The magnitude of the retirement crisis facing Americans is so severe that we must embrace a far bolder plan to avert disaster than proposals the Obama administration has made through the White House Task Force on the Middle Class.
The proposals do not go far enough, although promoting access to retirement savings plans through automatic IRAs, a government 401(k) match to help low-income households decrease their savings gap and new 401(k) regulations to protect participants are all sound and timely ideas.
The cornerstone of this looming crisis is that Americans soon will be retiring in record numbers, many with inadequate savings. In fact, the number of Americans age 65 and older will skyrocket to more than 72 million in 2030 from 40.2 million in 2010, according to the U.S. Census Bureau.
Even before the financial crisis began in the fall of 2008, most Americans of all ages and income levels were shockingly unprepared for retirement. For example, the typical middle-income household needs to generate $52,000 in after-tax income to maintain their current standard of living in retirement. A recent McKinsey & Co. study concluded that a middle-income household, with wage earners currently between 40 and 59 years old and current annual income of $50,000 to $100,000, will fall 37% below the amount of income needed in retirement. Said another way, that same household is on pace to receive $33,000 a year after taxes from Social Security payments and contributions from pension plans and personal savings.
The savings gap is even worse for younger workers. For example, workers between the ages of 30 and 39 and in the same middle-income bracket are on pace to cover less than half of the retirement income they need because they are not saving enough for retirement or because they lack access to retirement plans. In fact, across America, 35 million households have no retirement plan at all.
The task force's initial proposals provide a good start, but they are not sufficient to address the magnitude of these issues. A more ambitious policy agenda, if coordinated and broadly inclusive for all Americans, would make a tremendous difference:
• Maximize access to — and increase — personal savings and investments for all Americans. More than one-third of American households do not have access to a workplace retirement savings plan. This often is because they work for small businesses that cannot afford the costs associated with maintaining saving plans. While the administration's automatic payroll-deduction IRA proposal is a start, more needs to be done, particularly with ongoing tax incentives for small businesses to ensure that the broadest base of Americans has access to retirement plans.
• Ensure that Americans receive high-quality advice about their retirement plans. Overall, American financial literacy is low and needs to be improved. The administration's proposal strikes a good balance between ensuring that more advice will be available and at the same time protecting Americans from potential conflicts of interest among financial advisers. The reality is that delivering high-quality investment advice is expensive, especially to the mass market. Current 401(k) providers are best positioned to provide advice, and steps need to be taken to ensure that they can continue to provide the advice that American workers need.
• Help all Americans “catch up” from recent financial market setbacks. Temporarily doubling the caps on the amount of savings individuals can put into tax-deferred retirement accounts will help everyone regain lost ground.
• Ensure the viability of defined benefit plans so they can pay out what Americans expect them to pay out. Defined benefit plans play a critical role in the retirement security of millions of Americans, yet many of the plans are inadequately funded and are at risk of not being able to pay in full their obligations to retirees. Congress must accelerate rule-making to ease funding pressures for employers so they can avoid having to terminate their defined benefit plans entirely. At the same time, we need new legislation to encourage the development of hybrid plans, such as cash balance plans, that combine defined benefit and defined contribution elements.
• Help retirees minimize post-retirement risk. Skyrocketing health-care costs and longer life spans create major financial challenges for retirees. With fewer Americans participating in a defined benefit retirement plan, there is much greater need for income-protection insurance as well as long-term care and disability insurance.
Many Americans already are aware of the looming retirement crisis on a very personal level. A survey conducted by the Employee Benefit Research Institute in 2009 found that only 13% of American workers said they were confident that they were on track to have enough money to retire comfortably. This was the lowest level in the 17 years EBRI has administered the survey.
I am certain that helping millions of current and future retirees obtain a secure and dignified retirement will become the defining issue for the American voting public for decades. The administration was right to elevate the problem now as a policy priority, but it has taken only a very small step. Much bolder actions must be taken, urgently.
Ronald P. O'Hanley is president and CEO of BNY Mellon Asset Management and vice chairman of The Bank of New York Mellon Corp., New York. Mr. O'Hanley chairs the Retirement Security Coalition for the Financial Services Roundtable, a Washington-based public-policy group of the financial services industry.