Sen. Tom Harkin's proposal for a universal private retirement system with professional money management was praised by several pension experts as a first step in addressing ways to improve retirement security.
Diane Oakley, executive director of the National Institute on Retirement Security, Washington, which issued a report July 26 highlighting the increased risk of poverty among older Americans as defined benefit pension plans dwindle, said Mr. Harkin opened up “an important discussion to a new level. We need some innovation and creativity.”
Karen Friedman, policy director for the Pension Rights Center in Washington, said, ”We think Sen. Harkin has put forward a really good proposal. All the elements are the recipe for success.”
Mr. Harkin, D-Iowa, chairman of the Senate Health, Education, Labor and Pensions Committee, on July 27 proposed the new system to propel the debate over what he called a crisis of “disappearing pensions.”
Describing it as a “sort of a middle ground between pensions and 401(k)s,” Mr. Harkin unveiled a plan to create what he called Universal, Secure and Adaptable Retirement Funds.
Designed to augment existing employer-provided defined benefit and defined contribution plans, which would not be changed under the plan, its main features include:
- having employers enroll employees in a fund and process contributions from both employer and employees;
- creating an independent board of trustees for selecting or managing funds, which would shift fiduciary responsibility from employers;
- using professional asset managers for investments, where risks would be shared by participants;
- making benefits portable; and
- having benefits paid as an annuity, based on the investment returns of the funds at the time of retirement.
“It's like a retirement insurance program. It reduces costs and eliminates underfunding” by having benefits tied to the investment performance of the funds, Mr. Harkin said at a press briefing on the proposal.
Mr. Harkin stressed the funds did not involve government spending, apart from tax incentives for employers and employees that are available now for other retirement savings programs. “The essence of it is a private investment. It would be more employee-based and you could invest in lot of things, but at least the risk is shared broadly. That's the beauty of it — you're sharing risk,” he said.
Aside from the broad strokes of the proposal, Mr. Harkin does not have a specific legislative proposal ready to introduce in Congress, and does not have figures on the economic impact to employers, employees or the federal government. “We want different investment groups to be talking about it. We want to generate some interest in this,” he said.
The latest proposal is not the first from Mr. Harkin. Speaking at a NIRS conference in March 2011, the Senator proposed similar changes to the retirement system following a series of Senate hearings.
Many groups representing employers and investment professionals are holding their comments as they review the latest proposal and await details. “We stand ready to work with Sen. Harkin and other lawmakers to improve retirement coverage and adequacy,” said American Benefits Council spokesman Jason Hammersla, Washington. “Our first priority is making the existing employer-sponsored system more flexible and administrable for companies competing in a challenging global economy.”
But Ms. Friedman of the Pension Rights Center said: “Money pooled and professionally invested, with an annuity at retirement, and the risks spread around — that's all the stuff that's gone wrong with 401(k) plans.”
Ms. Friedman noted the proposal should enjoy the backing from well-connected financial industry groups that have sizable influence on Capitol Hill. “This will create new business for financial institutions and money managers. If you're able to create a system that works and the economics are good, that will help. It's in all of our best interests to recognize that there is a retirement crisis. If something is right, then it can be doable. We think it's realistic.”
A survey of P&I's online audience last week shows strong support for Mr. Harkin's proposal. Seventy-three percent of the 529 respondents as of Thursday support the proposal. See the latest results at www.pionline.com/polls.
Social Security changes
Mr. Harkin is also proposing several substantial changes to improve Social Security benefits that, along with new pension funds, are needed to close a $6.6 billion gap between what people have saved for retirement and what they need to retire on, as calculated by the Center for Retirement Research at Boston College.
The proposed changes would increase the amount of income to be replaced, base cost-of-living adjustments on a different price index, and remove a salary cap to make more wages subject to payroll tax.
Ms. Oakley of the NIRS said she is concerned about all aspects of the three-legged stool of retirement — pensions, Social Security and personal savings. “They are all kind of wobbly. It's an infrastructure issue, and we've got bridges out there that are collapsing.”
She and other pension advocates are hoping that the sense of urgency will carry over to the next session of Congress, as Mr. Harkin's proposal takes more concrete legislative form. Until then, Mr. Harkin and his staff will spend the next months working with business and labor leaders, policy experts, pension advocates, and congressional colleagues to flesh out specifics for setting up and running the universal retirement funds.
“I am glad that it's out there, although the devil is in the details. For smaller employers who would like to offer some sort of pension but don't like the costs and regulations of a 401(k), something simplified that could lower costs could expand access,” said Andrew Biggs, a pension scholar at the American Enterprise Institute in Washington.
Mr. Harkin, at the press briefing, said: “I am under no illusions that we're going get anything done this year, but I want to be ready to go in with this next year. The retirement crisis is simply too big to ignore, and it is time for us to roll up our sleeves and get to work.”
This article originally appeared in the August 6, 2012 print issue as, "Harkin's "universal' plan is a hit".