Posted on 25 February 2009
By Mark Miller
The House Education and Labor Committee held hearings this week to examine short-comings in the nation’s retirement security in the wake of the market crash. Committee Chairman George Miller (D-California) called the current 401(k) system “little more than a high-stakes crap shoot.”
Retirement experts have proposed a range of safer, more automatic savings options. These range from a so-called Automatic IRA that converts to an annuity upon retirement to a federally-run pension program that would sit alongside Social Security.
Miller’s committee will be holding further hearings on the issue in the coming weeks.
In the short term, the United States should preserve and strengthen 401(k) plans and root out hidden fees that are eating up much of workers’ savings, Miller told a hearing on retirement security.
“But we must also ask the difficult questions about the state of our nation’s retirement system as a whole and look to see whether we need to create a new leg of retirement security,” Miller said.
U.S. workers have historically depended on three sources of income during retirement.
These are Social Security, a government-run program financed by workers’ payroll taxes; traditional company pension plans, which are dying out as private companies terminate or freeze them; and 401(k) plans.
The last category was originally designed to supplement traditional pension plans. It allows workers to set aside a certain percentage of their income before taxes to invest in stocks or bonds.
Miller did not propose another retirement savings vehicle, saying his panel will explore possibilities in coming weeks.
But Alicia Munnell, a former economic adviser to President Bill Clinton, said a new tier of retirement income should be set up with the goal of paying out about 20 percent of pre-retirement income to retirees.
“Participation should be mandatory, participants should have no access to money before retirement, and benefits should be paid as annuities,” she said in testimony to the committee. “The system should be funded and reside as much as possible in the private sector.”
“I firmly believe that just having 401(k)s and Social Security is not going to provide people with enough money,” Munnell said. “I think we need a new tier, across income groups, for everybody.”
In December, Congress agreed to temporarily ease tougher funding requirements that require traditional pension plans to be fully funded by an employer after a seven-year period. Benefits consulting firm Hewitt Associates Inc and U.S. business groups say they will seek additional relief from Congress because of the troubled U.S. economy and sharp decline in stock markets.