While Social Security reform gets the most attention, it is only one part of a comprehensive approach to retirement security. Any retirement security bill should include three broad reforms.
Reform #1: Reduce Social Security's
burden on future generations.
Social Security has promised future generations far more in retirement benefits than its current funding sources will allow it to pay. Meeting these obligations without reforms will burden our children and grandchildren with crushing payroll taxes.
A sensible reform would reduce the growth in benefits promised to younger workers to more reasonable levels while also giving them the time and tools necessary to make up the difference through investment earnings. An excellent way to accomplish this goal is progressive indexation of future retirees' benefits. Other ways to accomplish this goal include gradually raising the retirement age and indexing future retirees' benefits to changes in longevity.
Reform #2: Improve younger workers' ability to save for retirement. To improve their Social Security benefits, younger workers should have the option to save part of their Social Security taxes in personal accounts, which they could use to increase retirement monthly income, reserve for an emergency, or leave to family members.
Only about half of the workforce participates in 401(k) plans or IRAs. Expanding retirement savings requires two major changes. First, existing plans need to be restructured to encourage people to participate. Second, all workers must have access to retirement savings plans.
To achieve greater participation, workers should be automatically enrolled unless they opt out. There should be a default contribution level expressed as a percentage of a worker's income, and workers' accounts should be automatically assigned an appropriate investment choice, such as a lifespan fund. Again, workers could opt out for other choices.
To expand 401(k)s to smaller employers, Congress should reduce or eliminate the regulatory burdens that raise the cost of 401(k) plans and discourage employers from offering them. It should also allow business and professional associations to offer plans to small businesses and self-employed professionals.
Reform #3: Restore financial stability to defined benefit pension plans. Millions of workers' defined benefit pensions are at risk because many of those plans do not have enough money to pay all of the benefits they have promised. Worse, the Pension Benefit Guaranty Corporation (PBGC), which insures such plans, faces a multi-billion dollar taxpayer bailout. Congress should boost PBGC premiums and tighten the rules on pension funding.
The Bush Administration proposes to raise PBGC premiums by $11 to $30 per worker and to index the premium to the annual growth in wages. Underfunded plans would also pay an annual risk-based premium. These are sensible reforms.
The Bush Administration and Rep. John Boehner also propose sensible changes to funding regulations that would both provide a more accurate picture of plan funding and require companies to meet their obligations. The proposed rules would prevent companies from expanding benefit promises while their plans are severely underfunded.
David C. John is Research Fellow in Social Security and Financial Institutions at The Heritage Foundation