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Enhancing retirement savings? Yes.
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Periodically I pitch my preferred version of Social Security/retirement system reform, as a “thinking big” means of remedying problems with the system in a way that the usual proposals don’t address. Here’s a write-up in fact-sheet fashion.
The United States faces three challenges as Americans age and the pension system has been transformed:
- First, the Social Security Trust Fund is facing insolvency;
- Second, the move from traditional Defined Benefit pensions to Defined Contribution retirement accounts will result in far fewer Americans with lifetime income protection as new generations move into retirement; and
- Third, the Multiemployer Pension Plan bailout provided in the American Rescue Plan, by the very way the legislation was written, will result in rescued plans becoming insolvent 30 years after its implementation, or even sooner.
Elements of the retirement system in the Netherlands offer features which can resolve these issues.
First, the basic Social Security benefit is a flat monthly sum, prorated only for those who have lived in the country for less than 50 years. This form of benefit also exists in Denmark, Ireland (prorated by work history) and Australia (means-tested). And the United Kingdom, in 2016, transitioned from a system very similar to America’s Social Security benefit, to a flat benefit, with a gradual transition period.
Second, Dutch employers provide pensions in a hybrid format combining features of defined benefit and defined contribution plans. (Note that the Dutch system is in the middle of a substantial transformation and the following sentences are heavily simplified and idealized.)
Near-universality is achieved through a combination of legislation, collective agreements, and labor-market norms. However, because of the flat benefit guaranteeing income replacement on a first tranche of income, benefits have an initial threshold – that is, for the first level of income, which will be replaced by Social Security, neither workers or employers make contributions (benefit accruals), mitigating the burden on both, with respect to low-skill workers.
In some cases (but much less often now), lifetime income guarantees are made by employers. However, a form of benefit which is increasingly popular is the “Collective Defined Contribution” or “Defined Ambition” plan, in which the plan provides lifetime income protection by pooling assets, holding additional reserves as needed with a conservative funding policy, and cutting benefits if needed to preserve funding levels. Because benefits have a built-in cost-of-living adjustment, the benefit “cut” may take the form of a benefit freeze (no COLA for a year or longer) rather than an actual cut, but the objective is in any case to provide workers with benefit protection to the greatest extent feasible by sharing/pooling risk, even without a guarantee by the employer. Similar plans are being developed in the United Kingdom. Here in the U.S., the risk-sharing Wisconsin public pension plan offers some potential features, as does the VAPP (variable-annuity pension plan) as adopted by the UFCW and Kroger, Albertsons, and Stop & Shop in 2020.
Moving from this general principle to a legal structure that works for the pension environment of the United States is not a simple task. When should cuts be required? What investments should be permitted? How conservative should the funding policy/contribution level be? What sort of entities should be permitted to offer this type of plan? Should there be a government backstop in case of a crash that would require cuts that are too harsh?
However, if paired with a flat-benefit reform of the “regular” Social Security system, I believe that a mandatory second-tier hybrid system could become acceptable to many who would otherwise reject a mandate to contribute to retirement savings accounts and offer a way out of the current “third rail” reform stalemate. And as a bonus, because this sort of plan is essentially a multiemployer plan, once a design has been worked out which all parties agree provides the best feasible level of benefit and protection relative to contributions, this model can become the basis for transforming existing multiemployer pension plans and providing for long-term solvency in those plans as well.
It should also be noted that it is far more common in the Netherlands than in the United States to invest using insurance/annuities, held by employers or pension funds, regardless of the type of retirement benefit, which results in particularly costly benefits. To be clear, this proposal does not envision annuities but rather would adapt the overall Dutch concept to American investment norms.
Finally, this is not the proposal of any think tank, advocacy group, or other partisan or nonpartisan group. I have no institutional affiliation, have worked with organizations on both sides of the political spectrum (the National Academy of Social Insurance and the Illinois Policy Institute, respectively), and truly hope that by adopting a wholly new system, with careful transition planning, support can be found on both sides of the aisle.
“Collective Defined Contribution Plans,” by J. Mark Iwry, David C. John, Christopher Pulliam, and William G. Gale, Brookings, December 2021. https://www.brookings.edu/wp-content/uploads/2021/09/20211203_RSP_CDC-final-paper-layout.pdf
Mercer Global Pension Index 2021. After a long stretch at #1, the Netherlands was knocked down to second place by newly-added Iceland. https://www.mercer.com/our-thinking/global-pension-index-2021.html. Also see “What Does It Take To Build The World’s Best Pension Systems? Ask The Netherlands And Denmark” for a description of the Index. https://www.forbes.com/sites/ebauer/2019/10/22/what-does-it-take-to-build-the-worlds-best-pension-systems-ask-the-netherlands-and-denmark/?sh=5b08258449b6
On the multi-employer VAPP:
News reporting: “Kroger, Albertsons, Stop & Shop to withdraw from UFCW national pension fund,” Supermarket News, July 21, 2020, https://www.supermarketnews.com/retail-financial/kroger-albertsons-stop-shop-withdraw-ufcw-national-pension-fund
Local 663 information for members: MRMC Benefit Plans (663benefits.com)
Podcast: “UFCW Local 21 and the Saga of the Variable Annuity Plan,” https://multiemployerfunds.com/episode/ufcw-local-21-and-the-saga-of-the-variable-annuity-plan/
Contact information: email@example.com
Annuities are great, in principle, but not so much when government policy keeps interest rates low.