Event Summary: Facing Up to the Retirement Savings Deficit

On October 13, 2011, we hosted an event focused on the retirement savings deficit and possible ways to address the ongoing problem of retirement income security in the U.S. The video webcast is available here. Speakers included Mark Iwry, from the U.S. Department of the Treasury, Michael Calabrese, from the New America Foundation, William Gale from the Retirement Security Project at Brookings Institution, Teresa Ghilarducci from the Schwartz Center for Economic Policy Analysis at The New School, and David Certner from AARP. There is broad-based agreement among the experts gathered that there is a retirement savings crisis and the discussion focused on the potential of the Obama Administration’s Auto-IRA proposal, which bolsters the current retirement landscape by opening up savings opportunities for many workers who don’t currently have access to employer-sponsored retirement accounts, 401(k)s, or pensions.

Reid Cramer, director of the Asset Building Program, introduced the panelists and moderated the discussion. He contextualized the importance of retirement savings, highlighting the inadequacies of the current system which exclude many people from saving adequately (or at all) for retirement. Despite improvements to employer-sponsored pensions and 401(k) plans in recent years, many people are currently ineligible for these savings vehicles which can leave them vulnerable to financial instability as they age. This problem contributes to an estimated $6 trillion retirement income deficit.

Mark Iwry discussed the numerous barriers that impede saving for retirement and described how some of the key features of the Auto-IRA proposal help address them. Current gaps in the savings system leave many workers ineligible for various forms of tax-advantaged savings, while workers that are eligible have low rates of participation. The architecture of the Auto-IRA assists with savings by simplifying the system and making parts of the process automatic, but the program is designed to complement not compete with or replace private retirement options.

Michael Calabrese introduced the key concepts from his new paper, Facing Up to the Retirement Savings Deficit. He noted that the current focus on the budget deficit has obscured the important issue of the retirement savings deficit. Decreasing rates of participation in private retirement plans and over-reliance on Social Security have contributed to the need for a stronger system. However, Calabrese highlighted significant gaps in the coverage of the Auto IRA and argued that the plan needs to be strengthened and made more robust by maximizing access and adequacy of savings for retirement.  The paper offers an in depth look at some of the specific features that would help make the Auto-IRA a more inclusive and sufficient policy.

Bill Gale identified a proposal to change the current tax deduction on retirement savings to a credit, which would be more equitable and progressive in its impact on retirement savings. Gale expressed that the current incentive structure of retirement savings is upside down and needs to be addressed if it is to effectively help low-earning people save for retirement. He also cautioned that attention to retirement savings will become even more important in the context of any efforts to reform Social Security.

Teresa Ghilarducci shared her agreement with many of the remarks of previous panelists and elaborated on the panic people across the income spectrum feel about this issue. She also noted the inverted incentive structure of the current system before introducing frustrations with the existing private savings options, which she is concerned have conflicting interests and are too lightly regulated at present. Her proposal differs significantly from the Auto IRA and is called Guaranteed Retirement Accounts. GRAs are described in her book When I’m Sixty Four.

David Certner finished the panel by identifying many of the shortcomings in the private retirement savings system and suggested that Social Security is a highly effective tool that should be expanded in order to meet the retirement savings challenge. He cited the very modest yearly amount Social Security provides on average and the significant percentage of people relying on it as their sole income source as keys to the program’s essential place in the retirement savings landscape.

The ensuing discussion and audience questions focused on a range of issues from opportunities for tax reform to the ongoing challenge of addressing realistic, attainable savings goals for low-earning people that don’t negatively affect consumption levels. Several questions focused on the recent economic recession and the challenge of balancing high risk investment options with retirement security goals. Other countries, such as the Netherlands, were referenced as possible sources of models for automatic and universal retirement savings.