GAO says better future retirement security requires comprehensive re-evaluation

A recently-released report from the Government Accountability Office (GAO) contains a warning that the U.S. retirement system is facing major challenges. Part of the reason for this, according to the report, is that traditional pensions have become much less common, and individuals are increasingly responsible for planning and managing their own retirement savings accounts, such as 401(k) plans. The GAO adds that many households are ill-equipped for this task and have little or no retirement savings.

Shift in retirement landscape

According to the GAO, fundamental changes over the past 40 years to the nation’s current retirement system have made it increasingly difficult for individuals to plan for and effectively manage retirement. The GAO adds that the shift away from employers offering traditional defined benefit (DB) pension plans to instead offering defined contribution (DC) plans, such as 401(k)s, has increased the risks and responsibilities for individuals in planning and managing their retirement. Increases in debt and health care costs can also impede individuals’ ability to save for retirement, says the GAO.

Three key challenges in planning retirement

GAO reports that employees encounter the following challenges in their efforts to provide for a financially secure retirement at a time when increases in longevity further raise the risk of outliving their savings:

  • Access: Accessing retirement plans through their employers.
  • Saving: Accumulating sufficient retirement savings.
  • Retirement: Ensuring accrued savings and benefits last through retirement.

Threats to U.S. retirement system

The following three pillars of the current retirement system in the United States are anticipated by the GAO to be unable to ensure adequate benefits for a growing number of Americans due, in part, to the financial risks associated with certain federal programs.

  • Social Security’s retirement program (Old-Age and Survivors Insurance): Beginning in 2035, this program is projected to be unable to pay full benefits. Long-term fiscal projections show that, absent fiscal policy changes, the federal government is on an unsustainable path, largely due to spending increases driven by the growing gap between federal revenues and health care programs, demographic changes, and net interest on the public debt.
  • Private employer-sponsored plans: DB plans: On the decline; also, the Pension Benefit Guaranty Corporation (PBGC) which insures most DB plans, is at risk due to substantial liabilities, especially in its multiemployer program.
  • DC plans: On the rise, but with more risk and responsibility for individuals; many individuals are not saving enough in these plans to provide an adequate retirement.
  • Individual savings: Outside of employer-sponsored plans, individuals’ retirement savings are often low or nonexistent, which may increase their reliance on various federal and state safety net programs.

Re-evaluation of retirement financing approach

The GAO says that, over the past 40 years, the nation has sought to address the issues facing the U.S. retirement system in a piecemeal fashion. The GAO does not think that this approach will be able to effectively address the interrelated nature of the challenges facing the system today. The GAO adds that it has been nearly 40 years since a federal commission has conducted a comprehensive evaluation of the nation’s approach to financing retirement. A panel of retirement experts convened by GAO in November 2016 agreed that there is a need for a new comprehensive evaluation. The GAO suggests that the experiences of other countries can also provide useful insights for ways to improve the system.
The GAO recommends that Congress consider establishing an independent commission to comprehensively examine the U.S. retirement system and make recommendations to clarify key policy goals for the system and improve how the nation promotes retirement security.

Source: GAO, The Nation’s Retirement System: A Comprehensive Re-evaluation Is Needed to Better Promote Future Retirement Security, GAO-18-111SP.
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