How Would You Fix the American Retirement System?

  • Originally published September 20, 2010 , last updated December 31, 2015
How Would You Fix the American Retirement System?

President Obama’s Economic Recovery Advisory Board (PERAB), chaired by Paul Volcker, recently issued a 188-page plan to “fix” the nation’s complicated retirement system.

The plan laid out eight ways to simplify the incentives for retirement savings and increase “retirement readiness” in America. See what you think of their proposals and let us know what you would like to see done to incent people to save more money for retirement.

1. Consolidate Retirement Accounts; Simplify Rules
Between IRAs, 401(k)s, 403(b)s and SEP-IRAs, etc., it can be hard to figure out whether you're eligible to contribute to a particular account and how much you can contribute. The PERAB report proposes that lawmakers consolidate employer-based retirement accounts and simplify eligibility and contribution rules.

2. Integrate IRA and 401(k) contribution limits
All workers, irrespective of income, would be allowed to contribute to an IRA and/or employer-sponsored plan.

3. Consolidate and segregate non-retirement savings
Volcker and the advisory board called for consolidating all non-retirement savings programs, including Section 529 plans (whose rules are set by states and vary widely), Coverdell IRAs, health savings accounts, Archer medical savings accounts, and flexible savings accounts, under a single instrument.

4. Improve savings incentives; expand auto-enrollment
Would turn the saver’s credit into a match, instead of a tax-break. That way any additional dollars go into the person’s retirement account, rather than their checking account. There is also talk of making employer-based plans automatic enrollment instead of making people opt in.

5. Reduce retirement "leakage"
In order to reduce the number of workers who cash out their retirement plan when the leave an employer, the PERAB proposes that their retirement account balance be retained in the existing plan, automatically transferred to an IRA account, or moved to an account with a new employer.

6. Simplify rules for employers sponsoring plans
Options include simplifying the nondiscrimination test, by simplifying the definition of a high-paid employee and providing a standard safe harbor for all, or repeal nondiscrimination rules entirely.

7. Simplify disbursements
Would eliminate Requirement Minimum Distributions (RMDs) and all the complicated rules that come with them. RMDs were instituted as a way to collect more federal taxes on qualified monies. Many believe, however, that the policy needs to be reexamined now that people are living longer.

8. Simplify taxation of Social Security benefits
By simplifying the formula that calculates the tax on Social Security benefits, the Volcker group thinks they can reduce the burden on older taxpayers and improve economic efficiency.