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John C. Goodman is president and founder of the National Center for Policy Analysis (NCPA), a nonprofit, nonpartisan research group based in Dallas. The author of “Patient Power: Solving America’s Health Care Crisis,” he’s credited with helping create the concept of Health Savings Accounts.
Devon M. Herrick is a senior fellow at the NCPA, where he concentrates on health care issues such as Internet-based medicine, health insurance and the uninsured, and prescription drug issues.
Matt Moore is a senior policy analyst at NCPA, focusing primarily on Social Security reform and education policy. He was previously the head of the organization’s Washington office.As 77 million members of the baby-boom generation begin to retire, America is about to experience one of the most wrenching demographic changes in its history. The institutions we have relied upon in the past are completely unprepared for what lies ahead.
Social Security, Medicare and Medicaid have made trillions of dollars of explicit and implicit unfunded promises. In fact, by 2030 (about the midpoint of the baby boomers' retirement years), we will have to double every tax rate or cut every benefit in half. But our problems do not end there. Federal, state and local governments have made $5 trillion in promises (many of which are unfunded) to civil service workers. Corporate America owes about $450 billion in pension promises and $350 billion in post-retirement health care promises that are also unfunded.
To make matters worse, the instruments we have created to help individuals save for their own retirement, principally through 401(k) accounts, are also not working well. Most people are not saving enough -- and are not prudently investing what they do save.
What steps can be taken to secure the retirement of baby boomers and future generations of retirees? The following are 10 recommendations.
Step 1: Improve Traditional Pension Plans. The current system encourages employers to unload unfunded pension obligations on the federal pension insurance agency -- resulting in smaller retiree benefits and potentially large burdens for taxpayers. Clearly, corporations should be required to fully fund their own pension plans. We also need to encourage immediate vesting and full portability of those benefits.
Step 2: Improve 401(k) Plans. More than half of all workers invest in a 401(k) or similar savings vehicle. But not enough people are investing appropriately for their future. They either do not invest enough or they pursue investment strategies that will not provide an adequate retirement income. To correct this problem, employers should be given a safe harbor against lawsuits and receive other regulatory relief if they invest employees in diversified portfolios, follow an investment strategy that becomes more conservative as the employee ages, and convert the funds into an annuity at retirement -- unless the employee specifically opts out.
Step 3: Expand Individual Retirement Accounts (IRAs). Current tax law penalizes those who do not have employer-sponsored savings plans. For example, participants in an employer-sponsored 401(k) plan can contribute up to $15,000 annually, while nonparticipants can contribute only $4,000 to a tax-advantaged IRA. Treat all savers equally.
Step 4: Remove Social Security's Penalties on Work. For early retirees on Social Security, the earnings test is an arbitrary tax that imposes an effective tax rate as high as 50 percent on wages -- in addition to regular income and payroll taxes.
Step 5: Repeal the Social Security Benefits Tax.Although nominally a tax on benefits, this is really a tax on other income, and it imposes some of the highest marginal rates in the tax code. In fact, a middle-income couple living on IRA withdrawals can face a higher marginal tax rate than Warren Buffett and Bill Gates.
Step 6: Use the Roth Method of Taxation. Unlike traditional savings vehicles, deposits into Roth IRAs are made with after-tax dollars, and withdrawals are tax free. Given the effects of the Social Security benefits tax and the expectation that tax rates will be much higher in the future (in part to deal with the expenses of Social Security, Medicare and Medicaid), Roth taxation makes sense for many taxpayers. Yet Roth IRAs, like traditional IRAs, are discriminated against relative to employer-provided savings plans. Level the playing field.
Step 7: Make Health Insurance Portable. Workers with employer-based health insurance enjoy an enormous tax advantage because, unlike wages, employer-paid premiums avoid income and payroll taxes. By contrast, early retirees and workers who buy their own insurance get virtually no tax break. The law should be equally generous to everyone who obtains private insurance -- regardless of how it is purchased. Further, we should encourage employers to purchase portable insurance for their employees -- insurance that travels with them from job to job and that they can keep after they retire.
Step 8: Provide Tax Relief for Post-Retirement Health Insurance. Although many employers provide post-retirement health benefits, the current system has two drawbacks: 1) employer coverage must generally be all or nothing, and 2) employees who do not receive benefits get virtually no tax relief if they purchase their own coverage. One solution is to move to a system of individually owned, personal and portable health insurance with appropriate tax relief. Short of that reform, employers should be able to allocate pretax dollars to retirees, up to the amount spent on active workers, for health care or health insurance. And retirees should receive tax relief on money used to purchase individual health insurance on their own.
Step 9: Create Health Savings Accounts for Seniors. Despite coverage from Medicare, seniors pay half their medical bills out of their own pockets. And they have few opportunities to use tax-free savings to prepare for these expenses. Under current law, Medicare-eligible seniors cannot open or make deposits to Health Savings Accounts (HSAs), and opportunities for young people to make deposits are too restrictive. Clearly we need a more liberal HSA policy. Short of that, seniors should be able to turn IRA and 401(k) funds into new Roth HSAs so money spent on health care is not taxed.
Step 10: Encourage Preparation for Long-Term Care. Although the tax law grants unlimited tax relief for current spending on employer-provided health care plans, it is quite stingy toward people who try to provide for their own long-term-care needs. Premiums should be tax deductible. Other financial incentives should be used to encourage seniors to buy long-term-care insurance as well. One promising model being experimented with allows seniors to buy insurance that protects assets at a level chosen by the insured. If long term care is required, once the insurance runs out and the asset level is reached, Medicaid picks up the rest of the tab.
Current public policies encourage underfunding of corporate pension plans, discourage labor market mobility, discourage workers from saving on their own, and discourage personal and portable insurance. If Congress implements these reforms, federal government and corporate policies will instead encourage flexible and sensible arrangements when it comes to saving for retirement, paying for health care or deciding whether or not to work, all the while helping workers build the largest possible nest egg in a way that reduces risk and volatility as retirement age approaches.
To see the entire report, click here.
POSTED BY: GreatScot (April 30, 2007 11:38 AM)
I have a feeling a surge in Democratic power, if sustained, will lead toward an "increase tax" solution to this problem. The poor will suffer most.
POSTED BY: Joel L. Frank (April 30, 2007 11:49 AM)
Re: Step 1
You need to go back and do some fundamental learning if you are of the opinion that you can have national portability with thousands of different Defined Benefit plans each with its own benefit.
National portability and Defined Benefit pensions do not go together. This is because the vested benefit is based on the salary earned just prior to leaving a job not to the salary earned just prior to retirement.
You need look no further than the higher education crowd, which has had a nationwide portable system since 1918. This is a Defined Contribution plan. Its nothing more than a personal IRA to which the employee and employer contribute. We already have such a plan which can be extended to include all employers, public and private. It is the super successful Federal Thrift Savings Plan. Check it out!!!
If we are serious about a nationwide portable retirement system we need a single Defined Contribution plan that all employees and employers pay into. An expansion of the super successful Federal Thrift Savings Plan to include all employees and employers public and private comes to mind.
POSTED BY: William (April 30, 2007 05:56 PM)
I do agree that this is a very good list.
I used to be a republican- USE TO BE-
I feel nothing but outrage at the way this bunch of so called republicans has
taken every value the party use to have and turned them upside down.I am now donating to dem's.
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