Thursday, May 24, 2012

Retirement Saving at a Crossroads

(Dear readers: this is the first of what I expect will be many entries in an online journal on the state of our retirement industry.  In today’s world of almost limitless communication and networking possibilities, we have an opportunity not only to better understand and react to our world and developments in our field, but to help shape them.  That is one of the reasons for this blog.  The “broth” of economic challenges, political divisiveness, and our aging population, seem to many to be a recipe for uncertainty; for some, even pessimism.  Remaining informed, and in turn informing others, is our best hope for a future in which Americans can be confident that their retirement years will be a blessing, rather than a burden.  As a retirement industry professional with a quarter century’s perspective and experience, surrounded by many associates in a company committed to that goal, I believe we can make a difference, and help shape a brighter future.  Todd Berghuis, Senior Vice President, Ascensus Retirement Services.)
It is certainly ironic that as American workers find themselves at a low point in confidence about a secure retirement, Congress is holding hearings to consider whether to preserve – or to radically alter – federal tax incentives that encourage retirement saving. 
On April 17, 2012, the House Ways and Means Committee held a hearing on the retirement saving incentives in the Internal Revenue Code.  Testimony was given on plan complexity, effects on the federal budget, and reasons why past Congresses enacted the saving incentives we now have.  While there are not currently bills being actively debated in Congress that would reduce or eliminate the tax preferences for IRAs and employer plans, there have been strong indications from lawmakers who want to cut federal expenditures – or greatly revamp the Tax Code – that retirement saving incentives will be “on the table” as they look for ways to balance the federal budget or restructure the Tax Code. 
At the same time as this discussion is occurring, Americans’ confidence in the likelihood they will have a secure retirement has declined markedly.  Evidence of this comes from the well-respected Employee Benefits Research Institute’s annual Retirement Confidence Survey (RCS), which polls Americans on their confidence in having a secure retirement.  This year the RCS registered a significant drop in confidence from just five years ago.  There has been a marked decline in both workers and retirees identifying themselves as “very confident” of “having enough money to live comfortably throughout … retirement.”  There has been a simultaneous increase in those “not at all confident.”    
Among active workers in 2007, which was prior to the current economic downturn, 27 percent identified themselves as being “very confident” of having a comfortable retirement.  Only 10 percent responded that they were “not-at-all confident.”  A striking reversal occurred in 2012.  Only 14 percent of active workers now responded that they were “very confident,” and 23 percent are now “not at all confident.”  For retirees, the numbers describe a similar loss of confidence.  The “very confident” dropped from 41 percent in 2007 to 21 percent in 2012.  The segment “not-at-all confident” rose from 11 percent in 2007, to 19 percent in 2012. 
This loss of confidence is also reflected in many of those who are now retired having worked longer than they expected, or wanted, and many who are still working today saying they are adjusting their expectations, believing they’ll not be able to retire when they hoped to.  Unfortunately, some factors that impact the timing of one’s retirement —like health and employability—may be beyond the worker’s control.  For this reason, too, having maximum retirement saving opportunities is crucial.
Some in Congress look at the tax preferences for IRAs and employer plans, and unfairly call them “tax expenditures,” suggesting that they represent lost tax revenues.  The reality is that taxation is merely delayed to the time of retirement for most such accumulations.  Nevertheless, some lawmakers believe that scaling back these tax preferences, or eliminating them altogether, would make available more revenues for the tax reforms they favor. 
But at what cost?  Confidence in a secure retirement is already diminishing, as the RCS survey shows.  What are the prospects for a secure retirement if Congress weakens or eliminates the current tax incentives to save for that final stage of life?  Hopefully, what is good for our citizens long term retirement needs will not be sacrificed for political advantage and change-for-change’s-sake in the short term.