New York City Public Advocate Letitia James worries about the fate of retirees in one of the world’s richest cities. “Without bold action on retirement security, more than half of working New Yorkers will be forced to retire on a food budget of $5 a day,” she warns.
In February 2015 James introduced a bill before the City Council to create a review board to study offering a 401(k) plan for private sector workers who lack one. New York Mayor and board member Bill de Blasio, who made the pension effort official in his State of the City speech last month, has adopted much of James’s plan for his own proposal to set up such a retirement savings system.
These moves stem from a growing sense among municipal and state policymakers that, without urgent action, Social Security and other earned benefits may be the only retirement income for many Americans. Vehicles like 401(k)-style savings accounts are emerging as an option to help people save, but they won’t solve the problem of retirement insecurity.
New York State — for which Governor Andrew Cuomo has also proposed a private sector savings plan — shows how big that problem is. “Sixty percent of [working] people in New York City have no access to a retirement plan,” says Beth Finkel, AARP’s New York State director. “In New York State, 52 percent of people do not have access to a retirement plan. Ten thousand people turn 65 every day, and many of them are retiring into poverty.” In New York City that number equates to about 3.5 million people without access to a retirement plan. If residents have been able to sock something away, it’s often only a few thousand dollars, Finkel adds.
“That’s why we are creating an infrastructure for New Yorkers to save for retirement and prepare for the future,” James says. “Our legislation will ensure that a comfortable retirement is not simply a luxury for the already wealthy but a reality for every individual in our city.”
For de Blasio, creating a city savings program will require Washington to make an exception to the 1974 ERISA, which is administered by the U.S. Department of Labor. Traditionally, civil servants have had state-sponsored pension plans that oblige governments to assume a fiduciary duty. Local and state governments would like to offer 401(k)-style plans to private sector workers without having to play that role. Rather than manage the money like a defined benefit pension, they want to give individual savers a choice of retail vehicles such as mutual funds and exchange-traded funds.
The road ahead for Cuomo looks easier. Last fall the DoL issued an ERISA exemption for state governments that want to offer 401(k) plans without fiduciary obligations. Final rules governing the exemption have yet to be released, but the initial guidance spurred several state efforts to offer these plans. If de Blasio wins a similar exemption for his city, private sector workers could see a wealth of new retirement options spring up at the civic level, even if their state government doesn’t act.
De Blasio’s push comes as the window to help older generations is closing. The most senior baby boomers are already eligible for Social Security, and thousands more reach that milestone each day. Generation X is nearing retirement too: Its oldest members are 51. Average retirement income on Social Security varies based on age and contributions, but most people end up living at or below the poverty line when Social Security is their only source of funds.
“We’re running out of time to give people enough years to save anything,” AARP’s Finkel says. “And if they don’t, they’re going to need public assistance that may not be available.”
Individuals are 15 times more likely to save for retirement if they have access to a plan, according to data from AARP. California was the first mover on the idea that states could step in to fill the gap if employers don’t offer pensions. In 2012 the state passed a law setting up California Secure Choice, a retirement planning board and trust. What emerged was a policy framework that would allow employees to opt into an automatic payroll deduction, just like most standard 401(k)s. Several states quickly picked up the idea, and now 27 have approved or are considering similar measures. For those that have passed legislation, the first plans could be offered as early as 2017.
Arizona State Senator Martin Quezada introduced one such bill. The measure hasn’t gone forward yet, but Quezada says retirement security became an crucial issue for him after he learned how little Arizonans have saved. “When I was researching this and going through the process, it became really clear to me how big of a problem this is,” he explains. “I plan to keep pushing for ways to help savers in Arizona.”
Long considered supplements to a defined benefit pension and Social Security, 401(k)s and IRAs are now often the only source of retirement savings for private sector workers. Although policymakers acknowledge the new reality by stumping for these investment options, delivering real retirement security is another matter.
New research from the Economic Policy Institute, a Washington-based think tank, shows that recessions are most damaging to workers near retirement because 401(k) balances can plummet or vanish in a downturn like that in 2008. Most state policies that would offer a 401(k) don’t address the lack of income security after retirement.
“Connecticut is one state that is considering a plan design to provide participants with the greater likelihood that their savings can last their lifetime, but most states have not fully taken this important step into consideration,” says Angela Antonelli, executive director of the Center for Retirement Initiatives at Georgetown University’s McCourt School of Public Policy. Antonelli, who is also research professor, says the next push will be to address lifetime income.
“The goal is more than savings for savings’ sake,” she asserts. “We need to engage individuals and policymakers in a discussion about how to improve retirement planning. We’re in the midst of a silver tsunami, and that could result in a big demand for public assistance unless we act.”
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