Building Better Retirement Plans

Testimony before the U.S. House of Representatives Committee on Education and Labor

CAPAF’s Christian Weller testifies before the House Committee on Education and Labor. Read the full testimony (CAPAF)

In my testimony today, I would like to focus on the lessons that can be learned from the current financial crisis for retirement income security. In particular, the long-term trend in declining retirement security has been exacerbated by the recent turmoil in the financial markets, and thus ever more poignantly underscores the need for swift and broad action to vastly improve the retirement income security for the majority of American families. Too many Americans rely too heavily on their homes as their primary source of household wealth. Declines in house prices quickly decimate this wealth, especially when families are heavily leveraged, as has been increasingly the case in the past few years, when mortgages grew faster than home values. And, even those families who have some retirement savings—about three quarters of American families nearing retirement—increasingly rely on their own luck and investment savvy to reach their retirement savings goals. Yet economists have long known that the success of “Do It Yourself” savings plans is severely hampered by the underlying investor psychology, which often leads individual investors to buy and sell low in crises like these.

These data point toward three policy goals. First and foremost, more Americans need retirement savings in addition to Social Security and outside of their own home. Second, Americans need to save more for retirement, encouraged by progressive saving incentives and supported by their employers. Substantially raising Americans’ retirement security is a heavily lift, as the data further below show, and thus can only be accomplished as a shared responsibility between individuals, employers, and the public. Third, Americans need to be reassured that the money that they will save for retirement will actually be there when they need it. The exposure to large market swings, as we have experienced twice in the past decade, can send individual investors scrambling for an exit at the most inopportune time. This prevents them from saving enough, and actually increases their exposure to financial market risks.

Read the full testimony (CAPAF)