Recent policy initiatives in the retirement arena, while they may not go far enough, would have an immediate impact on workers’ retirement security while pointing the way forward rather than closing off avenues for further reform.
A critical difference between these plans and more incremental reforms is that they don’t just focus on increasing retirement savings through automatic enrollment or reducing costs through fee transparency and other means, but also provide workers with a cost-effective way to insure against longevity and investment risks. While workers in 401(k) plans have always had the option of minimizing risk by investing conservatively and purchasing life annuities in the private insurance market, the cost is prohibitive—roughly double the cost of achieving a similar outcome through a traditional defined benefit pension (Morrissey 2009, Almeida and Fornia 2008).
At the federal level, Sen. Tom Harkin (D-Iowa) has proposed a multi-pronged approach that would expand Social Security while creating USA Retirement Funds (U.S. Senate HELP Committee 2012). In addition to pooled and professionally managed retirement savings, which have been shown to significantly improve net risk-adjusted returns, USA Retirement Funds would provide lifetime pension benefits based on long-term market conditions. While participants as a group would still bear the risk of prolonged market downturns, this risk would be spread across generations of workers and retirees so that retirement outcomes wouldn’t vary dramatically based on whether a worker retired in the wake of a bull or bear market.
At the state level, recent proposals modeled on EPI’s Guaranteed Retirement Account plan (Ghilarducci 2007) and the National Conference on Public Employee Retirement Systems’ Secure Choice plan (Kim 2011) would create publicly-administered retirement savings programs for private-sector workers, expanding coverage to millions of workers who currently have no retirement plan besides Social Security and—like the Harkin plan—taking advantage of risk pooling, economies of scale, and professional management. In addition to the important fact that they would smooth returns across generations, a feature they share with the Harkin plan, these plans offer a minimum rate-of-return guarantee, a source of security that will undoubtedly encourage more workers to take advantage of the plan.
Though many details remain to be worked out, none except the original GRA plan meets the 12 principles of a “universal, secure and adequate” retirement system put forward by Retirement USA, if for no other reason than the fact that most are voluntary (the Social Security component of the Harkin plan being the exception). While the Harkin plan is the most far-reaching legislative proposal introduced so far, it is also the farthest from becoming a political reality. One state initiative—the California Secure Choice plan—is just a signature away from being enacted. As the New York Times editorialized, “Memo to Gov. Jerry Brown: Please sign this bill.”