(August 6, 2012) — A plan to implement a new system of universal private retirement accounts in the United States could have momentous consequences for the retirement industry, but the proposal’s political and fiscal viability are still very much up in the air.
Last month, Senator Tom Harkin (D-Iowa) unveiled a report that aspired to “be the starting place in an evolving discussion about retirement security.” His plan has two planks: first, the creation of a new fund constellation, dubbed the Universal, Secure, and Adaptable (“USA”) Retirement Funds, available to all American workers; and augmenting Social Security by increasing benefits and removing the cap on wages subjected to the payroll tax. Together, the report claimed, the proposal would provide “concrete solutions” to a “$6.6 trillion… retirement crisis.”
Harkin’s plan, were it to be passed into law, could see the creation of system of retirement funds of “ginormous” proportions, says Carl Hess, the global head of investments at Towers Watson. From the standpoint of the asset management and investment consulting industry, which could see capital infusions in the hundreds of billions of dollars, he asks, “What is not to like?”
Significant details remain to be hammered out, however, before the proposal can be fully evaluated, Hess said. A principal question is whether the USA funds would function as defined contribution or defined benefit plans. Harkin has asserted that the funds would occupy a “middle ground” between defined benefit plans and 401(k)s, but it is unclear who in his system would ultimately shoulder the losses in a poor investment environment—the beneficiary or the government. While the proposal seems to suggest that a person’s monthly benefit would be pegged to investment performance, much like a defined contribution plan, the report also states that in “a severe and long-term economic downturn,” trustees would have the ability to “gradually adjust benefits to reflect market realities.” What would constitute a “severe and long-term” downturn, and whether benefit payouts would fluctuate along with investment performance if such conditions were not met, remains to be determined. “It is a bit nebulous who bears investment risk,” explains Hess.
The political tenability of the proposal is also questionable, says Hess. The cost of the plan would be sizeable, and the increases in Social Security revenue, necessary to pay for the funds, would be unlikely to pass through Congress. But as a “starting place” for a discussion about the future of retirement, Harkin’s plan seems already to be serving its purposes.
“Senator Harkin’s plan is a welcome contribution to the debate,” says Hess. “But it really represents a trial balloon. I don’t quite see how the economics of this system would work as it stands right now.”