The last time Congress thought holistically about U.S. retirement policy was 40 years ago in 1981. The ill-timed President's Commission on Pension Policy established under executive order by President Carter in 1979 issued its report in early 1981, only to be discarded by the incoming Reagan administration and forgotten by future presidents and Congresses.
Perhaps it is time to revisit that forgotten report. The commission called for mandatory employer contributions at a minimum of 3% of payroll for every employee over age 25 and 1,000 hours of employment (the so-called minimum universal pension system or MUPS) to be administered in employer pension plans or through a clearinghouse managed by the Social Security Administration; enactment of a Public Employee Retirement Income Security Act for state and local government plans modeled on ERISA; legislation to strengthen and universalize Social Security; and the consolidation of the administration and regulation of all federal retirement systems into one entity.
Fast forward to 2021, in which we confront a retirement system that is failing much of the population and portends economic and social tragedy. According to a recent report from the Center for Retirement Research at Boston College, 51% of American households, as of the third quarter of 2020, "will not have enough retirement income to maintain their pre-retirement standard of living, even if they work to age 65 and annuitize all their financial assets, including the receipts from a reverse mortgage on their homes."
The U.S. Government Accountability Office set off alarm bells in a 2017 report to Congress, "The Nation's Retirement System: A Comprehensive Re-evaluation is Needed to Better Promote Future Retirement Security." GAO highlighted the fact that, "over the past 40 years, the nation has sought to address the issues facing the U.S. retirement system in a piecemeal fashion ... and that it had been nearly 40 years since a federal commission has conducted a comprehensive evaluation of the nation's approach to financing retirement."
Mini pension crises are already brewing in various sectors of the U.S. economy. Several million workers and retirees are at risk in multiemployer pension plans where plan insolvency is projected in the next 20 years. To make matters worse, the Pension Benefit Guaranty Corp. multiemployer insurance program that was legislated to protect these participants is projected to collapse in 2026. At the same time, a number of state and local pension plans are in a death spiral that is presenting an unmanageable budgetary dilemma for legislators and taxpayers. Seven states have unfunded liabilities greater than $50 billion, with Illinois exceeding $180 billion and California exceeding $300 billion in unfunded obligations. Looming on the horizon, the Social Security trust funds will be depleted in 2035 which could result in 21% benefit cuts unless Congress acts.
The U.S. retirement system received a mediocre grade of C-plus when measured by the prestigious Mercer CFA Institute Global Pension index. The index has been benchmarking international retirement systems for 12 years based on measures of adequacy, sustainability and integrity. The U.S. ranks 18th out of 39 retirement systems reviewed. Within the subindexes, the U.S. ranks 10th for sustainability (the ability of the system to continue for decades ahead), but only 25th for adequacy (whether the system provides adequate levels of post-work income), and 31st for integrity (whether the system operates in the best interests of participants). It is hard to reconcile the performance of the largest and one of the most innovative economies in the world with what seems to be a third-rate retirement system.
The failure of U.S. national retirement policy is a result of a leadership void and regulatory fragmentation. Unlike many first-world governments, the U.S. lacks a dedicated pension department and cabinet executive for retirement policy. Congress' multicommittee jurisdictions over pension issues reinforces policy confusion. The historic decentralization of pension regulation between Department of Labor, Department of Treasury, the PBGC and the Social Security Administration has distorted national goals of pension security. As a result, tax policy has taken primacy over retirement policy. The members of the 1979-81 President's Commission on Pension Policy clearly recognized this problem when they recommended consolidation of all pension regulation into one department, as well as the creation of new committees on retirement income security — one in the House and one in the Senate.
Promoting retirement wealth and security should also be factored into policies aimed at addressing income inequality. Pension crises can quickly morph into social unrest as witnessed in France and Chile over the past two years. The U.S. Treasury Department and the Federal Reserve need to focus on the role of the pension system in enhancing capital formation and investment in the U.S. economy. Historically low interest rates, driven by extraordinary monetary policy, have damaged the U.S. pension system and requires special assistance from the central bank and Treasury. Pension systems can play a major role in supporting future economic growth and productivity. The Biden-Harris administration, along with Congress, should prioritize retirement policy in their efforts to "build back better." Reorganizing pension policy through consolidating regulatory and congressional governance is a good starting point.
David S. Blitzstein is president of Blitzstein Consulting LLC and is a former special assistant for multiemployer plans for the UFCW International Union, based in Bethesda, Md. This content represents the views of the author. It was submitted and edited under Pensions & Investments guidelines but is not a product of P&I's editorial team.