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The Role of Employer-Sponsored Retirement Plans and National Saving
Testimony before the Special Committee on Aging, United States Senate
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Eugene Steuerle is a senior fellow at the Urban Institute and a former deputy assistant secretary of the Treasury. He also serves currently on the Advisory Board for the Retirement Security Project sponsored by the Pew Charitable Trusts, as well as an advisor to the Conversation on Coverage, convened by the Pension Rights Center, cosponsored by a host of other organizations, including the Urban Institute, and supported in part by the Ford Foundation and the W.K. Kellogg Foundation. Part of his testimony is taken from research with Elizabeth Bell, Adam Carasso, and Richard Johnson and as part of a broader project on Opportunity and Ownership and supported in part by the Annie E. Casey Foundation. All views expressed in this testimony are his and do not necessarily reflect those of the Urban Institute, its board, its trustees, or any individuals in the organizations above.
Note: This testimony is available in its entirety in the Portable Document Format (PDF).
Mr. Chairman and Members of the Committee:
It is a privilege to join you again today and to discuss the role of employer-sponsored retirement plans in national saving. On the positive side, the United States is in a select group of developed nations with a significant share of its assets in pension and retirement accounts, largely employer-sponsored. The involvement of employers appears to be crucial to increasing retirement assets, whether the employer directly funds these accounts or merely makes them available to employees.
The evidence that retirement and pension incentives have done much recently for national saving, however, is weak. Total personal saving in the United States is now below the annual revenues spent in supporting retirement and pension plans. Even that comparison does not count the revenues used to support other saving incentives, such as for education or health. Even if net saving were not an issue, the distribution of retirement saving is highly skewed, and the current system fails to provide much in the way of retirement saving not just for those with low incomes, but for a substantial majority of the population.
One major reason is that all of these government subsidies are for deposits (whether by employees or employers), not saving, and there is a big difference. A second is that the extraordinary complexity of the laws surrounding employee benefits discourages some employers from participating, and the related costs absorb a significant share of the returns to saving. Some pension designs and laws also present an assortment of problems that probably also reduce saving: easy withdrawal before very old age, traditional defined benefit plan designs that often discriminate against older workers, and a threat of lawsuits (from tax, labor, and age discrimination statutes) that raise employer costs for providing retirement benefits. Yet another negative influence on saving is that most people now retire in late middle-age with one-third of their adult lives remaining before them-moving into spend-down patterns in years where traditionally saving rates tend to be high. Finally, the incentives provided to low- and moderate-income households often are also fairly small and sometimes nonexistent.
There are various ways to try to deal with these issues. One is limiting tax breaks for those who are "arbitraging" the tax system by applying limitations on their interest deductions when they are receiving tax-deferred interest or other capital income in retirement accounts. Tightening up on withdrawals from retirement plans before old age could also enhance saving. Another approach is to simplify, even at the cost of removing some preferences for some people. Strong consideration should be given to creating "safe harbors" for employers in designing retirement plans for older workers, including those seeking bridge jobs rather than full retirement. Another promising approach is to promote policies that allow employers to set defaults for employee deposits from which employees can opt out, rather than using defaults of zero deposits to which they must opt in. Another strong possibility is to increase the subsidy for lower- and moderate-income taxpayers. The savers credit serves as an example, although it has three major limitations: it is small or does not apply for most low- and moderate-income households, it does not cover employer deposits, and the tax subsidy itself does not go into retirement accounts. A clearinghouse may be necessary to handle rollovers out of employer plans and a simplified saving system, especially when small amounts are involved. Finally, mandates that employees save for retirement, including through employer-sponsored plans, should be considered as one leg of a broader retirement stool.
The rest of my testimony elaborates on these points.