Retirement Income Gap Projected at $7.7T

The Pension Rights Center updated its aggregate U.S. retirement income deficit figure to $7.7 trillion—up from $6.6 trillion just five years earlier—in conjunction with today’s retirement preparedness hearing by the U.S. Senate Special Committee on Aging.

The hearing was led by Chairman Susan Collins (R-Maine) and Ranking Member Claire McCaskill (D-Missouri) to examine the state of retirement readiness and scout some ideas on how to address growing retirement insecurity.

Collins, who earlier this month introduced the Retirement Security Act of 2015 that would increase the cap on deferrals and matching contributions for safe harbor plans, said the hearing was the first in a series of retirement hearings and would enable the committee to set the stage for future work by helping the committee members to better understand the scope of the problem.

“The committee needs practical ideas to consider that will address the growing gap in what Americans are saving and what they’ll actually need,” Collins said. “The issue is of great importance to all Americans who hope to enjoy their retirement years without fearing they will run out of money and fall into poverty.”

“Much greater public awareness is needed,” Collins said, citing the revised $7.7 trillion figure, which she called “incredible.” Nationally, she said, one in four households has nothing saved for retirement and will depend solely on Social Security. In Maine, the figure is one in three.

“We live in a 401(k) world,” said McCaskill, citing income disparity and racial disparity as two significant contributing factors to lack of retirement preparedness. In Missouri, only 45% of workers participate in an employer sponsored plan. “But research shows that when presented with opportunities, low- and middle-income people will put away money for retirement,” she said. “Our challenge is to provide those opportunities and the infrastructure to put money away.”

Income Sources Dip

Four factors—increased life expectancy, the shift away from defined benefit (DB) plans, rising health care costs and low interest rates—should have led people to save more, said Alicia Munnell, director of the Center for Retirement Research at Boston College. Twenty years ago, the retirement safety net was different and we didn’t have the problem we have now, Munnell said. “We need more retirement income, and the traditional sources, such as Social Security, are providing less. Medicare premiums will lead to less net Social Security income.”

The solutions are working longer and saving more, Munnell said, which requires education about delaying Social Security benefits to maximize the payout, and more affordable, less-leaky 401(k) plans.

“The standard prescription is that Americans should put aside more money,” said Sen. Elizabeth Warren (D-Massachusetts). Wall Street bears some responsibility, Warren contended, for burdening savers and investors with fees, commissions and kickbacks that brokers receive for selling what she called bad investment products.

One  consequence of the shift from DB to defined contribution (DC) plans, Warren noted, is that Americans had to rely on investment advisers and brokers who are paid for the products they sell, in order to navigate the stock market to save for retirement.

“There are lots of good investment advisers out there who put their clients’ interests first,” Warren said, “but they have to compete with advisers who don’t put their clients’ interests ahead of their own.” The only way to fix this is to change the fiduciary rule so that all advisers would act in their clients’ best interests, she claimed. 

Employer sponsored 401(k) plans pay too much in fees and individual retirement accounts (IRAs) pay even more, said Munnell. “Nothing convinces me you get a better product for these higher fees,” she said. As IRAs are covered not by the fiduciary rule, but the suitability rule of the Securities and Exchange Commission (a lower standard), she favored a fiduciary standard that would apply to broker/dealers.

Munnell also supports an expanded, low-cost IRA program for people without access to a workplace retirement plan, which she points out would give people a savings vehicle for when they cycle in and out of work. “It’s essential,” she said. “You can’t have half of workers covered and half not covered.”