Let's Save Retirement
60 Pages Posted: 12 Aug 2014 Last revised: 16 May 2015
Date Written: June 14, 2014
Unlike workers in many developed nations, far too few American workers today can look forward to financial independence as they age. As a result, many will be compelled to work much later into their lives, some into their 70s.
Social Security provides only a floor of retirement income. For many years defined benefit (DB) plans provided the core of retirement security, but today most DB plans in the private sector are closed to new employees, and those in the public sector are dramatically underfunded. A patchwork of defined contribution (DC) retirement plans – such as 401(k), 403 (b), and IRA – now serve as the primary retirement saving vehicles in the private sector, but they are complex, costly, and challenging for employers and employees to manage.
This paper recommends a single private DC pension system that can cover all working Americans, with a single set of rules.
A key part is the creation of broadly diversified Trusteed Retirement Funds (TRFs), whose sponsors are trustees, with fiduciary responsibilities.
Payroll deduction of every employee’s salary will automatically go into a broadly diversified TRF unless the employee either opts out or selects a preferred TRF (and unless the employer already sponsors a defined benefit pension plan).
TRF’s will relieve employers from fiduciary responsibility for all future DC contributions.
To protect retirees from the risks of inflation, longevity, and the unpredictability of the stock and bond markets, retirees will be encouraged to use their TRF savings to buy either an immediate or deferred indexed annuity. A Federal Longevity Insurance Administration will enable private insurance companies to provide cost-effective annuities.
All TRFs and annuities will be without marketing costs.
Tax deductions will be designed to stay within our nation’s current tax expenditures for retirement.
This paper offers a basis for near-term action by Congress and the Administration to help resolve the growing problem of funding workers’ retirement.
Keywords: Retirement, Pension, Defined Contribution Plans, Annuities, Indexed Annuities, Trusteed Retirement Funds, TRFs, Default Pension Funds
JEL Classification: Z18
Suggested Citation: Suggested Citation