The initial drive to rebuild the Gaza Strip following last summer’s destructive war between Israel and Hamas has gradually stalled. Only a tiny percentage of funds pledged at an October donor’s conference have reached Gaza, and thousands remain homeless. What factors have caused these failures in the reconstruction of Gaza? How can the Palestinian leadership and the international community work to avoid past mistakes?

In this Policy Briefing, Sultan Barakat and Omar Shaban draw on their extensive post-war reconstruction expertise to provide policy advice on approaching the daunting task of rebuilding the devastated Gaza Strip. The authors outline a reconstruction strategy that seeks to engage and empower local stakeholders in Gaza, while improving transparency to ensure accountability to the Palestinian people.

Ultimately, the authors propose a collaborative Gaza Reconstruction Council to oversee the reconstruction process, with representatives from Palestinian civil society groups and political parties, international agencies, and key regional countries. This council would oversee a specialized trust fund that would receive and administer donor monies, breaking the cycle of foreign funds failing to effectively contribute to the reconstruction of Gaza.

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Since September of 2014, Jordan has joined other Western and Arab coalition partners in striking Islamic State (IS) positions in Syria, with the country’s King Abdullah framing the war against IS as a “third world war.” How have conflicts on Jordan’s borders and now the country’s direct intervention strained the country’s resources? How have the country’s leaders presented their participation at home and abroad?

In a timely Policy Briefing based on field research, Sultan Barakat and Andrew Leber assess Jordan’s vulnerabilities to regional conflicts and domestic pressures. Despite broad public support for action against IS, they note a growing gap between state and society only exacerbated by adverse events such as the capture and uncertain fate of a downed Jordanian pilot.

Read "Fortress Jordan: Putting the Money to Work"

Ultimately, Barakat and Leber note Jordan’s strategic importance to its allies but caution against it playing a front-line combat role. The authors contend that reducing threats to Jordanian stability lies not in “taking the fight to IS” abroad, but in strengthening Jordanian society at home.

While calling for improved governance in the Kingdom, the authors note reluctance on the part of Jordan’s ruling elites and their allies to promote full-scale political reforms. Barakat and Leber contend that they should therefore channel their fears about regional instability and extremism into productive action on Jordan’s economy. This will entail restructuring aid flows to the country toward productive investment, selectively incorporating Syrian refugees into the workforce, and putting forward a credible vision for the country’s economic future.

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Nearly two years after ousting President Muhammad Morsi, Egypt’s military continues to crack down on the Muslim Brotherhood. Much like during Egypt’s 1952-54 political transition, the recent interactions between the powerful armed state bureaucracy and the influential religious organization have had a major impact on the country’s political trajectory. In both instances, the military and Muslim Brotherhood initially cooperated before ultimately clashing violently. How has each entity determined what approach to take toward the other? What does a continued imbalance in civil-military relations mean for Egypt’s future?

In a new Brookings Doha Center Analysis Paper, Omar Ashour examines the legacies and patterns of cooperation and conflict between the leaderships of Egypt’s military and the Muslim Brotherhood. Relying on extensive field research, he analyzes how each entity has made its critical decisions regarding the other by applying various decision-making models. Ashour considers the impact of cost-benefit analysis, organizational dynamics, factional disputes, and psychological factors to gain a deep understanding of the leaders’ motives.

Read "Collusion to Crackdown: Islamist-Military Relations in Egypt"

Ashour concludes that Egypt's prospects for social stability and economic recovery will remain bleak if the relationship between the military and the Muslim Brotherhood is not redefined within institutional, democratic rules of political competition. He argues that Egypt’s military should embrace a balanced civil-military relationship to realize broad, long-term benefits and avoid otherwise inevitable and costly clashes with segments of Egyptian society. As for the Muslim Brotherhood, Ashour recommends that it reevaluate its recent decisions and work to develop a sustained, solid, and cross-ideological civilian front that can pressure the military to leave politics and allow for democratization.

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The need to confront and drive back the forces of the Islamic State (IS) has pushed long-term reform efforts in Iraq far down the list of priorities. Yet pressing economic reforms – such as restructuring and rebuilding the country’s energy sector – increasingly seem a strategic necessity, as oil prices have fallen far below government projections. How can politicians be persuaded to invest in Iraq’s long-term future at a time of imminent security threats? How can the efforts to reform the Iraqi electricity network be harnessed to reestablish government authority in newly retaken areas?

Luay Al-Khatteeb and Harry Istepanian address these questions through analysis of past attempts at electricity sector reform. They argue that even before IS advances plunged Iraq into a deep political and security crisis, divisions within the Iraqi parliament and various government agencies had stymied efforts at reform. Still, they note that improving the provision of electricity is a clear opportunity to improve basic services to its citizens, boosting government legitimacy and acceptance in areas under its control, especially as it seeks to retake territory from IS.

Khatteeb and Istepanian hold that a comprehensive strategy is needed, one that incorporates an expanded role for the private sector, rationalized electricity tariffs, and a host of technical fixes to improve efficiency. Ultimately, they contend, much will depend on whether the government of Prime Minister Haidar al-Abadi views the IS threat as an excuse for inaction or an impetus for change.

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The Muslim Brotherhood has faced a great deal of opposition in the Middle East in recent years, with Egypt, Saudi Arabia, and the United Arab Emirates all declaring it to be a terrorist organization. Jordan’s Muslim Brotherhood, which has historically operated as a loyal opposition to the palace, has also come under fire as regional instability has dampened Jordanians’ appetite for protest and reform. While the group still enjoys significant public support, it is facing a number of internal tensions, culminating in its recent split. How can the Jordanian Muslim Brotherhood retain its political clout? Can it play a role in stabilizing and strengthening Jordan?

Read The Muslim Brotherhood in Jordan: Time to reform

In this new Policy Briefing, Neven Bondokji discusses the various reform efforts undertaken by Jordan’s Muslim Brotherhood since 2010, and argues that it urgently needs to see them through. She identifies key challenges, including the division over the Zamzam reform initiative, overlap between the movement and its affiliated political party, the inclusion of women, the ongoing ideological shifts in the movement’s political discourse, and generational tensions. Additionally, Bondokji examines how Jordan’s East Banker-Palestinian fault line is manifested within the Brotherhood.

Bondokji makes a series of recommendations, including that the Muslim Brotherhood ensure the independence of its political party’s leadership and decision-making, actively engage in and disseminate discourse on plural politics and policy debates, and introduce new leaders and styles of communication. She also asserts that Jordan’s government must empower political parties and allow for a more representative parliament. The application of such reforms, Bondokji concludes, would allow Jordan’s Muslim Brotherhood to be an asset in the country’s efforts against destabilizing extremism.

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From the rapid fall in oil prices to the conflicts that have threatened key energy sources and transit routes in the Middle East and North Africa, the global energy landscape has shifted dramatically over the past year. The change of a single number – the price of a barrel of crude oil – can carry profound implications for government policies and company decisions around the world, from efforts at subsidy reform to shale oil extraction. Understanding the interplay between key geopolitical events and energy markets remains crucial.

Has Asian consumers’ growing dependence on Middle Eastern energy supplies prompted greater interest in providing for the region’s security? How will new sources and new transit routes reshape the global LNG and natural gas landscape? What has been the impact of falling energy prices on unconventional production and investment in renewable energy resources?

At the fourth annual Brookings Doha Energy Forum, experts and policymakers from around the globe met to discuss the key global energy trends. In broad plenary sessions and focused roundtable discussions, industry leaders from the Middle East, Europe, Asia, and the United States wrestled with these and other questions. The findings of these many conversations are reflected in this report, jointly prepared by the Brookings Doha Center and the Energy Security and Climate Initiative.

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Over the past year, much attention has been given to the growing production of shale oil and the challenge that these unconventional sources of energy pose to traditional producers in the Gulf. As the world’s leading exporter of liquefied natural gas (LNG), Qatar faces related concerns – mounting competition from new LNG exporters and more competitive pricing in key Asian gas markets. How will this global gas boom unfold? How can Doha develop a robust response to growing volatility in gas pricing and demand?

In a new Brookings Doha Center Analysis Paper, Naser al-Tamimi examines Qatar’s position on the global gas stage and assesses the prospects of new competitors. He argues that new LNG production and exports – from Australia, the United States, and other countries – present a challenge to Qatar’s dominant status in global gas markets, particularly in the Asia-Pacific region. At the same time, diversification and slowing growth in this region’s major economies, such as China, South Korea, and Japan, may reduce LNG demand across the board.

Read "Navigating uncertainty: Qatar’s response to the global gas boom"

Ultimately, Tamimi argues that Qatar’s pricing mechanisms and export revenues will come under significant pressure as a result of these developments, posing a potential challenge to Qatari finances. He contends that an effective response from Qatari officials must emphasize greater exports to the Middle East/North Africa region, greater contract flexibility to attract new buyers, and cooperation with other GCC members to improve Gulf bargaining power in key regional markets.

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Over the past few years, higher education has been a frequent casualty of the violent conflicts sweeping the Middle East. Campuses have been bombed in Syria, Gaza and now Yemen; occupied or closed in Libya and Iraq; and been the subject of severe police crackdowns across the region. What institutional measures can both regional entities and international bodies take to protect institutions of higher learning in the Arab world? Beyond this, how can strategies of protection be incorporated into programs of reconstruction and development for this much-maligned sector?

Read "Houses of wisdom matter: The responsibility to protect and rebuild higher education in the Arab world"

Sultan Barakat and Sansom Milton, in a new Brookings Doha Center Policy Briefing, contend that higher education is often an unrecognized casualty of these conflicts, with priority given to more pressing humanitarian needs. They assert that the protection and rebuilding of such institutions across the Middle East forms a crucial response to present concerns, helping to shelter and develop strategically vital youth populations. Crucially, they hold that an action plan for higher education in the Arab world cannot end at rebuilding shattered classrooms or rescuing individual scholars.

Ultimately, Barakat and Milton argue for a regional approach to defending and advancing higher education, as a key tool to combat violent extremism, address economic challenges, and encourage social stability. A strategy of “building back better” would allow higher education to serve as an engine for regional revitalization, living up to the historical example set by the region’s centuries-old institutions of higher learning.

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Over the past several years, thousands of foreign fighters have traveled to Syria and Iraq on a scale unprecedented in modern history. While most foreign fighters remain engaged in combat, some have begun to return, posing a real, if sometimes exaggerated, security threat to home countries. In such situations, how should governments aim to respond? Are there policies that can defuse the security threats posed by returning fighters without alienating individuals and communities key to countering violent extremism?

Read "Returning foreign fighters: Criminalization or reintegration?"

Drawing on case studies from countries such as France, Denmark, and the United Kingdom, this Policy Briefing by Charles Lister points to the necessity of counter-terrorism measures, yet cautions against allowing these policies to translate into blanket criminalization of individuals or communities. On a basic level, policymakers will have to navigate between “hard” policies of criminal investigation and prosecution and more “liberal” policies that that aim to rehabilitate fighters and better reintegrate them into their home communities.

Lister concludes that countries should adopt a nuanced approach toward returning foreign fighters, relying on closer coordination between local authorities and community leaders, improved information sharing on the foreign-fighter phenomenon, and a better understanding of the dynamics of recruitment and radicalization.

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Indian Prime Minister Narendra Modi’s recent visit to the United Arab Emirates revealed New Delhi’s intention to bolster bilateral relations with the Gulf states. It was the first visit by an Indian prime minister in over 30 years, demonstrating the country’s renewed focus on expanding ties with the region it has always called “West Asia.” Although India and the Middle East share a long history of trade, immigration and cultural exchange, relations have yet to reach their full potential.

Read "Dealing with Delhi: How culture shapes India’s Middle East policy"

In this policy briefing, Kadira Pethiyagoda highlights the importance of an under-reported aspect of the relationship – culture. The author explains the role it plays in India’s policies toward the region, particularly under the current government, and argues that Gulf states need to understand the impact of Indian values and identity. Pethiyagoda provides recommendations on how the Gulf states can, through better understanding the cultural drivers of Indian foreign policy, build stronger ties with India, thereby advancing both economic and strategic interests.

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Event Information

Americans — especially low- and middle-income workers — are simply not saving enough for retirement. The current retirement income deficit—the gap between what Americans will need in retirement and what they will actually have—is well over $6 trillion. This gap will be insurmountable without a significant change to current tax policy to help incentivize more Americans to save for their own retirement.

On September 9, the Retirement Security Project at Brookings hosted a briefing in collaboration with the Senate Special Committee on Aging to examine new ways to help Americans save for retirement without increasing government spending. A panel of experts on tax, retirement and budget policy explored ideas to modify the tax incentives for retirement savings.

After the panel, participants took audience questions.

Audio

• Rethinking Incentives to Save for a Secure Retirement

Transcript

• Uncorrected Transcript (.pdf)

Event Materials

• 20110909_retirement_saving_incentives

Americans who use defined contribution retirement savings plans (for example, 401(k) or 403(b) plans) or Individual Retirement Accounts will see their retirement security enhanced by two recently announced regulatory initiatives. The first is a series of Treasury Department/IRS proposed regulations that such individuals to use annuity-like guaranteed lifetime income products. The second is a final Department of Labor rule requiring complete fee disclosure to employers sponsoring retirement saving plans. Together, the two initiatives will give current retirement savers and future retirees more flexibility in structuring their retirement incomes, while making it possible to avoid excessive or hidden fees.

Four Treasury/IRS proposals, which were developed under the leadership of our former RSP colleague Mark Iwry, deal with several of the most pressing issues faced by employers and savers that currently reduce the use of annuities. The first proposal would reduce barriers to giving retiring savers the option of annuitizing part of their account balances. Currently, people need to annuitize either the entire balance or none at all. People are naturally wary of annuitizing the entire amount because it leaves them with little in the way of a cash cushion for emergencies. By choosing to annuitize part of the balance, people can retain a lump sum for emergency or other purposes.

A second proposal would remove a technical impediment to using longevity annuities, an annuity that is typically purchased close to retirement but does not begin to pay benefit until the retiree reaches age 85 or a similar age. Longevity annuities enable retirees to manage their money for a set period of time, secure in the knowledge that the longevity annuity will provide income after that, should they live longer than expected.

The third proposal would allow an individual to begin to partially annuitize their savings well before retirement. Starting to annuitize early by buying small pieces of an annuity over twenty or so years allows the saver to avoid having to make a “once and for all” decision and allows the savers to spread out the interest rate risk over time. This option had been subject to a requirement that the saver get a notarized statement from his or her spouse (if any) concerning whether the annuity covers just the saver or both the saver and his or her spouse. The proposal allows this to be handled by the issuing insurer when payments would begin rather than when purchases begin.

The fourth proposal would apply to relatively rare case where the employer has both a retirement savings plan and a traditional defined benefit pension, and would allow an employee to buy a low-cost annuity through the employer’s DB pension.

These four regulatory changes are positive developments. The changes announced today eliminate unintentional barriers to the use of lifetime income products without dictating how individuals should use them. Some may choose to partially annuitize at retirement, some to use longevity annuities to protect them in later years, and some to begin to buy annuities well before retirement. Whatever the choice, the proposals open up new options to future retirees, and should encourage even more market innovations.

At about the same time, the Department of Labor released final regulations requiring providers to disclose all direct and indirect fees to the employer sponsoring a 401(k) plan. The regulations will add needed transparency on fees that will enable increased competition to produce better results for employers and employees.

Despite removing a required template of charges, the new regulations nevertheless give employers a complete and accurate picture of all charges they have to pay, including indirect fees paid by the provider to others. Currently, many indirect fees are not disclosed even though they may reduce the earnings of participants. Endorsed by industry and consumer groups, the disclosures will enable employers who use this information properly to meet their fiduciary responsibility to choose a responsible fee level. What is even more important, the full disclosure will enable employers to structure their 401(k) plan so that individual savers can get the best returns possible, and not be subject to unreasonable fees.

While much more remains to be done to improve retirement savings plan, the steps taken by the proposed Treasury/IRS regulations and the Department of Labor’s final regulations will help savers to improve retirement security.

The new 2013 budget unveiled by President Obama on Monday again contains the Automatic IRA, which was developed by Brookings' Retirement Security Project in conjunction with The Heritage Foundation. This year's version again includes an important change that will also encourage more employers to offer a 401(k) account to their workers. However, important changes to the Saver's Credit, which had been in previous budgets failed to make it this year.

Nearly half of American workers - an estimated 78 million- currently have no employer-sponsored retirement savings plan. The Automatic IRA is a simple, easy to administer and understand system that is designed to meet the needs of small businesses and their employees. Employers facilitate employee savings without having to sponsor a 401(k)-type plan, make matching contributions or meet complex eligibility rules. Employees are enrolled automatically into an IRA with a simplified system of investment choices and a set automatic savings level. However, they retain complete control over all aspects of the account including how much to save, which investment choice to use, or even to opt out completely. Automatic IRAs also offer savings options for the self-employed, for independent contractors, as well as providing those who are changing jobs the ability to continue their retirement savings.

The new 2013 budget would also double the size of the tax credit that employers receive in return for starting a new 401(k) plan from $500 annually for three years to $1,000 annually for the same period. This increase will ensure that the credit covers more of an employer's costs, and should encourage more employers to offer such a plan. This is a very good move, but the credit could be still further expanded to $1,500 for three years as will be proposed by a new House bill coming from Rep. Richard Neal. As Congress examines the proposal, it will have the opportunity to also expand the smaller credit that would be offered to employers that start an Automatic IRA to ensure that they are fully reimbursed for all expenses connected with starting and operating such an account for their workers.

A disappointing development is the failure to again include proposals to expand and improve the Saver's Credit by making it fully refundable. The Saver's Credit is an incentive for middle-and lower-income taxpayers to save in 401(k)-type accounts or IRAs. Retirement Security Project research found that more than 69 million taxpayers had income that was low enough for them to be eligible for the Saver's Credit in 2007. However, nearly 45 million of these filers actually failed to qualify for the credit because they had no federal tax liability. If the Saver's Credit was made refundable as RSP has proposed and deposited directly into the account as a match for savings, those 45 million taxpayers could have taken advantage of the program and had significantly higher retirement savings.

Editor's Note: this article originally appeared in the 2012 Print Version of AARP: The Journal.

Using one platform to offer a variety of services

Known in the UK under the term “corporate platform” to indicate that it expands options available on the employer’s benefit platform, the development allows employees to use the employer’s retirement savings mechanism to save and invest for additional nonretirement purposes. When the corporate platform is fully implemented, employees will be able to man­age almost all of their investments and savings plans from one location, thus giving them a con­solidated view of their entire financial status. If carried to its full potential, the expanded saving platform will allow employees to shop for sav­ings products, among options that are available on the platform, instead of having to seek them out from individual suppliers—a search that often takes up work hours. Of even greater value, it gives employees one source to go to for indi­vidualized advice or financial literacy training.

The enhancement has special significance in the UK, where by fall 2012, the larger employers that don’t offer any other type of pension or retirement savings plan, must begin to automatically enroll their employees into basic retirement savings accounts. This requirement is causing a great deal of discussion about the future role of employer-provided benefits, as well as recon­sideration of the fees and services included in a traditional package. The platform enhancements allow an employer to differentiate its employee benefit package from the required basic account structure. It also gives younger employees a benefit of more immediate value, than they would have from a retirement savings account that they won’t access for a good 40 years.

Presentations from a variety of service providers at an October 2011 summit hosted by Pensions Insight, a UK trade journal, showed that the platform can be easily customized to meet the special needs of a specific workforce. Using a single computer interface, employees can select from a wide variety of savings and investment options that are appropriate for their income level and stage of life. Thus, an upper income manager who manages his or her own finances could see more sophisticated products, while an entry-level worker sees more basic sav­ings products. Live presentations by financial professionals who explain what is available on the computer platform add to the system’s value and increase its use.

A place to provide choice and to build financial literacy

The platform will have special value for moderate- and lower-income employees. While higher salaried employees may appreciate the opportunity to build their investments, the real value of the platform will be to enable moder­ate- and lower-income workers to find savings opportunities that they might otherwise miss because they don’t know where to go, are uncertain about what is a fair price, or for a variety of other reasons. Because employees tend to believe that services included on the corporate platform are implicitly endorsed by the employer, they usually have greater faith that the services are from legitimate providers at a fair price.

Employees at all levels can also use the site to receive guidance on individual products or basic financial literacy training. Individuals can choose from a range of options, from short videos on a specific topic by experts or fellow employees, to longer connected courses designed to meet the needs of specific age or income groups. Use is increased when employ­ees receive emails or text messages geared to birthdays or other life events, or generated after the employee visits a specific part of the website.

Understanding the value of peer evaluations to motivate others, some providers include a place where employees can post feedback about spe­cific products or savings choices. These postings help to guide other employees’ decisions and build the reputation of the platform as a source of unbiased information. The site can also include links to outside advisors who can answer specific questions, guide employees to another site for more information, or perform other services either online or over the telephone.

Differing age groups can be contacted and guided through different technologies. At the UK platform summit, David Harris, of Tor Financial Consulting, showed that younger employees preferred different communication methods than either older workers or the usual way employers provide information. However, the platform is able to use a wide variety of methods and is equally effective no matter which is used.

The platform’s value to international policy makers

Although the UK’s platform is intended as an enhancement to employer-provided benefits, it can also be used for a wide variety of policy goals, as the basic structure can be easily adapted to meet almost any nation’s specific tax and savings system. In the United States alone, policy experts have proposed dedicated savings accounts for nonretirement purposes ranging from unemployment benefits and retraining, home purchases, health care, and long-term health care coverage, to repaying student loans or building college balances for children or grandchildren. However, if all of these various accounts were established and funded, it is doubtful the employee would have any money left for food, clothing, and shelter.

Rather than having a host of specific savings programs, employees may be better served by more flexible accounts usable for a variety of purposes, as outside developments or chang­ing needs dictate. The platform concept would allow individuals to choose which purposes they need to save for and how much to save for each. Combined with targeted guidance or education, this structure could expose individuals to pos­sibilities they might not have considered before.

The structure is ideally suited to employment situations, but it could also be used by the self-employed or by consultants at sites aimed specifically at them and sponsored by trade associations, unions, or even government agen­cies. While their circumstances may preclude payroll deductions, the same products could be offered through direct debits to bank accounts.

The added value of nudge

The flexibility of the platform allows it to be used by employees with all levels of financial sophistication, but new participants would benefit from a variation on automatic enroll­ment that places certain amounts, in addition to the retirement savings amount, into a general savings account or similar vehicle. The automatic savings amounts deducted need not be large, and where the law allows, could vary according to employee age, with a larger proportion of the overall deduction going to nonretirement purpose for younger employees and to retirement for older ones.

As with automatic retirement enrollment, the employee would have the ability to vary amounts, divide the total among various accounts, and even stop all future contributions. However, automatic enrollment would offer workers direct experience with the nonretire­ment side of the platform. By varying enrollment in various accounts according to employees’ age, automatic enrollment could encourage them to consider saving for various purposes, such as a first home, college tuition for children, or additional health services.

Improving retirement security

Although the platform is applicable to a wide variety of other uses, its primary purpose is to build retirement security. Before retirement, the platform helps employees understand how to save, what they have, and how much more they need for a comfortable lifestyle. The other savings provide funds that can be used in the event of an emergency, thus helping to reduce leakage from retirement accounts in countries that allow early access to that money. At retire­ment, the platform helps individuals to see what other assets are available, and what loans or other liabilities must be factored in. In the UK, it is also being used to encourage individuals to use annuities and add them to their invest­ments. The UK experience can help to guide US policymakers in their efforts to increase the use of similar products.

The enhanced information and flexibility of the corporate platform should help individuals to better understand their finances and how to meet their goals. It moves retirement savings plans from a minor part of employees’ financial lives, to a central feature that has many more uses than just an event many years in the future. This promotes regular use of the platform, and a fuller understanding of what is necessary for a comfortable retirement.

Many American households do not save for retirement. Those that do save often contribute too little, invest poorly, or withdraw funds early. These patterns leave households, particularly low- and middle-income households, vulnerable to insufficient savings to finance adequate living standards during old age and retirement.

This research report proposes retirement saving reforms designed to help boost saving among low- and middle-income households. These 11 proposals are grouped under five themes: (1) making saving easier, (2) making saving more rewarding, (3) strengthening the market infrastructure for saving, (4) providing private information to savers, and (5) improving public education for saving.

Download the full report at aarp.org »

Event Information

Australia's mandatory Superannuation Guarantee requires its citizens to save at least 9 percent of their income towards retirement. In many Asian nations, economic growth has spurred reexamination of pension systems to meet the needs of rapidly evolving societies. Would a mandatory savings plan be more effective than the current U.S. voluntary system? How have Asian nations have restructured their pension systems to deal with legacy costs? And what can Americans learn from the way Australia uses both employer and employee representatives to shape investment choices?

On September 17, the Retirement Security Project at Brookings and the AARP Public Policy Institute hosted a discussion of what the United States might learn from retirement savings systems in Australia and Asia. Opening speakers included Nick Sherry, who helped shape the Australian system as a cabinet minister and ran a Superannuation fund in the private sector, and Josef Pilger, an advisor on pension reform to both the Malaysian and Hong Kong governments and many industry providers. Steve Utkus, David Harris and Benjamin Harris, retirement experts from both the United States and the United Kingdom, considered how reforms in Australia and Asia can shape the American debate and whether this country should adopt key features from those foreign systems.

Audio

• Retirement Savings in Australia, Asia and Beyond: What are the Lessons for the United States?

Transcript

• Uncorrected Transcript (.pdf)

Event Materials

• 20130917_retirement_savings_transcript

In this year’s State of the Union Address, President Obama announced a new retirement savings account for workers whose employers do not offer any form of pension or savings plan. He also promoted the Automatic IRA, a retirement savings plan that originated at the Retirement Security Project and has been in the Administration’s budget for several years.

Only about half of workers has access to a retirement savings plan at work. Millions of Americans lack the ability to save at work via payroll deductions. And while these individuals could in theory save on their own in an IRA, the best estimate is that only about one in twenty eligible to contribute to an IRA actually do so on a regular basis.

To help solve this problem, the President announced the creation of My Retirement Account, or “MyRA.” Similar to the R-Bond discussed in a recent AARP Public Policy Institute paper written by William Gale, David John and Spencer Smith, MyRA would allow individuals to save in a government bond account similar to the one offered as an option to federal employees through the Thrift Savings Plan. The details are unclear (there’s a WhiteHouse fact sheet here), but MyRA would allow new savers and those with small balances to accumulate retirement savings without either having to pay administrative charges or face market risk. Employers would not administer the plan or have any fiduciary responsibilities related to the accounts. Importantly, too, contributions come from employees, not employers. The plan is meant to build off of existing institutions—payroll deduction, Roth IRAs, the G-fund in federal employees’ thrift saving accounts. And it is meant to supplement, not substitute for, 401(k) and other company-based retirement plans. It accomplishes the latter by only allowing contributions up to the IRA limit, by limiting investment choice, and by having people with more than a set balance move into a regular account.

This approach is a boon to those who can only afford small contributions to retirement accounts. Private sector funds often require minimum contributions that are out of reach of low-income savers or assess high fees to offset their costs.

The key questions are whether employers will participate and whether automatic enrollment (that is, a regular contribution on behalf of all employees who do not opt out) would be allowed for MyRA accounts. Research suggests that automatic enrollment would greatly boost the number of employees who participate.

President Obama also promoted the Automatic IRA, but that would require congressional action, something that has not happened so far. Because the Automatic IRA would require employers with more than 10 employees to offer retirement accounts, it would likely dramatically increase the number of workers who save for retirement. It would also give employees a greater choice of investment options and serve as a permanent retirement savings plan, rather than a starter account like MyRA.

With Tuesday night’s mention of both proposals, the president made retirement security a priority. Both proposals would allow workers to build economic security through their own efforts and promote the kind of values and self-reliance that both sides of the political spectrum find attractive.

Thank you for allowing me to testify before you today on the need to improve retirement savings opportunities for employees of private sector small businesses and ways to structure such an effort.

I am David John, a Senior Strategic Policy Advisor in AARP’s Public Policy Institute, AARP’s internal think tank. In addition, I am a Deputy Director of the Retirement Security Project at the Brookings Institution. Before I joined AARP last year, I was a Senior Research Fellow at the Heritage Foundation for almost 15 years.

My testimony this afternoon will focus on three areas: first, that there is a very real and growing retirement security problem in the United States; second, that the existing products and efforts are not resolving this problem; and third, that there are some approaches that Oregon could take that are compatible with existing law and would help future retirees to have a more comfortable retirement. These proposed actions would also help both your state and the country as a whole avoid the high costs of doing nothing. Let me be clear from the start that simply talking about increased education is not enough. This is a problem that will require action to improve.

The Problem Facing Us

Oregon and our nation face a serious problem if a large proportion of our workforce remains unable to save for retirement through an employer-related payroll deduction plan. This situation affects both those approaching retirement and those who are just starting their careers. However, older workers may have much higher access to defined benefit plans, and thus be much better off than younger employees who will have nothing to rely upon other than savings and Social Security.

Social Security is the foundation of retirement security both here and nationwide. In Oregon alone, its benefits keep hundreds of thousands out of poverty, but for most people, Social Security’s average benefit level of about $1,300 a month[1] does not provide enough for a comfortable retirement. That is about $15,600 a year. Economic security requires both Social Security benefits and sufficient additional savings to supplement them.

The lack of savings—and the opportunity to save at work through payroll deduction—is where the problem lies. Various industry groups and columnists have claimed that all is well, and that there really is not a problem. However, on close examination, there are holes in their figures, and they often focus on today’s retirees and those close to retirement, people who are much more likely to have a traditional defined benefit pension plan than younger workers who need to be saving now will have.

Even then, the numbers are not pretty. National data from the non-partisan Employee Benefit Research Institute (EBRI) show that in 2013, 51 percent of workers aged 45–54 had less than $25,000 in total savings and investments.[2] These are people between 10 and 20 years from retirement. Among workers aged 55 and above, those within 10 years of retirement, 43 percent had less than $25,000 in total savings and investments. These household savings numbers exclude home equity and defined benefit pensions (if any). Savings of that amount will not take an individual through one year of retirement, much less the 20 plus years that most healthy 65-year-olds are likely to experience.

Interestingly, the question in 2014 was revised to separate out those with access to an employer-sponsored retirement savings plan or pension and those without.[3] The answers showed once again the value of such a plan and the cost of not having one. About 62 percent of employees with access to a retirement saving plan through their employer had more than $25,000 saved, and 22 percent had $100,000 or more. However, 94 percent of those without access to such a plan had under $25,000 in total savings and investments, and only 3 percent had $100,000 or more.

Just to place these numbers in perspective, any amount of retirement savings is certainly better for a retiree than no retirement savings at all, but it takes a significant amount gradually built over a long period of time to build a significant level of financial security. Retirement savings of $100,000,[4] a sum that only 30 percent of the workers age 45–54 and only 42 percent of those age 55+ in the EBRI survey will equal or exceed, buys additional monthly income of $589 ($7,100 annually) for men at age 65 and $552 a month ($6,600 annually) for women at that age.[5] That would give men with $100,000 in retirement savings and average Social Security benefits a monthly retirement income of about $1,800 ($22,700 annually) and women with the same savings and Social Security benefits a monthly income of $1,750 ($22,200). Neither figure is likely to produce a comfortable retirement, and the EBRI data suggest that even that is out of reach for well over half of all Americans.

Admittedly, these are rough numbers, and many people will receive higher-than-average Social Security benefits. However, many other people will end up receiving much less than average. We know from other research that five groups are most likely to undersave: small business employees, lower-income individuals, women, younger workers, and members of minority groups. However, the problems are not limited to just these five groups. By the way, the recent column by Robert Samuelson[6] that repeats industry assurances that all is well cited the Investment Company Institute (ICI) as saying that the median value of IRA and 401(k) accounts held by people aged 55–64 is $100,000.[7] If that is true, then half of all those with such accounts would have annual retirement incomes equal to or less than the $22,000-plus level I just mentioned if they receive average Social Security benefits.

To make matters worse, when calculating the average amount in such accounts, researchers usually exclude those who have no account at all. In the case of the ICI data Samuelson cites, it appears that approximately 25 percent of households aged 55–64 did not have either a 401(k) or an IRA. They face an even worse future.

How can industry researchers present the existing retirement system as working very well? The answer is by using selective statistics. As an example, the EBRI study includes a question asking how many employees have saved for retirement.[8] The answer for 2013 is 66 percent of all workers and 74 percent of those aged 55 to 64. If one stopped there, the picture would look very good. It is only when one digs in deeper and asks how much they have saved that the true problem becomes evident. Similarly, other studies[9] that show no serious problem focus on today’s retirees, who had much more access to a traditional defined benefit pension than tomorrow’s retirees will. While many of today’s retirees are comfortable, their success does not imply that younger workers will automatically have the same future.

Access to Workplace Savings Is Essential

It is not that people do not want to save or cannot save. They do. The problem is often the lack of access to a convenient savings plan, and the inability to understand the many savings options that exist.

The existence of a workplace retirement savings plan is important. A recent Boston College Center for Retirement Research paper[10] found that access to a workplace retirement savings plan or pension is second only to having a job as the most important factor in assisting moderate- to low-income individuals to build retirement security. A wide variety of research shows that only about half of the U.S. workforce has the ability to save for retirement or has a pension at work. While there are a variety of data sources, each with its own strengths and weaknesses, another Boston College study[11] found that the coverage statistics are comparable between data sources when the same standards are applied. This included a study of IRS records[12] that appeared to show otherwise.

Regardless of the exact percentage point used to estimate coverage, the sad fact is that millions of Americans currently lack the ability to save for retirement at work through payroll deduction. This is especially true for small business employees. A recent U.S. Government Accountability Office (GAO) study[13] found that only about 14 percent (one in seven) of businesses with 100 or fewer employees offer their employees such a plan, and that between 51 percent and 71 percent of the roughly 42 million people who work for a small business lack the ability to save for retirement.

PPI research shows that about 642,000 Oregonians between the ages of 18 and 64—about 47.6 percent—are employed by a company that does not offer a pension or retirement savings plan.[14] The Oregon number is slightly better than the 51.1 percent national figure. That translates into 57 million Americans who are employed by the private sector and cannot save for retirement at work. These are not just younger employees who are new to the workforce. They include midcareer individuals who move from a large company that offered a retirement plan to a smaller company that does not. Often, these midcareer workers end up with a gap in their savings history that damages their ability to build economic security.

The Need for Better Coverage Is Widely Acknowledged

AARP is certainly not the only organization to recognize the need to increase the number of people able to save for retirement through a payroll deduction plan or account. Here, in Oregon, the Retirement in Reach Coalition[15] is a broad-based collection of business, professional, labor, and civic groups that have come together to help more Oregonians to save.

Nationally, a number of organizations, including many prominent research institutions, have written about the number of people who lack the ability to save for retirement and the need to improve coverage. Please note that these organizations do not necessarily support any specific solution or, indeed, any solution at all. However, all have written about either the need to expand coverage or how retirement security would be improved through greater coverage. As an example, Putnam Investments CEO Robert L. Reynolds has written about the need to improve the ability to save in a short paper titled “Three Steps that Could Shore up Retirement.”[16] The paper noted that “today—two years since the first boomers turned 65—the Employee Benefit Research Institute estimates that 49% of American workers are still ‘not confident at all’ or ‘not too confident’ about having enough money in retirement, 57% of pre-retirees have less than $25,000 saved for the future, and 32% of all workers do not have access to a retirement saving plan at work.”

The paper’s Step Two was: “Access to workplace savings for all workers. Any worker paying FICA taxes should have access to a retirement savings plan at work.”

Other organizations that have either issued papers or made statements about the number of people who lack an employer-sponsored retirement savings or pension plan include the following: the Brookings Institution’s Retirement Security Project,[17] the New America Foundation,[18] the Aspen Institute,[19] the U.S. Chamber of Commerce,[20] the Heritage Foundation,[21] and the Urban Institute.[22]

Again, this is not to imply that any of these organizations endorse any approach that Oregon might decide to take on retirement savings or that they support any part of my testimony. I mention them solely to show that concern about limited opportunities to save for retirement is widespread.

Those without an Employer-based Plan

In theory, everyone without an employer-based plan could save in an IRA, but EBRI research estimates that only about 1 out of 20 actually does so regularly.[23] In addition, payroll deduction is viewed as very important for encouraging retirement savings by people at every income level[24]. Overall, 61.5 percent of those surveyed in the EBRI 2011 Retirement Confidence Survey said that payroll deduction was very important for encouraging them to save for retirement, and another 27.8 percent said that it was somewhat important. Together, 89.3 percent said that it was either very or somewhat important. Further, the survey also found that a significant number of those currently saving would either stop or reduce their saving if payroll deduction was not available. It is much easier for people to save regularly if their savings are deducted from their paycheck before they receive it. Otherwise, the press of immediate bills tends to crowd out savings for longer-term goals.

Another factor in the extremely low savings rate among those who can use only an IRA is availability and trust. Especially in low-income neighborhoods, there are often no financial institutions nearby other than check-cashing outlets. Low-income individuals are often reluctant to go to financial outlets in other areas as they may feel that they are not welcome or that they will be treated poorly. Another drawback that applies to individuals of all income levels is the fear that they will be taken advantage of. Because financial professionals will know much more about the subject than their potential customers and may use unfamiliar terms, people have a very real fear that they will be talked into something that benefits the financier rather than the saver.

In addition, behavioral research shows that when people are faced with an important decision where they are uncertain what to do, they do nothing. This inertia factor is especially present in financial decisions like retirement savings.

These are reasons why an approach that focuses solely on additional education is extremely unlikely to succeed. Such an approach does nothing to increase the number of local financial outlets or opportunities to save. In addition, such financial literacy training often uses the same complex terms that potential savers find confusing. There is a value to training, but only in addition to expanded access to retirement savings.

On the other hand, when employees are presented with a plan at work that is structured in a way that provides guidance, they take the opportunity to save. This is true at all income levels. The Boston College study on why lower-income people are less likely to save that I mentioned earlier[25] showed very similar take-up rates between income levels. Eighty-six percent of those with incomes under 300 percent of the poverty line participated in a retirement savings system or pension if they were offered one and were eligible, compared to 95 percent of those with higher incomes.

Existing Products Are Not the Solution

Opponents of a state-sponsored retirement savings effort often cite the number and kind of existing products that are currently available to small businesses. A joint IRS/U.S. Department of Labor publication[26] lists seven types of retirement savings plans that are currently available. Unfortunately, most of them are both expensive and complicated or require the employer to make a contribution. Only one that is not widely available really enables small businesses to offer their employees an opportunity to save without saddling them with high costs or requiring savings.

Both the traditional 401(k) and the automatic enrollment 401(k) are excellent solutions for employers who are willing to offer them. However, the GAO found[27] that smaller employers can pay much higher administrative costs than those paid by larger employers. In addition, they can be complicated and require employers to play a more active role than many are willing to do.

Three other plans, the SEP IRA, the SIMPLE IRA, and the safe harbor 401(k), are either totally financed by employer contributions or require employers to make contributions. In addition, another of the seven options—a profit-sharing plan—is both completely financed with employer contributions and doesn’t require regular funding. While this plan does allow for profit sharing in good years, it does not necessarily include regular contributions that an individual can use to finance a retirement income.

The seventh type of retirement savings account available to small businesses is the payroll deduction IRA. It does not require (or allow) any employer contribution, or saddle the employer with complex regulatory burdens or impose significant costs. All the employer has to do is make it available to employees, deduct the contributions from their paychecks, and then send it to the financial provider. Unfortunately, it is not widely available or sold, as it offers financial services companies only limited income potential. Oregon can help to change that situation.

Another type of retirement savings tool, MyRA, was announced in President Obama’s January State of the Union speech. MyRA has some very positive features,[28] but it is not a solution or a substitute for anything Oregon might decide to do to help more people to save for retirement. A key weakness is that an individual can only have a maximum of $30,000 in MyRA. That is not nearly enough for any appreciable improvement in financial security. Second, MyRA savings will be deposited only in government bonds. While that investment is completely safe, it does not allow any real investment growth. An individual with just a MyRA is likely to get little more than the inflation-adjusted amount they contributed.

Why Oregon Should Be Concerned about This Problem

This is a state problem because doing nothing will mean higher state and local taxes for your children and grandchildren. Low-income retirees will need state and local services financed by state and local taxes for health care, housing, senior centers, and a host of other services. As Oregon ages and the baby boomers retire, the demand from this population for additional state government services will only grow. However, there is a simple, low-cost alternative to taxpayer-funded government services.

What Oregon Can Do to Help

The statute that created the Oregon Retirement Savings Task Force includes the limitation that you cannot recommend anything that might be contrary to the federal Employee Retirement Income Security Act (ERISA). Some would have you believe that this limits you to proposing additional employee education. This is not the case.

While ERISA as it is currently written does limit Oregon’s options, there are still avenues open to the state that would help to directly increase the number of Oregonians who can save for retirement at work. Oregon could still sponsor a payroll deduction IRA[29] that could be available at low cost to every resident of the state who is not currently covered by another retirement savings or pension plan. Such an account could be available through either state-managed investments or one or more private sector providers chosen and monitored by a state agency.

The state, the employer, or any private sector provider would not be responsible for the performance of the savings, and there would be no promised retirement benefits. All of the savings would come from and be owned exclusively by the individual saver. It would be up to the saver to monitor his or her eligibility and compliance with contributions rules. The small costs of such a program could be paid out of fees assessed on the accounts, or the start-up costs could be subsidized by the state.

A key fact is that the only liability faced by the employer would be to collect and forward individual contributions to the provider or agency on a timely basis. In theory, such contributions could be forwarded using the same schedule as the state currently uses to collect its income tax revenues. Federal law limits the role of the employer to encourage its employees to save for retirement through providing general information about the payroll deduction IRA program. The employer is also allowed to answer any questions about the program or to refer them to the IRA provider and provide any informational materials written by the IRA provider, as long as no endorsement by the employer is provided. At all times, the employer must remain neutral about the provider.

This is not a perfect plan, and it does not include features that many who support increased access to retirement savings would like to see. However, we believe that such a plan would be legal and, if combined with an educational program, could increase retirement savings among Oregonians. As federal law either changes or is reinterpreted, additional features and services could be added. This would be a starting place, not a final destination.

Automatic Enrollment

At this point, any Oregon plan would probably not require the use of automatic enrollment. However, as both state and federal law evolve, it would be helpful to explore encouraging that feature in any retirement savings plan. Under automatic enrollment, an employee continues to have total control over his or her retirement savings decisions, but unless the employee decides otherwise, he or she is enrolled and saves a set percentage of income in a specific investment choice. Automatic enrollment uses behavioral economics to make inertia work for the employee. These features work. The five groups mentioned earlier that are most likely to undersave (women, younger employees, small business employees, lower-income employees, and minority groups) all see their participation rates climb from very low levels to close to 90 percent.

And employees like automatic enrollment. A 2007 survey[30] of automatically enrolled workers showed that 95 percent found that it made saving easy. Eighty-five percent started to save earlier than they would have without it. Almost all of the employees who were automatically enrolled and remained in the plan said that they were satisfied with the process (97 percent) and were glad their company offered automatic enrollment (98 percent). Even those who were automatically enrolled and decided not to save liked the feature, with 90 percent being satisfied with the process and 79 percent being glad their company offered automatic enrollment.

Conclusion

Again, thank you for allowing me to testify today. Improving the ability to save for retirement through the increased availability of payroll deduction savings would address a real need both here in Oregon and nationwide. From a policy standpoint, an active program that increases the access that small business employees have to payroll deduction retirement savings plans would help the nearly 650,000 Oregonians who don’t currently have such an opportunity. It would enable them to build economic security through their own efforts.

BEST PRACTICES:

• A universally available payroll deduction IRA that is available to any Oregonian who currently lacks an employer-provided retirement savings or pension plan.
• A very short list of available investments that includes both a stable value fund and a balanced or target date fund. New savers would go into a previously designated investment unless they chose otherwise. Savers wishing other investments would be able to find other IRA accounts.
• Regular statements that clearly indicate investments, earnings, fees, and account balance. A number indicating the monthly retirement income that such a plan could produce if the current amount is saved would be very helpful.
• A coordinated statewide education program that explains the accounts and how to use them as well as the value of saving for retirement.
• Financial literacy classes in every school.

In the 2015 State of the Union Address, President Obama made retirement security a priority for his Administration by promoting the Automatic IRA, a retirement savings plan that originated at the Retirement Security Project. The proposals would increase the ability of part-time workers to join their employer’s plan and improve tax incentives for businesses that either start an Automatic IRA or other type of retirement plan or add automatic enrollment to an existing plan.  

Only about half of all American workers have access to a payroll deduction retirement savings plan at work. For part-time workers, fewer than four in ten have the opportunity to save at work. And while these individuals could in theory save on their own in an IRA, the best estimate is that only about one in twenty eligible to contribute to an IRA actually do so on a regular basis.

Last year, the President announced the creation of My Retirement Account, or “MyRA.” Similar to the R-Bond discussed in a recent AARP Public Policy Institute paper written by William Gale, David John and Spencer Smith, MyRA would allow individuals to save up to $15,000 in a government bond account similar to the one offered as an option to federal employees through the Thrift Savings Plan.

Now, the White House proposes to build on the MyRA.  Because the Automatic IRA would require employers with more than 10 employees to offer retirement accounts, about 30 million more workers would have the opportunity to save for retirement via payroll deduction. Using automatic enrollment, a mechanism that both works and that employees strongly support, the Automatic IRA would serve as a permanent retirement savings plan, rather than a starter account like MyRA.

To further increase the number of retirement savers, the Obama Administration also proposes to allow part-time employees who have worked for the employer for at least 500 hours a year for the past three years to make voluntary contributions to the employer’s plan.  Currently, employers are allowed to exclude any employee who works less than 1,000 hours per year. 

And to encourage employers to offer retirement plans, the existing tax credits for small employers who start a new retirement plan or pension would be greatly expanded.  Small employers who create an Automatic IRA would be eligible for a $3,000 tax credit, while those who open another type of retirement plan would be eligible for a $4,500 tax credit.  And just adding automatic enrollment to an existing plan would earn a small employer a tax credit of $1,500.

While these proposals would all need the approval of congress, they may well be able to rise above the usual political maneuvering.  For instance, both left and right have made positive comments about the Automatic IRA, and businesses should support the call for expanded tax credits to cover their costs in implementing the plans.

Most important, the president continues to make retirement security a priority with practical solutions that would allow many more Americans to build retirement security through their own efforts.  His proposals promote the kind of values and self-reliance that both sides of the political spectrum find attractive.

American experience strongly suggests that the coming UK pension freedoms sound better in theory than they will work in practice. After nearly a decade where the UK has been the gold standard for retirement savings policy, it is about to take a step that it may regret.

As annuity purchases are not required, very few Americans buy them, feeling that they are spending a great deal of money for a comparatively small monthly income. Even those in traditional DB pension plans usually take a lump sum if they are allowed to do so. As a result, many US retirees spend unwisely, trust the wrong financial advisor, or make other financial mistakes.

Many people greatly overestimate how long their savings will last. Most others assume (often wrongly) that they can manage their own money as well as anyone else or that they can live comfortably on Social Security alone. U.S. Social Security pays a benefit that depends on the retirees’ individual income history. The average annual amount is about $13,000 (GBP 8,700).

One survey found that in West Virginia, a state with a relatively low average income, 78% of those near retirement and 67% of those at retirement would likely outlive their financial assets. Workers with lower incomes are most at risk. A recent national study found that by the 20th year of retirement, more than 81% of Americans with incomes up to $27,000 would run short of money, as would 38% of those earning up to $42,000, and 19% of those with incomes up to $65,000.  Even 8% of those with the highest incomes could not meet their expenses.

Advice alone is not likely to help. US experience shows that literally every minute that passes after general advice is given reduces the chance that the consumer will act on it – even when they have decided to do so. And even a significant number of those who consult with a financial planner fail to act on that guidance.

What does show promise is income illustration. In a 2014 U.S. survey, 85% of plan participants found estimates of the income they could anticipate from their retirement savings useful, and 35% said that they would save more. Income illustrations change the framing of retirement saving from gross amounts saved to retirement income.  Annuity-like products become insurance against running out of money, something Americans are increasingly concerned about.

Two other potential developments may help. One is longevity insurance, an annuity that provides income only after a set age. Purchasing a policy defines how long one must make retirement savings last, and the retiree is protected against running out of money. Because longevity insurance is deferred, one can receive higher amounts of monthly income for a lower cost.  In 2014, $50,000 would buy $275 a month at age 65 or $1200 a month starting at age 80.

Another idea is an automatic enrollment trial annuity. As developed by several Brookings Institution colleagues and me, new retirees would automatically use part of their savings for a two year annuity unless the retiree refused it. The rest of their savings would be available as a lump sum. After the trial period, the annuity would become permanent if they did nothing or they could cancel it and take the rest of their money as a lump sum.

The many annuity horror stories from the UK show a definite need for change, but the coming reforms go too far. US experience suggests that too many UK retirees are likely to see their savings exhausted all too quickly. There are alternatives that could do a better job of protecting retirees.

Increasingly, many Marylanders are unprepared for retirement.

The US has the broadest range of retirement savings options in the world. There are thousands of retirement products offered. But most Marylanders don’t use them.

The need is growing. The Baby Boomers are the largest generation in history. They will live longer in retirement than any generation in history.

But – financially – many are not prepared. Many have virtually no retirement savings: more than a third those within ten years of retirement age have saved less than $10,000. $10,000 invested and spent over the average person’s retirement works out to about $1,000 of income per year. Even with Social Security, that’s not much to live on.

Fears about retirement are the #1 economic concern. Many Marylanders know they’re unprepared – and they’re worried about it. Concerns about retirement security are now more broadly based than the cost of health care, fear of job loss or other economic concerns – and have been for over a decade.3 Those concerns have grown since the financial crisis, even though the stock market has recovered. Many know they’ll have to defer retirement—and many fear they will never be able to afford to retire at all.

The key to retirement saving is having a retirement plan and contributing to it every paycheck. But many businesses, including most smaller businesses, don’t offer retirement plans. As a result 1,000,000 Marylanders working in private businesses across the State don’t have a retirement plan. There are, of course, individual retirement accounts (IRAs) -- but almost no one uses them who didn’t get access through an employer-based plan via payroll deduction.

Having a plan is essential, but not a panacea. Even when plans are available, many employees don’t join. Many who do contribute and save less than they need to meet their own goals. Even with plans, many will need to save more.

The challenge continues at retirement, because most of these plans are paid out in a single lump sum payment—few plans offer reliable retirement income for life that traditional pensions do. Since most retirees do not consult financial advisors and are not financial experts themselves, some who live longer than average or are unlucky in their investments will find that they haven’t saved enough and will exhaust their savings.

They will, of course, have Social Security. That’s why it’s so important that Social Security be both preserved and strengthened. But the average monthly benefit in Maryland is about $1,300 and for most people Social Security covers only a fraction of their basic needs in retirement. Most Marylanders will need additional income from retirement savings – and the State of Maryland can help them get it.

Other states and other governments are making it easier for people to save and for private employers to help them do it. Maryland should, too. Acting now will save Maryland taxpayers millions in the future.

California, Massachusetts, and Illinois have already enacted legislation. Illinois created a new program that requires employers who have no retirement plan to automatically enroll their employees in a state-created program. Massachusetts authorized a program for uncovered employees of non-profits. California created a board to plan and propose program similar to that in Illinois. Similar legislation is being or has been introduced in some fifteen other states – states all across the country with varying political orientations, populations, and economic bases.

Although there are many variations under consideration, these programs generally provide for an automatic payroll deduction of a set amount unless the employee opts out. Funds are to be invested professionally and may be pooled to achieve higher returns and lower costs. Those who cannot or do not want to make complex financial decisions are not required to do so – their contributions are placed automatically into a reliable fund or set of funds.

In order to ensure that employers – many of whom are small businesses – can participate in a program, it must be designed to help them avoid significant disruption, expense or administrative burden. This can be accomplished by enabling employers to use current payroll processes to help their employees to build retirement security, without requiring employers to make contributions themselves.

If Maryland doesn’t act now, Maryland taxpayers will face higher costs for decades to come.

These plans are designed to be self-sustaining: their operating costs are paid for by plan contributions and the State would not assume any obligations. In practice, however, these plans will end up saving taxpayer funds: If Maryland doesn’t act now, Maryland taxpayers will face higher costs for decades to come, as retirees are forced to turn to State assistance instead of living on their own savings.

There are many ways to improve retirement security. The key is for businesses to help their employees save, without becoming overburdened themselves.

Task Force is not recommending any one approach, but strongly recommends that Maryland join other states, by developing and implementing a plan that helps Marylanders have more secure retirements.We recommend development of a specific state-based program that meets Maryland’s needs from the options discussed in our report.

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Editor's Note: This blog originally appeared on AARP's Thinking Policy blog

Automatic enrollment for retirement saving is both effective and popular among all income, gender and ethnic groups. It has increased participation, helped people to both start saving earlier and to make appropriate investment choices.This mechanism would be even more useful, especially for younger workers and those with low-to-moderate incomes if retirement savings plans also allowed employees to save for unexpected expenses. Recent research by the US Financial Diaries Project, which looks at the actual income flows of low-to-moderate income consumers shows why this feature would be valuable.

Their studies found that low-to-moderate income households are saving for near-term small emergencies. However, those situations happen so often that they prevent households from building up higher savings for larger emergencies. A split auto enrollment plan would help them to have money for those bigger problems.

One way to structure such a plan would be to automatically enroll an employee into a saving program where part of the contributions would go to a regular 401k-style retirement saving account and the rest into a passbook savings account at a federally insured bank or credit union. The emergency savings could be a percentage of the total contribution or based on income levels, such as a percentage of contributions on the first $20,000 of annual income. Auto escalation would apply only to the retirement contributions.

Some will correctly argue that the split reduces potential retirement savings, but it also potentially reduces leakage from those accounts. When an unexpected expense arises, workers will have other savings that they can use instead of dipping into their retirement accounts.

As with all automatic enrollment plans, the saver would have complete control, and could choose to save more or less, change where the savings go, or even to not participate at all. If the employee already has a passbook account, he or she could either direct all contributions to the retirement account or send the passbook money to the existing account instead of a new one.

Savers would receive whatever tax benefit their plan type offers for retirement contributions, but they would not receive any additional tax advantages for the passbook balances. They could withdraw money from the passbook account at any time without any penalty. And those balances would earn whatever interest rate the bank or credit union is paying on passbook accounts.

Because the passbook account feature is under the legal framework of a retirement plan, it would be appropriate that no more than half of the total contribution would go into general savings. In addition, a plan should be required to set its base contribution rate at 6 percent of income before it could offer such a feature. The passbook savings are intended to supplement retirement contributions, and not to replace them. And if the employer matches savings, that amount would go into the retirement account.

This type of split is possibly legal already, but there are technical issues that need to be considered. The 2006 Pension Protection Act eliminated any state legal barriers for automatic enrollment into a retirement account. It may be that federal regulators could interpret that provision as applying also to passbook amounts as the split savings is a feature of the retirement plan. If not, then legislative action would be needed. Certain provisions of the PATRIOT Act may also need to be revised.

And to encourage employers to offer such an account, regulatory burdens should be kept to a minimum. An employer would be considered to have met its responsibilities for picking an appropriate product under the federal Employee Retirement Income Security Act if it chooses a simple passbook account at any federally insured bank or credit union. Adding an automatic enrollment passbook savings account could make 401k-type retirement accounts even more valuable to new and low-to-moderate income savers. Retirement would always remain the primary reason to save, but the split contribution would make a 401k more attractive and help to build a general savings habit.

Since it was created in 1935, Social Security has grown from covering about half of the work force to covering nearly all workers.  The largest remaining exempted group is a subset of state and local government workers (SLGWs).  As of 2008, Social Security did not cover about 27 percent of the 23.8 million SLGWs (Congressional Research Service 2011).  Non-coverage of SLGWs is concentrated in certain states scattered around the country and includes workers in a diverse set of jobs, ranging from administrators to custodial staff.  Some police and fire department employees are not covered.  About 40 percent of public school teachers are not covered by Social Security (Kan and Alderman 2014).    

Under current law, state and local governments that do not offer their own retirement plan must enroll their employees in Social Security.  But if it does offer a retirement plan, the state or local government can choose whether to enroll its workers in Social Security.  

This paper reviews and extends discussion on whether state and local government workers should face mandatory coverage in Social Security.^[1]  Relative to earlier work, we focus on links between this issue and recent developments in state and local pensions.  Although some of the issues apply equally to both existing and newly hired SLGWs, it is most natural to focus on whether newly hired employees should be brought into Social Security.^[2]  

The first thing to note about this topic is that it is purely a transitional issue.  If all SLGWs were already currently enrolled in Social Security, there would not be a serious discussion about whether they should be removed.  For example, there is no discussion of whether the existing three quarters of all SLGWs that are enrolled in Social Security should be removed from coverage.

Bringing state and local government workers into the system would allow Social Security to reach the goal of providing retirement security for all workers.  The effects on Social Security finances are mixed.  Bringing SLGWs into the system would also help shore up Social Security finances over the next few decades and, under common scoring methods, push the date of trust fund insolvency back by one year, but after that, the cost of increased benefit payments would offset those improvements. 

Mandatory coverage would also be fairer.  Other workers pay, via payroll taxes, the “legacy” costs associated with the creation of Social Security as a pay-as-you-go system.   Early generations of Social Security beneficiaries received far more in payouts than they contributed to the system and those net costs are now being paid by current and future generations.  There appears to be no convincing reason why certain state and local workers should be exempt from this societal obligation.  As a result of this fact and the short-term benefit to the program’s finances, most major proposals and commissions to reform Social Security and all commissions to shore up the long-term federal budget have included the idea of mandatory coverage of newly hired SLGWs.

While these issues are long-standing, recent developments concerning state and local pensions have raised the issue of mandatory coverage in a new light. Linking the funding status of state and local pension plans and the potential risk faced by those employees with the mandatory coverage question is a principal goal of this paper.  One factor is that many state and local government pension plans are facing significant underfunding of promised pension benefits.  In a few municipal bankruptcy cases, the reduction of promised benefits for both current employees and those who have already retired has been discussed.  The potential vulnerability of these benefits emphasizes the importance of Social Security coverage, and naturally invites a rethinking of whether newly hired SLGWs should be required to join the program.  On the other hand, the same pension funding problems imply that any policy that adds newly-hired workers to Social Security, and thus requires the state to pay its share of those contributions, would create added overall costs for state and local governments at a time when pension promises are already hard to meet.  The change might also divert a portion of existing employee or employer contributions to Social Security and away from the state pension program. 

We provide two key results linking state government pension funding status and SLGW coverage. First, we show that states with governmental pension plans that have greater levels of underfunding tend also to have a smaller proportion of SLGW workers that are covered by Social Security.  This tends to raise the retirement security risks faced by those workers and provides further fuel for mandatory coverage.  While one can debate whether future public pension commitments or future Social Security promises are more risky, a solution resulting in less of both is the worst possible outcome for the workers in question.  Second, we show that state pension benefit levels for career workers are somewhat compensatory, in that states with lower rates of Social Security coverage for SLGWs tend to have somewhat higher pension benefit levels.  The extent to which promised but underfunded benefits actually compensate for the higher risk to individual workers of non-Social Security coverage is an open question, though.  

Mandatory coverage of newly hired SLGWs could improve the security of their retirement benefits (by diversifying the sources of their retirement income), raise average benefit levels in many cases (even assuming significant changes in state and local government pensions in response to mandatory coverage), and would improve the quality of benefits received, including provisions for full inflation indexation, and dependent, survivor and disability benefits in Social Security that are superior to those in most state pension plans.  The ability to accrue and receive Social Security benefits would be particularly valuable for the many SLGWs who leave public service either without ever having been vested in a government pension or having been vested but not reaching the steep part of the benefit accrual path.  

Just as there is strong support for mandatory coverage in the Social Security community and literature, there is strong opposition to such a change in elements of the state and local government pension world.  The two groups that are most consistently and strongly opposed to mandatory coverage of newly hired SLGWs are the two parties most directly affected – state and local governments that do not already provide such coverage and their uncovered employees.  Opponents cite the higher cost to both employees and the state and local government for providing that coverage and the potential for losing currently promised pension benefits. They note that public pensions – unlike Social Security – can invest in risky assets and thus can provide better benefits at lower cost.  This, of course, is a best-case alternative as losses among those risky assets could also increase pressure on pension finances.

There is nothing inconsistent about the two sides of these arguments; one set tends to focus on benefits, the other on costs.  They can be, and probably are, all true simultaneously.  There is also a constitutional issue that used to hang over the whole debate – whether the federal government has the right to tax the states and local government units in their roles as employers – but that seems resolved at this point.

Section II of this paper discusses the history and current status of Social Security coverage for SLGWs.   Section III discusses mandatory coverage in the context of Social Security funding and the federal budget.  Section IV discusses the issues in the context of state and local budgets, existing pension plans, and the risks and benefits to employees of those governments.  Section V concludes.

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Introduction

Many American workers do not have access to employer-sponsored payroll deduction plans for retirement saving. Groups with low rates of access include younger workers, members of minority groups, and those with low-to-moderate incomes. 1 Small business employees are especially at risk. Only about 14 percent of businesses with 100 or fewer employees offer their employees a retirement plan, leaving between 51 and 71 percent of the roughly 42 million people who work for a small business without access to an employer-administered plan (Government Accountability Office 2013).

Lack of access makes it difficult to build retirement wealth. A study by the Employee Benefit Research Institute (2014) shows that 62 percent of employees with access to an employer-sponsored plan held more than $25,000 in saving balances and 22 percent had $100,000 or more. In contrast, among those without access to a plan, 94 percent held less than $25,000 and only three percent hold $100,000 or more. Although workers without an employer-based plan can contribute to Individual Retirement Accounts (IRAs), very few do.2 But employees at all income levels tend to participate at high rates in plans that are structured to provide guidance about the decisions they should make (Wu and Rutledge 2014).

With these considerations in mind, many experts and policy makers have advocated for increased retirement plan coverage. While a national approach would be desirable, there has been little legislative progress to date. States, however, are acting. Three states have already created state-sponsored retirement saving plans for small business employees, and 25 are in some stage of considering such a move (Pension Rights Center 2015). John and Koenig (2014) estimate that 55 million U.S. wage and salary workers between the ages of 18 and 64 lack the ability to save for retirement through an employer-sponsored payroll deduction plan. Among such workers with wages between $30,000 and $50,000 only about one out of 20 contributes regularly to an IRA (Employee Benefit Research Institute 2006).

This paper highlights a variety of issues that policymakers will need to address in creating and implementing an effective state-sponsored retirement saving plan. Section II discusses policy design choices. Section III discusses management issues faced by states administering such a plan, employers and employees. Section IV is a short conclusion.

Note: this paper was presented at a October 7, 2015 Brookings Institution event focused on state retirement policies.

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In recent weeks, the Obama Administration has taken the two most important steps in nearly a decade to increase access to retirement savings for more than 55 million Americans who currently do not participate in a retirement saving plan.

The Treasury Department's myRA program, launched this month, will help new savers and the self-employed start accounts without risk or fees. And earlier this week, the Department of Labor clarified rules that will make it easier for states to create retirement savings plans for small business employees.

myRA

The new myRAs provide another way for new savers to build small nest eggs. They will also help consultants, contract employees, and part-time workers save for retirement or for emergencies. 

For employees, myRAs are payroll deduction savings accounts designed to meet the needs of new savers and lower income workers.  They have no fees, cost nothing to open, and allow savers to regularly contribute any amount.  Savings are invested in US Treasury bonds, so savers can’t lose principal, an important feature for low-income workers who might otherwise abandon plans if they face early losses.  Those who are not formal employees and thus lack access to an employer-sponsored plan can participate in myRA through direct withdrawals from a checking or other bank account. 

As the growing “gig economy” creates more independent workers, the myRA will be a valuable entry to the private retirement system.  These workers might otherwise retire on little more than Social Security. All workers can build myRA balances by redirecting income tax refunds into their accounts. Because a myRA is a Roth IRA (that is, contributions are made from after-tax income), savers can withdraw their own contributions at any time without penalties or tax liability.  

When a myRA reaches $15,000, it must be rolled into another account, and Treasury may make it possible for workers to transfer these savings into funds managed by one of several pre-approved private providers.  MyRAs won’t replace either state-sponsored plans or employer-related pension or retirement savings plans.  However, they will make it possible for new and lower-income savers as well as the self-employed to build financial security without risk or fees.  

State-Sponsored Retirement Savings Plans

The DOL announcement gave the green light to several state models, including Automatic IRAs, marketplace models, and Multiple Employer Plans.  About two dozen states are considering these plans and, so far, Illinois and Oregon have passed “Secure Choice” plans based on the Automatic IRA, while Washington State has passed a marketplace plan.

DOL’s proposed Automatic IRA rules (open for a 60 day comment period) would let states administer automatic enrollment payroll deduction IRAs provided that the plans meet certain conditions for selecting or managing the investments and consumer protections.  States would also have to require businesses to offer such a plan if they don’t already offer their employees a pension or other retirement savings plan. Companies that are not required to offer an Automatic IRA or other plan, but decide to join the state plan voluntarily could still be subject to ERISA. The Retirement Security Project at the Brookings Institution first designed the Automatic IRA, which was proposed by the Administration before being adopted by some states.

In a separate interpretation, DOL allowed states to offer marketplace plans without being subject to the Employee Retirement Income Security Act (ERISA).  These plans are essentially websites where small businesses may select pre-screened plans that meet certain fee or other criteria.  Under the DOL guidance, these marketplaces may include ERISA plans, but states cannot require employers to offer them.   However, if states sponsor a marketplace model, they could also require employers without other plans to offer Automatic IRAs.

Finally, DOL’s rules let states administer Multiple Employer Plans (MEPs), where individual employers all use the same ERISA-covered model plan.  MEPs are usually simplified 401(k)-type plans. Because the state would be acting on behalf of participating employers, it could assume some functions that would otherwise be the responsibility of the employer. These include handling ERISA compliance, selecting investments, and managing the plan.

The Retirement Security Project has issued a paper and held an event discussing ways states could create small business retirement savings plans. The paper is available here and the event is available here.

Together, the two initiatives—the new MyRA and the state-sponsored plans-- could greatly increase the number of American workers who’ll be able to supplement their Social Security benefits with personal savings.

In many policy-related situations, the states can be useful laboratories to determine the most appropriate federal actions. Variations across states in health care programs, earned income credit rules, minimum wages, and other policies have helped inform debates about federal interventions.

In this paper, we reverse that approach. Many state and local governments currently face difficulties financing future pension obligations for their workers. The federal government, however, faced similar circumstances in the 1980s and successfully implemented a substantial reform. We examine the situation the federal government faced and how it responded to the funding challenge. We present key aspects of the situation facing state governments currently and draw comparisons between them and the federal situation in the 1980s. Our overarching conclusion is that states experiencing distress today about the cost and funding of its pension plans could benefit from following an approach similar to the federal government’s resolution of its pension problems in the 1980s.

The federal government retained the existing Civil Service Retirement System (CSRS) for existing employees and created a new Federal Employees’ Retirement System (FERS) for new employees. FERS combined a less generous defined benefit plan than CSRS, mandatory enrollment in Social Security, and a new defined contribution plan with extensive employer matching. Although we do not wish to imply that a “one size fits all” solution applies to the very diverse situations that different states face, we nonetheless conclude that the elements of durable, effective, and just reforms for state pension plans will likely include the major elements of the federal reform listed above.

Section II discusses the federal experience with pension reform. Section III discusses the status and recent developments regarding state and local pensions. Section IV discusses the similarities in the two situations and how policy changes structured along the lines of the federal reform could help state and local governments and their employees.

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Many American workers do not have access to employer-sponsored payroll deduction plans for retirement saving. Groups with low rates of access include younger workers, members of minority groups, and those with low-to-moderate incomes. Small business employees are especially at risk. Only about 14 percent of businesses with 100 or fewer employees offer their employees a retirement plan, leaving between 51 and 71 percent of the roughly 42 million people who work for a small business without access to an employer-administered plan (Government Accountability Office 2013).

Lack of access makes it difficult to build retirement wealth. A study by the Employee Benefit Research Institute (2014) shows that 62 percent of employees with access to an employer-sponsored plan held more than $25,000 in saving balances and 22 percent had $100,000 or more. In contrast, among those without access to a plan, 94 percent held less than $25,000 and only 3 percent hold $100,000 or more. Although workers without an employer-based plan can contribute to Individual Retirement Accounts (IRAs), very few do. But employees at all income levels tend to participate at high rates in plans that are structured to provide guidance about the decisions they should make (Wu and Rutledge 2014).

With these considerations in mind, many experts and policy makers have advocated for increased retirement plan coverage. While a national approach would be desirable, there has been little legislative progress to date. States, however, are acting. Three states have already created state-sponsored retirement saving plans for small business employees, and 25 are in some stage of considering such a move (Pension Rights Center 2015).

This policy brief, based on John and Gale (2015), highlights a variety of issues that policymakers will need to address in creating and implementing an effective state-sponsored retirement saving plan.

Download "Policy Design and Management Issues for State Retirement Saving Plans" »

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