Even though a federal law designed to protect retiree income turns 50 this year, calls to reform retirement benefits appear louder than ever.
The New York Times recently published an article titled “The $25 Trillion Retirement Savings System Needs Fixing.” It provides expert advice on several ways to enhance financial protection in private retirement accounts and advocates for expanding Social Security benefits.
The Times noted that the Employee Retirement Income Security Act of 1974, enacted by President Gerald Ford, was enacted at a time when most Americans had pension plans. Since then, however, many private employers have stopped offering high-cost retirement benefits in favor of defined-contribution plans such as 401(k)s.
In 1983, 62% of private-sector workers nationwide had pensions, but that dropped to 18% in 2022, according to the Center for Retirement Research at Boston College. ) Over time, this has become the norm and now covers over $25 trillion in assets.
“But most wealth is held by upper-income households, and insurance coverage is far from universal,” The Times noted. “Additionally, there are wide disparities in retirement account ownership and participation rates across race, gender and ethnicity.”
The article argues that the first way to create a more accessible and fairer system is to expand 401(k) coverage. Because small businesses are less likely to offer these retirement plans, only about half of private employees nationwide are covered by one of these retirement plans. Low-income workers are saving less than before, and black and Hispanic workers are saving a fraction of what white workers are saving.
The report noted that 17 states, including California, Illinois and Maryland, have passed legislation that automatically enrolls workers in IRA-style savings plans if their employer does not offer one. Of the eight states that have actually launched these programs, total assets total $1.5 billion.
The second approach to reform is to make 401(k) plans more like pensions. This would require accounts with features that automate participation, be professionally managed, and provide retirees with a guaranteed source of income. The Times noted that some 401(k) plans have incorporated annuities to “guarante a fixed income for life.”
The article goes on to argue for better investment advice for IRAs and a redesign of tax-deferred features in retirement accounts.
The Times cited data showing that across all types of employer-sponsored retirement plans and IRAs, 59% of the tax deferrals flowed to the top 20% of earners, while only 3.7% went to the top 20% of earners. The bottom 40% of income earners. Some experts believe those extensions could be limited or eliminated entirely, with the resulting revenue used to shore up shrinking Social Security funds.
The article points out that similarly, some advocates believe that “substantially expanding (Social Security) benefits is the only meaningful way to narrow the retirement income gap between low- and middle-income people.”
Nancy Altman, Nonprofit President social security worktold The Times that Social Security benefits could be expanded by eliminating certain corporate tax breaks and raising the cap on wages subject to payroll taxes. Altman advocates Social Security providing up to 80% of pre-retirement funding for minimum wage earners and up to 72% of pre-retirement funding for middle-income workers.
