Time for America to wake up and take care our retirement system

With the unveiling of the House Republican tax bill, many U.S. retirement savers are breathing a sigh of relief in the knowledge that they will be able to continue their same tax-deferred contributions to their retirement plans. The feeling of relief is warranted as previous proposals suggested cutting contributions limits to as little as $2,400 a year. But those sighs may ultimately be premature when a real retirement crisis is still impending.

I wrote last year that the retirement crisis is our next Flint, a predictable tragedy that could have prevented through proactive measures. Reductions to tax-deferred contribution limits would have taken steps back rather than forward, hastening rather than staving off this crisis. Republican legislators ultimately decided against this in their plan, and should be applauded. Don’t be mistaken, however, because a crisis not accelerated does not make a crisis solved.

{mosads}The state of the retirement system and retirement savings didn’t carry much weight during the presidential election and it hasn’t been a priority for the legislative agenda. There is little indication that the current administration is worried that there is an issue or has considered the potential fiscal, not to mention moral, ramifications of creating a generation of retired poor.

Some hope comes from one government agency that is very aware of the retirement situation and the weaknesses in the system: the U.S. Government Accountability Office. A 2015 report found, “About half of households age 55 and older have no retirement savings” such as in a 401(k) plan or an IRA. It also found that among those with some retirement savings, the median amount is about $104,000 for those between ages 55 and 42 and $148,000 for those ages 65 to 74.” Since living off one’s assets for up to 35 years will require some people to have saved in excess of a million dollars, current averages are equivalent to only a few years of retirement spending.

In a 2017 report, the GAO describes the clear shift away from employers offering traditional defined benefit pension plans to defined contribution plans, such as 401(k)s, as the primary type of retirement plan. It also highlights the challenge of economic and social variables, such as health care costs and debt loads, on managing self-directed defined contribution plans. Employer plans are a core pillar of retirement, alongside the government and individuals. This shift to defined contribution plans means that two of the three retirement pillars, employer plans and personal savings, now place the majority of the responsibility for saving on the individual. The third pillar, government programs, is under acute stress and risks not being able to fund benefits by 2035, according to the report.

The GAO paints a very bleak picture. Our retirement system is dependent on individual saving, but it does not provide adequate access, incentives and education about contributions and retirement preparedness. Moreover, it is a system under the financial stress of providing benefits to those that are financially underprepared for retirement. With these ingredients come a full retirement crisis. With crisis comes an array of social and financial issues that the country may not be in the fiscal shape to handle.

The GAO reminds us that it has been 40 years since a federal commission has conducted a comprehensive evaluation of the nation’s approach to financing retirement. Perhaps we’re overdue. When CFA Institute collaborated with Mercer to analyze what makes an ideal retirement system, our system’s deficiencies became perfectly clear. But there is a way forward. The report recommends a four-pillar system that not only puts some responsibility for saving and investing in the hands of individuals as part of a voluntary plan and with savings from outside the system, but also pairs that with governmental support which motivates voluntary savings and compensates individuals for not accessing it before retirement. It also recommends minimal benefits for all through a public pension and mandatory savings linked to the working years.

Without retirement reform, only the most diligent and disciplined about saving and investing have any chance of living off their assets once their working lives are over. This would also mean that low-income earners or those without access to retirement saving opportunities may be destined to live their golden years without any support.

Full-fledged retirement system reform will take significant time to address. However, there are modifications to the system that can be done in the short term to motivate savings and retirement preparedness: Greater retirement saving opportunities for lower income workers and small business employees, that may not have access to employer supported plans, better savings incentives and tax-advantaged options, such as life time tax-deferred contribution caps, and reduce the options for early withdrawal or provide greater disincentives for using retirement savings as an alternate financing vehicle.

The retirement system needs to make it easy and beneficial for individuals to save and invest for the future. It’s time for America to wake up to the fact that we have a significant retirement issue which needs to be addressed now before it becomes unmanageable or insurmountable. Retirement system reform will require political courage from all involved. Not only will it require legislative review and action, but also a public mandate as an imperative priority. With no action, we risk a generation whose survival is dependent on government assistance and a full-on retirement crisis.

Robert Stammers is director of investor engagement at the CFA Institute.