The crisis surrounding pension financing in the United States continues despite the country being one of the wealthiest in the world, and solving the ongoing problem requires more than incremental policy changes that produce incremental changes. That’s the idea the Bloomberg editorial board posits in a new article published by the news organization.
“Managing this looming crisis will require much more ambition than Congress has shown so far,” writes the board. “The US has never really thought about how best to encourage people to top up their expected Social Security payments and set aside enough for old age. For much of the 20th century, the government largely left the issue to employers who offered retirement benefits to long-serving employees.”
Many Americans now consider defined benefit plans to be the ideal form of retirement planning, but the history of such plans doesn’t really reflect reality, as only about two-fifths of employees were covered by such plans, the article said.
“Even for those lucky enough to have insurance, relying on employers to provide income in old age has never been a good idea,” the article continues. “People tend to live longer than companies, and many employers are ill-equipped to manage retirement finances. Since 1974, more than 140,000 companies have terminated defined benefit plans. Thousands more have transferred distressed plans to the Pension Benefit Guaranty Corporation, a state insurer that could still cost taxpayers dearly.”
Current benefit plans like 401K options arose similarly by chance, but the way such plans are written could pose a risk for employees deciding how much and how often to put money aside, the article said.
“Legislators keep trying to address the shortcomings with tweaks like the SECURE Act passed in 2019 and a sequel currently under consideration,” the editors say. “Among other things, the initiatives aim to automatically enroll more people, cover part-time workers, get more small businesses to offer 401K plans, and encourage the inclusion of annuities designed to help retirees hold their money. Such reforms are mixed.”
Automatic registration could help people save, but could be undermined if fees remain high, the piece explains. The process remains complicated and does not bring the desired results, the article states.
“The US needs a simpler and more comprehensive approach,” the article says. “The essential components: universal insurance coverage, automatic enrollment in low-cost plans, a limited selection of well-curated investments, easy portability when workers change jobs, and subsidies for low-income earners. Such a system would reduce unnecessary risk, minimize fees, maximize returns, cut red tape, and benefit businesses and the broader economy — while ensuring many more Americans can retire comfortably.”
Read the column at Bloomberg.