We appreciate the effort that went into this latest proposal (link) by Senator Harkin. However, as suggested in my blog last year, I believe the current retirement structure we now have works reasonably well. However, what is needed are some relatively minor adjustments to existing programs rather than any new programs.
Let me share a few ideas that I’ve developed for the retirement structures already in place:
- Social Security. In my proposal to reform Social Security that appeared as an op-ed in Bloomberg News (link) I spelled out an approach that could save $200 – $400 billion over the next 10 to 20 years, while providing more flexibility in benefits – even addressing the need for long term caregiver benefits. The approach buys time for Social Security as the baby boomer retiree population retires is replaced by a younger demographic. We need to recognize that for a significant percentage of the population this might be their primary retirement income source.
- Qualified Retirement Plans. 401(k)s and other qualified retirement savings should have a default option at retirement (complementing default options at enrollment) that allows the account value to be gradually converted into a lifetime annuity – the operative word being “gradually”. I led research while at MassMutual (link) which found this gradual approach to be the most efficient strategy.
- Rollover IRA. We should encourage a similar strategy to the above In the Rollover IRA space. It would be desirable in both of these markets to create a payout annuity exchange, thereby creating more capacity and a more competitive marketplace. Letting investors buy into Social Security might also be an interesting option.
- Personal Retirement Savings. For savings held outside an IRA or 401(k) – what we call Personal Retirement Savings – we should encourage the use of lower cost variable annuities, and more flexible payout annuity options. These savings which can represent 50% or more of financial assets can fill in the income gaps from the above three sources.
- Integrated Retirement Plan. When all these elements are put together in an optimal way, the increase in spendable retirement income by 15% to 30% is possible. These gains come from: lower fees; tax deferral; and, greater use of annuitization – and not from an assumption of more risk. Interestingly, done properly, there might be little, if any, reduction in legacy benefits, at least for investors who survive to their life expectancy.
To make these structures work, there needs to be low cost advisory services delivered on a mass basis. With the above solutions, properly designed, that should not be an issue.
Social Security reform that benefits retirees.