Who Will Pay For Your Retirement? The Looming Crisis A Statement by the Research and Policy Committee of the Committee for Economic Development Who Will Pay For Your Retirement? The Looming Crisis Library of Congress Cataloging-in-Publication Data Committee for Economic Development. Research and Policy Committee. Who will pay for your retirement? : the looming crisis : a statement / by the Research and Policy Committee of the Committee for Economic Development. p. cm. Includes bibliographical references. ISBN 0-87186-119-4 : $20.00 1. Old age pensions — United States. 2. Retirement income — United States. 3. Social security — United States. 4. Civil service — Pensions — United States. 5. Individual retirement accounts — United States. I. Committee for Economic Development. II. Title. HD7105.35.U6C65 1995 331.25'2'0973 — dc20 95-3345 CIP First printing in bound-book form: 1995 Paperback: $20.00 Printed in the United States of America Design: Rowe & Ballantine COMMITTEE FOR ECONOMIC DEVELOPMENT 477 Madison Avenue, New York, N.Y. 10022 (212) 688-2063 2000 L Street, N.W., Suite 700, Washington, D.C. 20036 (202) 296-5860 CONTENTS RESPONSIBILITY FOR CED STATEMENTS ON NATIONAL POLICY vi PURPOSE OF THIS STATEMENT ix CHAPTER 1: EXECUTIVE SUMMARY AND POLICY RECOMMENDATIONS ....................................... 1 The Challenge Posed by an Aging Population ...................................................................................................... 2 The Untimely Decline in Retirement Saving .......................................................................................................... 5 Pension Contributions and Funding ................................................................................................................. 5 Economic Effects of Declining Retirement Saving........................................................................................... 6 Policy Options to Tackle the Retirement Finance Problem .................................................................................. 7 Regulatory Reform for Private Retirement Plans ............................................................................................ 7 Retirement Information and Individual Responsibility ................................................................................. 8 Reforming Government Employee Pensions and the Social Security Program.......................................... 8 Summary of Policy Recommendations ................................................................................................................... 9 CHAPTER 2: RETIREMENT SAVING AND ECONOMIC SECURITY ...................................................... 15 The Economic Security of Future Retirees ............................................................................................................ 15 The Economy and Retirement Saving ................................................................................................................... 16 Private- and Public-Sector Responsibilities for Pensions ................................................................................... 21 Actions Required to Meet These Responsibilities................................................................................................ 22 CHAPTER 3: THE BASIC FACTS ON OUR AGING POPULATION AND RETIREMENT SAVING .................................................................................................................................. 24 An Aging Population ............................................................................................................................................... 24 Private Sector Preparation for Retirement of the Baby Boomers....................................................................... 27 Private Pension Contributions .......................................................................................................................... 28 Private Pension Coverage.................................................................................................................................. 29 Decline in Defined Benefit Plans ...................................................................................................................... 30 Preretirement Withdrawals of Pension Funds ............................................................................................... 31 The Status of Pension Funds ................................................................................................................................... 32 Private Pension Funds ....................................................................................................................................... 32 Public Sector Funding of Pensions ................................................................................................................... 33 Expectations of the Baby Boomers for Retirement Income ................................................................................ 37 How Much Should Workers Save for Retirement? ............................................................................................. 38 Undersaving by Baby Boomers ........................................................................................................................ 39 CHAPTER 4: DESIGNING TAX INCENTIVES TO RAISE SAVING.......................................................... 42 The Tax Base Controversy ....................................................................................................................................... 42 Tax Incentives and Saving ....................................................................................................................................... 43 Design of Tax-Preferred Saving Incentives..................................................................................................... 44 Proposals for Compulsory Saving Programs ................................................................................................. 45 The Budget Deficit .................................................................................................................................................... 46 84 iii CHAPTER 5: THE REGULATORY TANGLE: PROPOSALS FOR SIMPLIFICATION ........................... 48 Favorable Tax Treatment ......................................................................................................................................... 48 Federal Regulation ................................................................................................................................................... 48 ERISA and Subsequent Legislation........................................................................................................................ 49 Regulations Limiting Private Pension Contributions and Benefits .................................................................. 50 Funding Limit for Defined Benefit Plans ........................................................................................................ 51 Reductions in Contribution and Benefit Limits ............................................................................................. 53 Regulations to Prevent Discrimination in Pension Plans ................................................................................... 59 Top-heavy Rules ................................................................................................................................................. 60 Social Security Integration................................................................................................................................. 60 Coverage and Vesting Rules ............................................................................................................................. 60 Preserving Pension Funds for Retirement ............................................................................................................ 61 Preretirement Lump-Sum Withdrawals and Borrowing from Pensions ................................................... 61 Portability of Pensions ....................................................................................................................................... 61 Pension Benefit Guaranty Corporation ................................................................................................................. 61 The Premium Structure ..................................................................................................................................... 62 Moral Hazard ...................................................................................................................................................... 63 Rising Regulatory Costs Discourage Pension Saving ......................................................................................... 64 Sources of Cost Increases ................................................................................................................................... 65 Impact of Cost Increases on Plan Terminations and Formations ................................................................ 65 APPENDIX: A BRIEF HISTORY OF GOVERNMENT REGULATION OF PRIVATE PENSIONS ............................................................................................................... 66 NOTES 72 MEMORANDUM OF COMMENT, RESERVATION, OR DISSENT 82 OBJECTIVES OF THE COMMITTEE 83 iv 85 RESPONSIBILITY FOR CED STATEMENTS ON NATIONAL POLICY The Committee for Economic Development