Wyden tells Senate hearing that tax incentives for retirement are insufficient

The incentives for savings in the tax code are not getting to the people who need them, according to Senate Finance Committee Chairman Ron Wyden (D-OR). “It’s clear that something is out of whack,” he said during a September 16, 2014 Committee hearing examining retirement savings and tax reform. Witnesses at the hearing, however, countered that the tax incentives, or lack of better targeting, were not the problem.

As the Finance Committee continues to work on modernizing the tax code, it should take “a good look” at fixing the issue, Wyden said. He cited a study from the Federal Reserve indicating that nearly a third of workers have no pension and nothing set aside for retirement. “It is a fact of today’s economy that millions of Americans are unable to save. Report after report has shown that America’s middle-class is—at best—struggling to stay afloat,” he said.

Wyden also highlighted a program in his home state of Oregon that he said was “worth looking at.” The state-created Retirement Savings Task Force recommended the state set up an auto-IRA program for any Oregonian worker who is not covered by an employer retirement plan. A percentage of employees’ paychecks would go into savings accounts, and contributions would grow with time. “It wouldn’t be mandatory—employees could opt out at any time—but it has the potential to be a first step toward retirement security for many Oregonians,” he said.

Ranking Committee member Orrin G. Hatch (R-UT) agreed with Wyden’s assessment. He reminded Wyden that, during deliberation over the recent highway bill markup, Finance members agreed to work together on multiemployer pension reform. “That was done in the spirit of bipartisanship. And, I have a pension reform bill for the modern economy that just last week received high marks from the Urban Institute that I hope you’ll work on with me as well,” said Hatch.

Other proposals offered

John C. Bogle, founder of the Vanguard Group, offered what he termed an “ideal” five-point plan for retirement savings where Social Security remains intact. For those who have the financial ability to save for retirement, there would be a single defined contribution structure, “dominated by low-cost—even mutual—providers, inevitably focused on all-market index funds investing for the long term, and overseen by a newly created Federal Retirement Board that would establish sound principles of asset allocation and diversification.” Retirement savings would continue to be tax-deferred, but with a limit on contributions and tax deductions.

Other points in Bogle’s plan would mitigate longevity risk by creating simple, low-cost annuities and extending the existing ERISA requirement that plan sponsors meet a standard of fiduciary duty to encompass plan providers as well as the corporations themselves.

Andrew G. Biggs, a resident scholar at the American Enterprise Institute, told lawmakers that he did not believe the country is facing a retirement crisis. He said research does not support the claim that retirement security is rapidly eroding and does not, in his opinion, “justify turning our retirement system upside down.” He noted that, “If there isn’t a retirement crisis today, it does not seem likely there will be one in the future, as the best retirement models do not project that future retirees will have significantly lower replacement rates than current retirees.”

Brigitte Madrian, an Aetna Professor of Public Policy and Corporate Management at Harvard’s Kennedy School, said the relatively small impact of financial incentives on savings plan participation suggests that a failure to save is not primarily the result of inadequate financial incentives. “Rather, there are other barriers to saving not addressed by traditional policy solutions.”

Madrian said the literature on behavioral economics and savings outcomes points to a “myriad” of frictions that impede successful savings outcomes. She listed procrastination, a lack of financial literacy coupled with the complexity of determining how much to save and how to best to invest for retirement, inattention and the temptation to spend, as examples of conditions that lead to retirement insecurity. “In many cases, countering these frictions leads to increases in savings plan participation and asset accumulation that surpass the effects of financial incentives,” she said.

Source: Senate Finance Committee Hearing, 9/16/2014.

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