House Committee on Ways & Means: Taking a Serious Look at the Retirement Crisis in America: What Can We Do to Expand Defined Benefit Pension Plans for Workers?
House Committee on Ways & Means
Taking a Serious Look at the Retirement Crisis in America: What Can We Do to Expand Defined Benefit Pension Plans for Workers?
Wednesday, February 28, 2024
Topline
- Democrats discussed different proposals to increase enrollment in retirement plans for young Americans.
- Sen. Tedd Budd (R-N.C.) criticized the Department of Labor’s proposed fiduciary rule for restricting access and increasing consumer costs, while also hampering the progress made by SECURE 2.0.
Witnesses
- Sara Schambers, UAW Member, Local 182, Ford Livonia Transmission
- Teresa Ghilarducci, Irene and Bernard L Schwartz Professor of Economics and Policy Analysis, The New School for Social Research
- Dan Doonan, Executive Director, National Institute on Retirement Security
- Rachel Greszler, Senior Research Fellow, The Heritage Foundation
- Eric Stevenson, President, Nationwide Retirement Solutions, Nationwide Mutual Insurance Company
Opening Statements
HELP Committee Chair Bernie Sanders (I-V.T.)
In his opening statement, Chair Sanders noted that as a nation, there is more income and wealth inequality than we’ve had in the history of America. Sanders said the social safety net for the most vulnerable is far behind other wealthy nations. Sanders then noted that the nation’s senior citizens are struggling as well and that we now have a retirement crisis in America that demands our immediate attention. Sanders said that in the United States, almost 45% of Americans between 55-64 have no savings at all and no idea how they will retire with any shred of dignity or respect. He expressed concern for millions of senior citizens who are no longer able to work and have exhausted their saving. Sanders then stated that half of seniors try to survive off an income of less than $30,000 a year. Sanders stated that in America over 23% of seniors are living in poverty, which is a higher rate than other nations.
He then said that 50 years ago, it was not uncommon for corporations to provide defined benefit pension plans, but that since, there has been a 40-year war on the working class and stated that we are moving in exactly the wrong direction. Sanders emphasized that at a time when far too many seniors are living in poverty, we must expand, not cut social security. He then said that we must make social security solvent for the next 75 years so that it will be there for our kids and grandchildren. Sanders then went on to say that the legislation he has introduced accomplishes this. He continued by saying that today, billionaires pay amount of money into Social Security as someone who makes $168,000 per year because of the social security cap. Sanders said that his legislation would lift the cap on social security starting at $200,000 a year. He then stated that every corporation should be required to provide a retirement plan to workers and if not, they must give workers the option to contribute to a federal pension plan similar to what Members of Congress have. He said that today, federal employees have a certain percentage of salaries deducted from their paycheck put into the FIRS program which provides a pension based on salary and years of service. Sanders noted that if it’s good for Members of Congress and staff, it’s good for the American people.
HELP Committee Ranking Member Bill Cassidy (R-L.A.)
In his opening statement, Ranking Member Cassidy started by saying that it seemed to be a little odd that the focus of the day seems to be promoting the defined benefits pension system, that is a little outdated and disconnected. He went on to say that in 1974, Congress passed ERISA as response to tens of thousands of Americans losing their retirement security because their employer’s defined benefit system failed. Cassidy said this was exemplified by the Studebaker Automobile Company and 1800 others terminating their pension plans. He noted that since ERISA, defined benefit plans have been replaced by defined contribution plans, which have flourished. Cassidy also stated that very few people now retire after 50 years at a company which allows them to move between employers while maintaining their retirement fund. He also noted that Congress just passed SECURE 2.0, making improvements to the retirement system. Cassidy said that they based the solution off the defined contribution system. He noted the popularity of SECURE 2.0, saying that it passed by a vote 414-5 on the House floor. Cassidy said that the Chair speaks of solution to crisis, but we have it. He said that there are provisions of SECURE Act 2.0 yet to be implemented, including those for low-income individuals.
Cassidy said that the Chair has cited statistics pointing to a retirement crisis, but many of those statistics predate the passage of SECURE 2.0. Cassidy noted that there is a place for defined benefit pension plans, and with reforms they can be successful. He explained that many of these multiemployer defined benefit plans struggled for years, and in 2021, they told Congress they needed a bailout. Cassidy said that the Democrats passed a $90 billion bailout of a multi-employer defined benefit system with a party line vote. He noted that large labor unions successfully lobbied to make sure the bailout did not come with any meaningful reforms to protect workers and prevent future failures.
Cassidy said it is infuriating to hear the union pension plans are on verge of collapse only a few years after they received tens of billions of dollars. He said he would be happy to discuss reforms like the ones that have been successful in individual employer space. Cassidy noted that we will have to overcome staunch union opposition to make any reform that provides greater oversight and protection. Cassidy also said that lifetime income is desired by many Americans and that it should be easier for defined contribution plans to include them. Cassidy stated that there are things to do on a bipartisan basis. He said it was disappointing that rather than working together to hold a bipartisan hearing, the majority planned the hearing on a partisan basis with no input from minority on scope or legislative focus. He then discussed the two bipartisan bills he has introduced with Sen Kaine. He said that the Helping Young Americans Save for Retirement Act, would make it easier for younger workers between 18-20 to save for retirement. He then stated that the Auto Reenroll Act of 2023 assists workers who previously declined to participate or contributed little to nothing into their retirement plan. He concluded by stating that many members of the Committee have wonderful ideas included in SECURE 2.0 and that that it would be great to explore the current effectiveness of provisions in SECURE and discuss other ideas.
Testimony
Sara Schambers, UAW Member, Local 182, Ford Livonia Transmission
In her testimony, Schambers explained that unlike the generations of auto workers before her, she doesn’t have a pension, retirement security, or health care in retirement. She recounted how her union has been fighting to turn auto worker jobs back into financially sustainable careers and noted that while the UAW made great progress in their recent negotiations, they haven’t regained the American dream yet. Schambers blasted companies for saying that stock prices are more important than the 150,000 auto workers. She noted the next Big Three contracts expire in 2028 and said the auto workers are ready to fight like hell for retirement security, pensions, and healthcare in retirement. Schambers pledged to strike if provoked and added that Wall Street is provoking auto workers by denying them benefits. She asked the HELP Committee members if they would support American workers or corporate greed, concluding that dignified retirement shouldn’t be too much to ask for.
Teresa Ghilarducci, Irene and Bernard L Schwartz Professor of Economics and Policy Analysis, The New School for Social Research
In her testimony, Professor Ghilarducci described the US retirement system as inadequate, noting that median American retirement wealth has decreased for the bottom 90 percent of the country. She explained only the top ten percent of seniors have seen a rapid growth in their retirement savings and home equity values. Ghilarducci said that while Congress has incentivized savings and funded financial literacy efforts, the American retirement savings system is not flourishing. She explained how a well-designed pension system could help all Americans accumulate enough money, invest well, and decumulate their retirement accounts. Ghilarducci cited auto enrollment into benefits and reducing the age requirements in ERISA as good baby steps. She noted IRAs allow leakages and do not pool investments and explained that since Americans use IRAs for homebuying and other life events besides retirement, they should not be treated as purely retirement savings. Ghilarducci concluded by thanking Senators Hickenlooper and Tillis for proposing meaningful legislation that would provide access to retirement accounts to all public workers.
Dan Doonan, Executive Director, National Institute on Retirement Security
In his testimony, Doonan cited the SECURE Act and SECURE 2.0 as steps in the right direction. He noted the movement away from pensions is a major culprit in the retirement crisis, explaining that while 401K programs are an important part of the retirement equation, they aren’t designed to replace pensions. Doonan described pensions as the most economically efficient way to deliver retirement income, noting they offer workforce advantages to employers. He explained that while the greatest challenge with pensions was their unstable cost to employers, more sophisticated tools and plan designs exist to address that challenge today. Doonan assured companies that if they gave pensions another look, they would see that win-win solutions are possible.
Doonan noted the median Gen X household only has $40,000 in retirement savings and warned that half of US households will not be able to maintain their standard of living in retirement. He discussed how the financial burden of retirement continues to increase as people live longer, face large risk pooling, and see rising costs. Doonan noted the individual savings system is not well-suited for workers, explaining that while people think 401K programs are cheaper, they’re putting less money into a less effective system and hoping for the best. He concluded by discussing IBM’s decision to move back to a pension system, which led to savings.
Rachel Greszler, Senior Research Fellow, The Heritage Foundation
In her testimony, Greszler assured the committee that older Americans’ financial well-being is strong by historical standards, noting that the share of Americans with no retirement savings fell to 12 percent in 2022. She said retirees’ real incomes are up 30 percent over the past 35 years and added that households with the lowest income levels see the highest income replacement levels. Greszler explained how assets surged as the U.S. shifted from defined benefit to defined contribution plans. She noted that while defined benefit and defined contribution plans can both provide secure retirement, Social Security and multi-employer union pensions have become Ponzi schemes. Greszler warned that Social Security will become insolvent in 9 years. She cautioned that maintaining the same level of Social Security benefits would require every household to pay $3,000 more in taxes each year and argued that it would be better for that money to be saved in personal retirement accounts.
Greszler urged the reform of Social Security by shifting the program towards a universal system and adopting other common-sense measures. She explained that in multi-employer pensions, 96 percent of beneficiaries are in a plan that is less than 60 percent funded. Greszler called on Congress to shore up the
Pension Benefit Guaranty Corporation (PBGC) and to apply the same rules to union and non-union pensions. She concluded by urging policymakers to enact universal savings accounts to make it easier for Americans to save for all kinds of expenses.
Eric Stevenson, President, Nationwide Retirement Solutions, Nationwide Mutual Insurance Company
In his testimony, Stevenson explained how with pension systems, employers used to take on all of the risks to provide benefits to employees, who generally spent their whole career in one place. He criticized defined contribution systems for expecting employees to manage their savings and be financially literate with little support. Stevenson suggested taking the best of the direct benefit and direct contribution systems and removing their respective limitations. He noted the SECURE Act created educational assets and encouragement for younger workers to begin saving. Stevenson concluded that it would go a long way if plan sponsors were encouraged to offer at least one kind of retirement income solution.
Question & Answer
Social Security
Sanders noted that a billionaire only pays Social Security tax on the first $168,000 they earn each year. He discussed how wealthy Americans have massive amounts of untaxed money, while the country has massive rates of income inequality. Doonan explained that one of the reasons that Social Security fell off track is because we used to capture 90 percent of total income, but with rising inequality, the current number is down to about 81 percent.
Sen. Tommy Tuberville (R-A.L.) said he paid over a million dollars into Social Security, but only gets about $3,000 a month. He said Social Security is a scam because it’s impossible to live on.
Tuberville asked why Social Security benefits are taxed, and if that is effectively taxing someone twice for Social Security. Greszler said yes, and noted Social Security’s massive growth is to the detriment of lower-income and African American workers who have the lowest life expectancies and will see the least returns.
Tuberville asked about a solution to the issues facing Social Security. Greszler urged a shift towards a universal benefit system and called for gradually lessening benefits for the middle and upper class. She suggested indexing retirement age to life expectancy and adopting a more accurate inflation index. Greszler also said that workers need to have the option to put their money into something that earns a positive return and can’t just be spent by Congress.
Tuberville said his adult children ask him if they will ever see their Social Security money and asked what Grezler’s thoughts were on that question. Greszler said they will see some of it. Stevenson discussed the creation of new tools to protect against volatility, like step-ups and lock-ins. He said every 401K, 457, and 403(b) plan should offer at least one of those solutions.
Department of Labor’s Fiduciary Proposal
Sen. Ted Budd (R-N.C.) noted that Congress has provided explicit instructions on numerous occasions to the DOL on how to encourage Americans to save for their retirement. Budd emphasized that the DOL’s current fiduciary proposal rule directly contradicts Congress’ directives.
Budd explained that, if implemented, the DOL’s proposed fiduciary rule would restrict access, increase consumer costs, limit personalized financial advice, and only allow consideration of very basic investment products.
Budd asked Stevenson if DOL’s proposal is counterproductive to the bipartisan work included in the SECURE Act and SECURE 2.0. Stevenson said the proposed rule will hinder the implementation of everything in SECURE and SECURE 2.0. He emphasized that implementation would stop a lot of things that Congress is working on and would come at a major cost.
Budd asked if Stevenson agreed that the DOL’s rule would leave people worse off in a time where people are living longer, inflation is rampant, and when there is a need for people to start saving earlier and saving more. Stevenson warned that it has the potential to do so. He explained that if Congress implemented everything in SECURE 2.0, it would make a huge dent in all the challenges that were discussed during the hearing.
Retirement Tax Credits for Small Businesses
Sen. Maggie Hassan (D-N.H.) discussed her work with Senator Budd to develop a bipartisan bill to reform the Start-Up Tax Credit. She explained that their legislation would ensure that start-ups receive a tax credit that fully covers the cost of setting up a retirement savings plan.
Hassan asked how expanding retirement-related tax credits for small businesses could help increase access to retirement security for their employees, and how Congress could continue to support small businesses on this issue. Stevenson explained that new small businesses have a lot of initial costs and said that anything Congress does to make establishing retirement benefits easier for them would help a lot.
Budd noted that a calculation error in SECURE 2.0 restricts access to tax credits for the smallest businesses. He discussed his work with Senator Hassan to introduce a Senate companion to the bipartisan RISE Act to address that miscalculation.
Budd asked Stevenson about whether tax credits like the RISE Act would actually help boost retirement savings for people. Stevenson said absolutely, and emphasized how many people work for small businesses. He urged Congress to explore all options to allow small businesses to set up retirement saving programs while enabling workers to participate.
Defined Benefit & Defined Contribution Plans
Cassidy discussed how people move around a lot in the current job market. He noted that defined contribution plans let workers take savings with them, which he said seems like a major advantage that defined contribution has compared to defined benefit. Doonan explained how private employers have changed their incentive systems, and said they aren’t really promoting careers anymore. He noted there is not as much job jumping in the public sectors where pensions are more common.
Cassidy asked if people would be more likely to stay in their job with defined benefits. Doonan said yes.
Cassidy asked Stevenson to elaborate on how step-ups and lock-ins can help small investors deal with anxiety. Stevenson said step-ups and lock-ins bring the best of defined benefits and defined contribution plans.
Auto-Enrollment
Sen. Bob Casey (D-P.A.) discussed his 401Kids Savings Act, which would automatically create savings accounts at birth for all children. Casey’s legislation would provide federal support for low and moderate-income families. Under the bill, once a child turns 18, the funds from the savings account can be used for higher education, starting a business, buying a home, or retirement.
Casey asked the witnesses to discuss his legislation and the importance of starting savings at birth. Ghilarducci said compound interest is a powerful force and described the bill as a good plan. Stevenson noted we wouldn’t have the current retirement crisis if we automatically enrolled everyone in retirement plans at 21. Doonan agreed that starting earlier helps.
Sen. Tim Kaine (D-V.A.) discussed his work on an auto-enrollment bill, and recommended allowing workplace retirement plans to open to employees at the age of 18 instead of 21.
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