1. The Cost of “Choice” in a Voluntary Pension System Prof. Jon Forman & Sandy Mackenzie for the Tax Economist Forum Washington, DC Third Way, 1025 Connecticut Ave., NW May 15, 2013 1

2. Figure 1. How Benefits Compare to Earnings (2012 dollars & percentage of final wages) 2

3. Figure 2. Initial Social Security Replacement Rates for Retired Workers (1970s birth cohort, percent) 3

4. Table 1. Share of Workers Participating in the Pension Plans, 2011 (percent) Worker characteristicSponsorship rate Percentage participating Employer size Fewer than 10 employees13.811.3 10–49 employees29.623.0 50–99 employees43.433.4 100–499 employees54.542.5 500–999 employees60.647.8 1,000 or more employees65.351.4 Public sector79.370.6 4

5. Table 2. Social Security: Administrative Outlays as a Percent of Trust Fund Income and Benefit Payments, FY 2013 5 Percent of Income Percent of Benefit Payments OASI0.3%0.4% DI2.7%2.1% OASDI (combined) 0.7% SSI (Federal and State n/a0.7% TOTAL SSA 1.4%

6. COSTS OF PRIVATE PENSIONS The Cost of Choice Administrative and Compliance Costs – median participant’s all-in fee (ICI) was 0.78% of assets ($248 per year) Opportunity Costs – Lost investment returns – Lost savings opportunities – Lost opportunity to buy longevity insurance – Leakage 6

7. Table 3. Form 5500 Income Statement of Pension Plans by type of plan, 2010 (amounts in millions) Income and ExpensesDefined BenefitDefined Contribution Income Employer contributions $127,443$118,056 Participant contributions 760175,787 Other income 283,576410,020 Expenses Total benefit payments 169,645287,282 Administrative expenses 9,7694,011 7

8. Yields Administrative Expenses: For defined benefit plans – 7.5% of contributions – 2.4% of total income – 5.8% of total benefit payments – 0.4% of assets For defined contribution plans – 1.3% of contributions – 0.6% of total income – 1.4% of total benefit payments – 0.1% of assets 8

9. Regulatory Costs Are Not Substantial IRS$110 million EBSA$183 million PBGC$6.5 billion The total of $6.8 billion is a very small fraction of the value of retirement assets, $18.9 trillion. 9

10. Figure 3. Pension funds’ operating expenses as a share of total investment in selected OECD countries, 2009 (percent) 10

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12. Table 4. 2008 Replacement Ratios (married couple, ages 65/62, one working) Pre- retirement income Replacement Ratios From Social Security From private and employer sources Total $20,00069%25%94% $30,00059%31%90% $40,00054%31%85% $50,00051%30%81% $60,00046%32%78% $70,00042%35%77% $80,00039%38%77% $90,00036%42%78% 12

13. Table 5. Lump Sum Amounts Needed at Retirement from Private and Employer Sources as a Multiple of Final Pay Pre- retirement income Baseline replacement rate needed (% of final pay) Equivalent Lump Sum Needed (as a multiple of final pay) MaleFemale $20,00025%4.44.5 $30,00031%5.05.5 $40,00031%5.05.5 $50,00030%4.85.4 $60,00032%5.25.7 $70,00035%5.66.3 $80,00038%6.16.8 $90,00042%6.87.5 13

14. Reducing Costs A Universal, Second-Tier Pension System – Expand Social Security; or – Strengthen the Private Pension System with a Simple System of Add-on Accounts More Modest Approaches – Encourage Default Investments – Employer Retirement Savings Accounts – Multiple Employer Plans – State Funds 14

15. Two approaches to reform: 1. The blank slate Assume a blank slate, or tabula rasa – Ask what the second tier would look like if policy had a free hand – A case can be made for heavy government involvement – Social Security is a natural platform for a second tier; it can funnel savings at little cost to providers of retirement savings vehicles 15

16. The blank slate, cont’d – Employers above a certain size not offering their own plan could be required to as a conduit for a government plan, or private sector savings vehicles. – Social Security can also act as a low-cost intermediary for the purchase of annuities and other lifetime income products. 16

17. The blank slate, cont’d – Because the SSA is already providing annuities (which are indexed), it could conceivably provide an additional annuity piggy-backed on the first tier. – In one version of this reform, the government simply acts as a conduit, although its role is mandated. In the more radical version, it becomes the provider of retirement savings vehicles and longevity insurance. 17

18. 2. Incremental reform Woodrow Wilson—work with the system as it is, do not assume a tabula rasa. – Increase the second tier’s coverage by requiring the use of defaults: employees participate automatically unless they explicitly opt out, – Require more appropriate default investments (e.g. TDFs). 18

19. 2. Incremental reform, suite et fin – Reduce liability concerns of providers over provision of annuities and other lifetime income products by enacting appropriate safe harbors. – Make a concerned effort to improve financial education. – Replicate California’s experiment with a state fund. 19