A Decade after Landmark U.S. Pension Law: Ongoing Changes Required – Reuters

By Mark Miller

CHICAGO – Next week marks the 10th anniversary of a significant federal law known as the Pension Protection Act of 2006. Has the law truly lived up to its promise?

This anniversary provides an opportune moment to evaluate the adjustments still necessary to enhance the retirement security of American workers.

The record of the Pension Protection Act (PPA) is a mixed bag. It established stricter funding requirements for defined benefit pension plans and stimulated critical enhancements in workplace 401(k) plans. These improvements primarily include automation features that increased worker participation rates and streamlined investment choices through popular target date funds.

Despite these advancements, a retirement security crisis looms large. Many employers are abandoning traditional pension plans, unwilling to take on the associated obligations. Rising costs related to insuring plans through the Pension Benefit Guarantee Corporation are also a concern for some.

In 2015, only 20 percent of Fortune 500 companies offered a defined benefit plan to new hires, a stark decline from 59 percent in 1998, as reported by Willis Towers Watson.

Moreover, the majority of workers are not saving adequately for retirement. Among those aged 55 and over, one-third have accumulated less than $25,000 in savings. The situation is even more dire for minority workers, with savings for nonwhite households nearing retirement averaging just $30,000—four times less than that of white households, according to data from the National Institute on Retirement Security (NIRS).

So, what measures should be taken? Here’s a checklist to consider.

EXPAND SOCIAL SECURITY

Social Security stands as our sole universal, mandatory pension program and plays a crucial role in preventing poverty among seniors. Expanding benefits is one of the most effective ways to enhance retirement income for middle-class and lower-income households. The optimal approach would be to increase benefits for all, though some legislative proposals suggest more targeted increases for vulnerable retirees.

This expansion must coincide with a funding strategy to address Social Security’s long-term solvency issue, as the combined trust funds for retirement and disability benefits are projected to be depleted in 2034. Possible funding options include lifting or eliminating the wage cap on payroll taxes—currently set at $118,500—and gradually increasing the 12.4 percent payroll tax rate, which is split between employers and employees.

EXPAND ACCESS TO WORKPLACE SAVING

While the PPA increased participation in workplace retirement plans through automatic enrollment, about one-third of all workers still lack access to such plans. This issue primarily affects small businesses that struggle with the cost and complexity of establishing their own plans.

A recent report from the Bipartisan Policy Center (BPC) urges the creation of a national Retirement Security Plan aimed at employers with fewer than 500 employees. This would introduce a minimum coverage standard mandating companies with 50 or more employees to offer their own plans, auto-enroll workers in the national plan, or enroll them in federally sponsored myRA accounts—essentially a Roth IRA with payroll deduction options.

Shai Akabas, director of fiscal policy at BPC, noted that the goal is to help small businesses collaborate and alleviate responsibilities, ensuring that employers above a certain size enroll in a retirement plan.

IMPROVE THE SAVER’S CREDIT

The PPA made the Saver’s Credit permanent, providing up to $1,000 (and $2,000 for joint filers) for lower-income households that contribute to retirement accounts. Unlike a deduction, which lowers taxable income, a credit directly reduces federal income tax liability.

Unfortunately, to benefit from the credit, an individual must first have tax liability, which many eligible households do not. Approximately 35 percent of households that qualify for the credit fail to claim it. Making the credit refundable—allowing it to be accessible regardless of tax liability—and directly depositing it into low-income savers’ accounts, similar to employer matching contributions, could enhance its effectiveness.

Diane Oakley, executive director of NIRS, emphasizes the need to integrate this credit into retirement saving strategies.

FOCUS ON INCOME

While the PPA facilitated easier savings accumulation through automation, it did little to assist retirees in converting their savings into income streams.

One potential solution is to encourage plan sponsors to adopt managed account services from third-party advisory firms, providing comprehensive financial planning guidance that goes beyond portfolio management. These services can play a role in advising retirees on fund distribution.

For younger workers, target date funds have been beneficial, but as individuals age and approach retirement, their financial situations become more complex and require different types of support.

Another avenue is enabling retirees to convert portions of their 401(k) savings into annuities, which guarantee a steady income stream for life. Plan sponsors have expressed hesitance due to concerns over fiduciary liabilities in the event that an annuity provider fails. This issue could be mitigated by granting sponsors "safe harbor" protections.

David Blanchett, head of retirement research at Morningstar, suggests that allocating part of a savings portfolio to an annuity would benefit the majority of savers, provided individual circumstances are considered. He advocates that the best starting point is to assist workers in optimizing their Social Security benefits, as it often represents the largest annuity individuals will possess and provides substantial value.