Last week, the Senate Committee on Health, Education, Labor & Pensions (“HELP”) held a hearing on what Sen. Tom Harkin (D-IA), the HELP Committee’s Chairman, refers to as the “retirement crisis.” Sen. Harkin states that the “retirement income deficit” (which he defines as the difference between the assets people need for retirement and what they have available) is approximately $6.6 billion. The hearing was largely in response to Harkin’s report in which he outlines, in broad strokes, his plan to enhance retirement security. Sen. Harkin’s plan has two basic prongs: (1) strengthen Social Security and (2) create a new retirement fund option that will be government-run, but largely privately funded.
On the Social Security side, Sen. Harkin proposes to increase the benefits payable by modifying the formula for calculating benefits and improving the built-in cost of living adjustment for Social Security benefits. He also proposes to remove the cap (currently, $110,100) on wages subject to the Social Security tax over a 10-year period. The removal of the cap would come with an increase in benefits for those with wages over the cap, but the additional benefits would be less than the enhanced benefits he proposes for wages below the cap.
The more interesting side of his proposal is to build a system of “Universal, Secure, and Adaptable (‘USA’) Retirement Funds.” USA Retirement Funds, in addition to having a subtle patriotic flair, would basically be individual accounts for each employee that would provide lifetime income benefits, like a pension. Essentially, they would be government-sponsored IRAs that paid out in annuity form. (This is similar to some proposals that states have put forward, as we discussed here previously.)
Contributions would come from employees, who would be automatically enrolled, and employers. Employers maintaining a defined benefit pension plan, or a defined contribution plan with automatic enrollment and a match, would not be required to participate. All other employers would have to automatically enroll their employees in the USA Retirement Funds. The investment of the funds would be professionally managed and their assets pooled to spread the risk.
The funds would be overseen by a board of trustees with employer, employee, and retiree representatives. While Sen. Harkin’s proposal is short on many specifics, one item he does specify is that the trustees would have the ability to “gradually adjust benefits to reflect market realities” in the event of a severe and long-term economic downturn. (Contrast this with private plans, which can reduce future benefit accruals, but generally cannot reduce benefit payments.) They could also increase benefits if the USA Retirement Funds had better than expected returns.
Sen. Harkin acknowledged at the hearing that Congress is unlikely to act on his proposal this year (we think it has something to do with this “election” we keep hearing so much about), but he promised to aggressively pursue it next year. If Harkin is successful in pushing this proposal (or some version of it) through Congress, it could have a greater impact on the current retirement system than he proposes. For example, some pension plans and some profit-sharing contribution formulas determine benefits by effectively offsetting for Social Security benefits. How will his proposal impact those formulas? Will employers who do not have a match now consider adding one to avoid contributing to the USA Retirement Funds? Alternatively, could employers simply decide to terminate their plans and just buy in to this new system? Would such a system effectively be the last nail in the coffin of defined benefit pension plans? These and other considerations could become increasingly important if Sen. Harkin’s proposal gains traction.