Senate Committee Looks to Expand Retirement Savings Accounts
February 2, 2016
Last Thursday, the Senate Committee on Finance held a hearing to examine strategies to help American workers better prepare for retirement. The hearing focused on issues related to expanding access to and participation in tax-favored retirement savings plans. Chairman Orrin Hatch (R-UT) and ranking member Ron Wyden (D-OR) gave opening statements, followed by testimonies from Alicia Munnell of Boston College, John J. Kalamarides of Prudential Financial, and Thomas A. Barthold of the Joint Committee on Taxation.
Those giving testimony before the Committee all recognized that there is a serious problem facing today’s prospective retirees. According to the National Retirement Risk Index, over half of all households are at risk of retiring with insufficient savings. Each statement before the Committee mentioned that the amount of retirement income needed per household has been steadily increasing. The increasing number of baby boomers who are retiring is putting significant stress on Social Security and Medicare. This, in addition to high health care costs among other things, forces potential retirees to rely more heavily on their own savings. As Munnell pointed out, the average household has only saved enough to live on $400 per month by the time retirement comes. Even when Social Security is factored in, this is not enough to retire on.
Everyone speaking at the hearing recognized that retirement savings plans are simple, straightforward ways of helping workers save for retirement. For those who have access to IRAs or 401(k)s through their employers, retirement saving plans have been remarkably successful at helping prepare for retirement. According to Sen. Hatch, these plans have been the greatest wealth creator for the middle class. The problem is that not everyone has access to a tax-favored retirement savings plan through their employer. And, out of those who do, not everyone chooses to participate.
Just over half of all workers have the ability to enroll in savings plans through their employer. A large portion of those who are left out are employees of small businesses. Small businesses have long been hesitant to sponsor plans for their own employees, because the costs in both time and money of creating a plan are often too high. Small businesses simply do not have the resources to cover the administration or fiduciary liability associated with sponsoring a retirement savings plan.
The main proposal put before the Finance Committee would make it much easier to create new Multiple Employer Plans (MEPs), something that President Obama also supports. An MEP is an arrangement that allows multiple small businesses to join together and share a single plan. Current law makes it difficult for multiple employers to pool their resources and provide their employees with shared retirement savings plans. But, by sharing costs and administrative burdens, small businesses would face far fewer barriers to creating retirement plans for their employees. Furthermore, as Kalamarides testified, a Prudential Retirement survey of small business owners found that many were favorable toward the idea of providing their employees with a retirement plan. Many small businesses would welcome the competitive advantage that comes with being able to offer a retirement savings plan.
Expanding tax-favored retirement programs would be beneficial for American workers. The tax code has long been biased against those who choose to save and invest for the future. Retirement savings accounts have become a refuge for those who want to save for retirement without being subject to the usual double taxation. The more Congress expands tax-favored retirement accounts, the more people will be incentivized to save.