efficiently (certainly when compared to the efficiency of, say, the health care system.) But the pressure points on the current structure of the system are real.
Where this all leads is unclear. The U.S. legislative path is haphazard at best (that’s perhaps too polite a way of describing a system that can count PBGC premiums as revenue for the purposes of financing highway repairs.) So I will offer no predictions for how this will play out in the corridors of power. But the pressure for change is certainly building.