Friday, March 28, 2014

Get the Facts Straight Before Dissing the Current Retirement System

We hear a lot these days about the supposed inadequacy of 401(k)s and other defined contribution plans for providing income for American workers in retirement.  Those who are most critical sometimes reveal a soft spot for the defined benefit (DB) pension plan, the “no worries” retirement plan designed to provide long-tenured workers with a guaranteed income after leaving the workforce.  Many overlook the fact that, even in the DB heyday, workforce mobility resulted in many, many workers never qualifying for that “large” pension check.   
The truth is, neither the 401(k) nor the DB plan was created to be only leg upon which a retiree would stand during retirement.  The classic model as many are aware is actually a “three-legged stool.”  In addition to an employer-sponsored retirement plan, the other two legs of this stool – by tradition – are Social Security, and additional personal savings and assets of the worker.  Together this three-legged stool would support a reasonably secure retirement. 

As much as we may be frustrated by some academics, think-tank specialists and lawmakers who feel we need a paternalistic, mandated government-run program that guarantees benefits to retirees, we don’t doubt they are sincere in their goal of helping people achieve a secure retirement.   But with the budget woes in which our country is mired, and the extremely divided political climate, a European-style universal defined benefit pension system is not realistic.  Even if that would be desirable.
But before wringing our hands and running for cover, accompanied by shouts of “the sky is falling,” let’s consider some data that suggests that things may not be as bleak as some profess.  The data is presented in an article recently appearing in the Wall Street Journal.  It was jointly written by Sylvester Scheiber, a former Chairman of the Social Security Advisory Board and now an independent pension consultant, and Andrew Biggs, former Deputy Commissioner of the Social Security Administration and currently Resident Scholar at the American Enterprise Institute. 

Scheiber and Biggs point out that the data most often cited to measure the magnitude of qualified plan and IRA payments to U.S. retirees is greatly understated.  How so?  Proposals to revamp the retirement saving system that originate in Congress, or in the halls of academia, routinely cite retirement income figures from the U.S. Census Bureau’s Current Population Survey, or CPS.  But Scheiber and Biggs note that CPS data counts only Social Security benefits and scheduled periodic payouts from retirement accounts – typically annuitized balances in IRAs and defined contribution plans – and DB plan payouts. 
The” as-needed” or irregular withdrawals are not counted, say Scheiber and Biggs, and are huge.  They should know, because they compared CPS retirement payment figures to Internal Revenue Service data on IRA and employer plan distributions, which are required to be reported annually – on pain of penalty – on IRS Form 1099-R, Distributions from Pensions, Annuities, Retirement or Profit Sharing Plans, IRAs, Insurance Contracts, etc.   

Examples of their findings include the following.  CPS data for 2008 reported $222 billion in “pension or annuity income.”  IRS retirement plan and IRA reporting forms showed $457 billion.  Given the fact that most large balances in employer-sponsored plans are destined to eventually be rolled over to IRAs, where they will probably not be annuitized, accurate IRA estimates are extremely important.  But CPS data is even more suspect here.  In 2008 the CPS reported $5.6 billion in IRA-derived income.  But, according to Scheiber and Biggs, retirees themselves reported $111 billion in IRA distribution income on their tax returns. 
The two former Social Security officials contend that the CPS not only misses at least 60 percent of the IRA and employer plan income being delivered to retirees, but greatly underestimates the share of the U.S. workforce that has an opportunity to participate in an employer plan.  CPS reports that roughly one-half of all U.S. workers have this opportunity, yet Scheiber and Biggs note that the Social security Administration’s analysis of Form W-2 data places the figure at over 70 percent.

Can the U.S. retirement system be made better?  Certainly.  We can retain and enhance incentives for employers to establish plans and encourage early participation, embrace automatic employee enrollment and automatic escalation of employee contributions.  Perhaps create an automatic IRA program for employers not yet ready for the deep end of the pool.  These are things that can make a good system even better.  Let’s consider these, while at the same time recognizing the true magnitude of benefits being delivered now, before we throw the baby out with the bath water.