In Practice March 4, 2007

U.S. Faces Federal, Retirement and Healthcare Challenges

The U.S. offers many tax preferences to encourage savings, but by and large they’ve failed.
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This was a sentiment of David Walker, Comptroller General of the Government Accountability Office (GAO), speaking at the Securities Industry and Financial Markets Association (SIFMA) Savings and Retirement Symposium in Washington, D.C. last week.
Living for Today
“Too many people are living for today and not enough people are looking at tomorrow,” he said.
The United States is grappling with four major deficits, Walker said: budget, balance of payments (of which trade is a subset), savings, and leadership. Growth in spending for Social Security, Medicare, and Medicaid is expected to outpace economic growth, and will continue to increase as a percentage of GDP as well.
The government is like a family living beyond its means, Walker said, putting everything on credit cards and borrowing from both friendly and not so friendly lenders, and they can see the day they won’t be able to make their minimum payment. Current fiscal policies are not sustainable, and therefore, serious reforms will be necessary.
Walker suggested a three-pronged approach to dealing with the problems:
  • Improve financial reporting, public education and performance metrics
  • Strengthen budget and legislative process and controls
  • Fundamental reexamination and transformation (of things such as entitlement programs, other spending, and tax policy)
Retirement Security
The U.S. is faced with an aging population and a declining labor force, all of which are contributing to a negative personal savings rate, Walker said. A GAO report that examined key elements for economic security in retirement said people need adequate retirement income (including savings, Social Security, pensions, earnings from employer sponsored plans), affordable health care, and long term care.
Although the Pension Protection Act (PPA) should help to address the savings rate issue, there is much unfinished business within the legislation, Walker said, and “only time will tell if these reforms will work.”
There are three major issues facing the Social Security system, Walker commented: sustainable solvency, balancing adequacy and equity in the benefits structure, and implementing reforms. One possible way forward, he suggested, is to keep the program as a defined benefit type system, but add on a mandatory defined contribution-type program with a 2% contribution from everyone who participates. This would lead to a real trust fund, he said.
401(k) Fees
The GAO completed a report in 2006 that examined 401k fees and whether or not there is adequate transparency surrounding retirement plans, Walker said. However, he said he does not presume there is abuse or a massive problem, but instead that abuse needs to be proven.
In order to prevent abuse, three things need to be in place, Walker said:
  • Incentives for people to do the right thing
  • Transparency to make sure they do the right thing, and
  • Accountability if they don’t do the right thing
Health Care
Medicare is in need of dramatic and fundamental change, Walker suggested, otherwise, Medicare, Medicaid and the entire health care industry could bankrupt America. Health care was the nation’s top tax expenditure in fiscal year 2005, and that will only continue to grow. To get this spending under control, Walker said, the public needs to be educated better about health care.
Any reform needs to align incentives for providers and consumers to make prudent decisions about medical services and foster transparency about costs of care. The reforms need to address access, cost, quality, and personal responsibility, Walker said.
A copy of Walker’s remarks at the conference is available here

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