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Monday, December 1, 2008

Challenges and Opportunities for Retirement Security

Anna M. Rappaport, F.S.A., M.A.A.A.
President, Anna Rappaport Consulting

We are truly at a crossroads with respect to retirement security in America. We have an opportunity to improve and build on what we have in the longer run, but only if we effectively address some short-term challenges. We need to do several things or we will lose our opportunities:

Find a forum where diverse stakeholders will work together effectively – those who represent the public, labor and business must work together to strengthen the system. Repeated failure to work together has led to regulatory instability and chaos that for decades has been a major contributor to the decline of pensions and loss of retirement security.

Address a critical short-term issue – the existing legislative structure (the Pension Protection Act) is designed to strengthen the funding of pension plans. Its requirements are much more stringent than prior laws, and produce very strange (and I believe unintended) impacts in the face of the financial crisis. The business community and hundreds of plan sponsors have petitioned Congress to protect the workers covered by pension plans by relaxing the requirements for faster contributions. This request would not relieve businesses from paying the required contributions, but it would give them more time. We need to remember that this is a voluntary system. If there is no temporary relief, the PPA requirements will lead to the freezing of many more defined benefit plans and to benefit curtailments. For more information on the critical PPA issues, look at http://www.eric.org/.

Maintain and strengthen Social Security – The system should be maintained as an income based system with the fine tuning needed to make it work effectively.

Understand the realities – We need to recognize the realities facing diverse stakeholders:

  • Risk pooling and sharing are a very important part of a financial security system.
  • Individuals are far more willing to save in an employer plan, and they are more likely to trust information provided through an employer than in the marketplace.
  • Regardless of what changes are made for future benefits, people who are age 50 and over today will get their benefits primarily from existing systems, and they will not have adequate time to earn much benefit from a new system. For a very large number of people, these benefits include defined benefit plans.
  • Choice and individual freedom are highly valued. However, a system that requires individuals to act and make decisions to ensure their long-term security will fail for many people because of lack of knowledge or discipline.
  • For Americans who want to work longer or who do not have adequate assets, work options that enable work to higher ages are critical.
  • We need to remember successes and as well as failures as we build on current systems.
  • We are living longer. Periods of retirement have increased each decade, and we have failed as a society to adjust out benefits to demographic realities.
  • Americans are retiring gradually. Many have a period between full-time career commitment and total exit from the labor force where they are working at a slower pace, and often partially retiring.
  • The size of the program and risk pool matters. A large program can access the market on an efficient basis with much lower expense charges and better results than an individual or small employer.

What should the future system look like? As we focus on retirement security for the next generation and look for new options, we should be prepared for a Tier II system that is different from the existing system. But at the same time it is vital not to throw out the baby with the bath water. Many ideas and options are surfacing. It is critical that we find solutions that offer adequate pooling of risk, respond to the realities of how individuals behave, and build on the strength of our employment and market based system. Rather than focusing on a specific solution immediately, we need to think about trade-offs and options as we balance stakeholder issues.

My wish is that first we deal with the immediate critical issues to not further damage the system that will be the bedrock for the next 10-15 years of retirees and that we work together to create a sound future for Americans. Today, I see our priorities as:

  • Creating the right platform to work together.
  • Dealing with the short-term crisis so that the long-term situation is not far worse.

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