Wanted: New Retirement System Designs

by Andy Peterson, SOA Staff Fellow, Retirement Systems

Andy Peterson The SOA Pension Section Council has been working diligently to develop new retirement systems to complement the current defined benefit and defined contribution structures through the Retirement 20/20 initiative. Less than two weeks ago (June 2-3, 2010), the results of the call for models were presented at a conference in Washington, D.C. While the conference report and final papers won’t be ready to publish for a few months, I thought I’d use the blog space to give you a quick synopsis of what we learned.

The latest step of our Retirement 20/20 project was to put out a call for models (i.e. papers proposing new retirement designs). We had 18 authors submit designs for new “tier II” systems. (If Social Security and the Canada/Quebec Pension Plan are tier I, the employer-sponsored defined benefit and defined contribution system are the current tier II system in the U.S. and Canada.) The authors were asked to go beyond what is possible within the U.S. and Canadian regulatory structure to define a better tier II system that meets the needs of stakeholders: individuals, society (taxpayers) and employers, and that also does a better job of using markets effectively.

The conference featured designs from its four prize-winning authors: Ken Beckman, Rowland Davis, Don Fuerst and Tom Walker. In addition to the winning authors, conference presenters included select paper authors, retirement policy experts, academics, industry professionals and government experts.

The winning authors presented their proposals, then we moved into panel discussions to explore the primary themes that emerged from the papers, including:

  • Using “smarter” investment strategies that tend to be less risky (particularly as individuals approach retirement). These strategies tend to mandate either a default or required investment option, at least for a portion of an individual’s retirement savings (remember, most individuals aren’t actuaries, and studies show most individuals don’t typically make smart investment choices). They also suggested more use of fixed-income vehicles like TIPS (Treasury Inflation Protected Securities).
  • Showing retirement accumulations as income, rather than a single sum. This uses the lessons of behavioral finance to help people understand the goal of retirement saving isn’t to amass as much wealth as possible, but prepare for a (potentially) long period of not working by accumulating sufficient guaranteed income.
  • Ensuring retirement savings are taken as annuity income in retirement, potentially protected from inflation increases. While this is very controversial in today’s political climate, most conference participants agreed that lifetime income of some form is an important goal, and that it’s important for the profession to help policy makers understand that Social Security (in the U.S.) is not enough income for most individuals.
  • Giving employers the option of accessing a plan that they don’t have to sponsor. If employers are relieved of the burden of sponsoring plans, more employers and by extension, individuals, may be able to participate in plans.
  • Finally, a degree of standardization might help. If we start thinking about the purpose of retirement plans as more about ensuring individuals have a secure retirement income and less about providing employers a benefit option, then the priorities of the system shift. One consequence of the shift that some authors explored was having more standardization in the system can lower cost and improve the ability for individuals (and employers) to plan.

Many of these ideas are new and are not without controversy. There was significant discussion, debate and some healthy disagreement both among panelists and the audience about ideas like mandating plans, guaranteeing benefits, and balancing the needs of different stakeholders. That’s OK. Actuaries understand risk, and we need to take risks to explore what’s possible, even if it may not always be politically feasible. We were reminded of the challenge of the current Washington political climate in the post-health care reform environment. But we also were excited by comments from several Washington insiders that there are specific ideas that we can take forward to help create better outcomes within the system today.

We have a sampling of the papers online, including those from our four prize-winning authors and papers from three other authors who appeared as panelists at the conference. In addition, we will be posting presentations and other materials from the conference shortly. You can also read prior conference reports and other materials available online. The full conference report will come in the fall. In addition, we will be having a similar conference in Canada in fall 2010 (details to be announced).

So what do you think about these ideas? If you had to name your highest priority area to focus on in improving our retirement system, what would it be? Feel free to add your comments below.

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