The Final Project for this class comes from the iOme Challenge done every year. However, I want your solution to come from the information / research that you have read in this class. You may find research to cite outside of what you read in class, but it must be ORIGINAL ACADEMIC RESEARCH – in other words it must be research articles and not something written by CNN or FOX or MSNBC or anything like that. To find research articles, GOOGLE SCHOLAR is a good place to start if you need to find additional materials.
The 117th Congress has appointed you as a member of the 2021 Independent Commission on Retirement Security. Commissioners have been given this charge:
The retirement system needs to be re-evaluated and a comprehensive approach needs to be developed to modernize efforts in support of more efficient and effective programs that help Americans plan and save for a more secure retirement.
Your job as a Gen Z’er about to enter the workforce is to bring a new perspective to the Independent Commission on Retirement Security and to develop a comprehensive proposal to improve one or all of the three pillars of the nation’s retirement system for all generations in order to improve their chances of living a financially secure retirement. Your proposal should include specific policies that will target the needs and challenges of specific population segments you believe the commission should prioritize.
BACKGROUND INFORMATION PROVIDED:
There is widespread agreement that large numbers of Americans are unprepared for lengthy retirements. The three pillars of retirement — Social Security, employer-sponsored retirement plans, and personal savings — together may not provide adequate benefits due to the various financial risks that need to be addressed.
The first pillar, Social Security’s retirement program, was never meant to be the only source of retirement income. In 2010, Social Security’s retirement program began paying out more in benefits than it received in income. Current projections indicate that unless changes are made to either or both the funding and benefit payments, Social Security will only be able to pay 75 percent of benefits starting in 2035.
The second pillar—employer-sponsored retirement plans—are proven to be the most effective and easiest way for workers to save for retirement. Current research shows that if an employer offers a plan, workers are 15 times more likely to save. Yet one-third of civilian workers are not offered a retirement plan at the workplace and many of those workers who are offered a plan still do not participate. Furthermore, there is no clear path on how to include the growing numbers of part-time and temporary workers in the current employer-based retirement plan system.
The third pillar—personal savings—refers to what individuals save beyond any savings they may have through a workplace plan. Americans are living longer, yet few are saving for retirement on their own. According to the IRS, only eight percent of eligible taxpayers contribute to tax-favored individual retirement accounts (IRAs) each year.
Looking at both workplace and individual retirement savings, a large percentage of Americans have saved little for retirement. According to the Employee Benefits Research Institute, nearly half of Americans nearing age 65 have less than $25,000 put away for retirement. One in four Americans have less than $1,000 saved. Yet, living longer means Americans have to make their savings last longer.
Ethnic and racial inequality is also an important factor in retirement savings. According to the National Institute on Retirement Security, 66 percent of Latino households have no assets in retirement accounts and 62 percent of Black households have no assets in retirement accounts. This compares to 37 percent of White households with no retirement assets.
In addition, many Americans lack basic knowledge about personal finance, including managing debt, improving credit, and retirement planning. A 2018 study by the FINRA Foundation estimates that two-thirds of Americans could not pass a basic financial literacy test. It found that Americans have low levels of financial literacy and have difficulty applying financial decision-making skills to real life situations. Also, many job changers cash out and spend their retirement income instead of preserving it and moving it into a new retirement plan. The need for cash along with a complex process of rolling over the funds contributes to a very real problem – the loss of a retirement benefit as it is used for current needs and not rolled over into other retirement savings.
Finally, it is clear that different generations face different degrees of urgency when it comes to retirement. For instance, Millennials (born between 1981 and 1996) and Generation Z (born 1997 onward) have the longest time frame before them and the most to benefit from both improvements to the fragmented retirement system and to wage growth. Generation X (born between 1965 and 1980) are vulnerable when it comes to retirement – there is research indicating that about one-third of Gen-Xers have zero retirement dollars saved. Baby Boomers (born between 1946 and 1964) are already in their first decade of retirement or getting very close to retirement and may benefit from new ideas or programs. Even within generations there is a great diversity of circumstances, with some segments well prepared and others in great need of new solutions. Women have a particularly hard time achieving a secure retirement as they earn less over their working lives and lose income when they work part-time or leave the workforce to care for children or aging parents. As a result of lower earnings, their Social Security benefits are less and their ability to save is also affected.
New Approach to our Retirement System
Retirement comes to the lead as a public sphere policy question regarding the financial planning issue when one continues to age. Ordinary regulars must make odd complex financial choices daily. Research shows that they usually make these decisions blindly, not knowing the vital financial knowledge. Economists have been looking for the relations between retirement planning, financial literacy, and wealth for the recent past. This research tends to attribute retirement gaps to the circumstance that many employees are ill-informed about simple economical and financial notions (Cooper & Li, 2020). Apparently, most Americans lack common expertise about individual investment, including debt management, credit improvement, and planning for retirement.
FINRA Foundation in a 2018 research evaluates that two-thirds of Americans could not pass a basic financial literacy test. Financial literacy among Americans was found to be of low levels, and had difficulty in the application of financial decision-making skills to actual situations. Also, instead of preserving one’s retirement income, many job migrators withdraw and spend their income and moving it into new plans of retirement. The need for cash and a complicated process of rolling over the funds contribute to an authentic problem. Nevertheless, current conditions use the retirement benefits and rolls over into other retirement savings resulting to benefit loss in the long run.
Research shows that financial illiteracy is prevalent by the National Council of Economic Education, which states inadequate information of main economic concepts among students and working adults. More so, there is the recurrent disparity between what people affirm they know and factually financial knowledge. Other countries as well portray the related financial illiteracy, as the study shows. Recent research demonstrates that older Americans are progressively likely to transfer debt into retirement, and over time, the capacity of household debt grows significantly.
This actuality is raising concerns regarding retirement security. The debt burden affects how much older adults can fund their accounts and manage their savings in the long run (Elder & Rudolph, n.d.). Additionally, when interest rates upswing, retirees will require to earmark considerable funding to service their debts. An increase in debt also prompts the delay in retirement for one to recover one’s financial standings. Besides, the paper examines how to encounter the various mysteries concerning obligations to boost confidence for retirees when serving their retirement.
Somewhat, acknowledgment is less about why people fail to strategize for retirement and whether planning disorients the retirement saving patterns. Moreover, there is extensive agreement that for longer retirements most Americans emulate unpreparedness. Thus, the present parameters involved in retirement scheme may not be enough gains because of numerous financial risks that seek address.
When it comes to retirement, different peers face different degrees of urgency (W KALISCH & AMAN, n.d.). For instance,
The millennials (born between 1981 and 1996) and generation z (born 1997 onward) have the most prolonged time frame before them and the most to benefit from both improvements to the fragmented retirement system and wage growth. Generation x (born between 1965 and 198 Different peers face different degrees of urgency 0) is vulnerable when it comes to retirement. Research indicates that one-third of Gen-Xers have no retirement pension saved. Baby Boomers (born between 1946 and 1964) are already in their first decade of retirement or getting very close to retirement and may benefit from new ideas or programs.
Many Americans have invested little for retirement considering on both at workplace and individual retirement savings. Employee Benefits Research Institute stats that, “Nearly half of Americans nearing 65 have less than $25 000 put away for retirement. One in four Americans has less than %1,000 saved.” Yet, living longer, Americans have to make their savings last longer (Cooper & Li, 2020).
There is a great variation of situations even with generations, with some well- organized segments and others seeking for new resolutions. When women work only for part-time or leave the workforce to care for children or aging parents, they undergo tough time achieving a secure retirement as they earn less over their working lives and lose income. Thus, lowering their earnings, and their social security benefits becomes limited, which profoundly affects their ability to save (Elder & Rudolph, n.d.). Therefore, this paper tends to generate new outlooks to the Independent Commission on Retirement Security and generate a comprehensive proposal to recuperate one or all the pillars of the nation’s retirement system; additionally, all peers will increase their chances of leading a financially secured retirement lives. In what follows, therefore, are the three prime pillars of retirement.
Social security takes part in the retirement plan of approximately every American employee. It is essential to understand how the system works and how much one will get from the social security program when one retires. Vital information that one needs to be aware of is how one qualifies for the social security benefits. How one’s remunerations and age affect the benefits, what one should contemplate in deciding when to retire, and why one should not rely deeply only on social security for all income when in retirement.
Social security is not the only source of retirement income. Unless change is made to either the funding and benefit incomes in the current projections, starting 2035, social security by will only pay 75 percent of benefits. The aptitude to pay full benefits would need the trust funds to use their asset reserves. When there is depletion of trust funds’ assets, the program’s gain payments will depend exclusively on persistent tax revenues. However, the exhaustion of asset reserves does not mean Social security will be thoroughly bankrupt and unable to pay benefits.
In addition, policy decisions that would aid in eradicating such gaps generally fall into two groupings: revenue increase and decreased benefits, that is, payroll tax increase and increase in average retirement age, respectively. Moreover, some debate that economic development would translate into employment increases and real wages, which, via a payroll tax, would benefit the program’s financial status, probably eradicating any financial gaps projections.
Employer-Sponsored Retirement Plans
In adding retirement security to complement the social security benefits, employees or money workforces need assistance. Thus, these retirement plans are considered to be the most effective and easiest way for workers to save for retirement. Research shows that workers are 15 times more likely to hold if an employer offers a program; although, one-third of civilian employees are not offered with the retirement plan at the workplace, and many of those workers offered a plan still do not participate. Furthermore, there is obscurity path on including the rising figures of part-time and interim workers in the present employer-sponsored retirement plan system.
The rise of stationary coverage trends and lacking comprehensive federal legislation, several states initiate their own. Five states (Oregon, California, Illinois, Connecticut, and Maryland) enact Secure Choice plans based on the Automatic IRA (AARP 2017) (W KALISCH & AMAN, n.d.). In these plans, states guarantor a simple, low-cost payroll deduction plan managed by private-sector facilitators. The structure is the same as section 529 college saving strategies. Participation takes effect by employers, though with some exceptions if they do not give workers another kind of retirement plan.
In addition, Washington and New Jersey have developed retirement savings markets, state-sponsored websites that enable small-scale entities to set retirement plans that are traced to meet specific criteria. Although the federal legislative act has been lacking, national principles by the Department of Labor in 2016 momentarily eased the implementation of state actions by authorizing situations under which state-sponsored retirement saving plans are exempt from federal pension parameters.
Whatever people save alongside any reserves they may have to go through a workplace plan is personal savings. Americans experience more life longevity, yet few are investing for retirement on their own. Only eight percent of eligible taxpayers contribute to tax-favored personal retirement accounts (IRAs) each year according to IRAs report. Retirement saving and financial preparation have become more vital for realizing financial security in retirement. Recently, paramount accountability of retirement investing and planning shifts from employer to an American worker.
People naturally need to make choices on how much to contribute each year, how to capitalize their retirement wealth over a lifetime, and how to draw their funds in retirement without outlasting their assets (W KALISCH & AMAN, n.d.). Deciding on these choices requires complicated calculations involving uncertainties about the future projections, such as estimates on health care expenditures, prediction on longevity from family members, and expectations on inflation and market returns. However, some find it hard to navigate the different options and choices.
Furthermore, American families with various income levels and dissimilar access to retirement saving channels may have different retirement saving priorities. Households with enough savings in retirement income may comprise employees with high returns and existing retirement plans, such as those having employer-sponsored retirement pensions. Retirement saving strategies for those families may concentrate on guarding their investments wealth by controlling investment revelation and management, enabling investment adoptions, and regulating to ensure the proper investment guidance.
Middle-income families with less or no retirement savings beyond social security may not be on track for enough retirement income. Some of these families may find it challenging to save for retirement because of financial purposes. Others are non-suitable to participate in these employer-sponsored saving programs, thus, resulting in saving difficulties. Families who may have challenges in asserting their preretirement living morals throughout retirement may gain from policies to boost participation and contribution in retirement plans.
Nevertheless, for some low-income families, social security and additional income completely replace a significant proportion of preretirement earned income. Income from IRAs and DC plans is habitually a tiny ratio of their retirement income. If these families are not on track for sufficient retirement income, plan changes in SSI and other state income sustenance programs, an appropriate way to assist these families in meeting basic needs in retirement.
Some of the new outlook’s proposals to the Independent Commission on Retirement Security supplement the major parameters that determine the nation’s retirement system for all peers. These new outlooks tend to propose increasing one’s financial security confidence throughout retirement or when one is to enter into retirement.
Flat Rate Pensions. Considering overall the member countries, 25 have flat-rate pension schemes, which fluctuate in terms of their geographies and characteristics. Some states have flat-rate basic pensions facilitated by general taxation but different from public support schemes. Entitlement prerequisite for the benefit includes a particular span of residence in that state (W KALISCH & AMAN, n.d.). Therefore, flat-rate pension improves personal savings on some individuals regardless of the current basic pay in one’s payroll since it cuts across to all employed workforces in that given country.
Contribution-Based Supplementary Pension Scheme. This pension scheme provides benefits related to contribution records rather than earnings, in addition to the basic flat-rate pension mentioned above. Moreover, unlike other methods, older people cannot benefit if they do not accrue contributions before they retire. Other techniques have the same functions concerning the social security system (W KALISCH & AMAN, n.d.). They comprise those parts of the general social support scheme, funded by general taxation, which will be beset explicitly to the elderly and intended for long-term benefit establishment. These are social pensions and will be administered differently from conservative social security administration for pension programs.
Earnings Related Pensions. When some fail to implement the flat-rate pension, the alternative proposal will be earnings-related pension programs. Earning related pension improves the employer-sponsored or state-sponsored retirement pension scheme. Everyone would get a Supplemental Executive Retirement Plan (SERPS) of 25 percent of their incomes above the lower earnings limit as there no IRS approval and less reporting since they are non-qualified (W KALISCH & AMAN, n.d.). The organization regulates the plan and can book an annual expense equal to the present value of the stream of future benefit payments. When paying a benefit, the company deducts them as an expense.
Public Earnings-Related Pension Programs. The level of final profits from public pensions, both flat-rate and earnings-related, will provide a particular group of benefits to those who retire. Public earnings measure in terms of a replacement rate, that compares each level of pension gains and the prior incomes of workers. Also, declaring how the retirement pension system can control the structure of the pension system induces the status of payments. In particular, whether there is an earning-related benefit and the state’s level seeks to sway the allocation of retirement wages through either benefit appraisal to low-income earners or reducing the services available to executive income earners.
Private Pension Schemes. Personal pension schemes become more crucial in the complete procedure of retirement income provision. Some of the private pension enticements shall include providing mechanisms for individuals to make special requirements for their retirement in relatively safe forms of saving, inspiring long-term conservation in ways that have limits on early access (W KALISCH & AMAN, n.d.). Also, by presenting retirement income provisions where the end-benefits are primarily fully funded, and the earnings on prior contributions principally govern the level of profits. Nevertheless, some prospects of more outstanding private pension provision may elevate the level of national savings.
Tax Concession for Pension Benefits and Other Income/Savings. Tax concession for pension benefits and other income regards pension benefits as tax-free income. The settlement will ensure that pensioners get the full payment of their pension to intensify their disposable income. Private pensions are not given any special status alongside these benefits as tax-free income (W KALISCH & AMAN, n.d.). Remarkably, the benefits fuel retirement incomes on top of the public pension benefits and the employer-sponsored retirement pensions. These benefits are because of the provisions to these private schemes usually gain from the concession.
Current Retirement Income Concerns and Process
At the forepart of these apprehensions are the channel and public pension systems in long-term financial sustainability. Retirement income primarily concerns countries that struggles with the reflection and engagement of reforms to their pension system. There is a total certainty among many countries that they should plan for the influence of the elderly in the population on public pension costs (W KALISCH & AMAN, n.d.). The preparation does not relate to the predictable changes in the financial balance of public pensions funded mainly on a Pay as You Go (PAYG) basis. Nevertheless, it is related to other forces on government, such as fiscal alliance. Retirement pensions need not exceed the constrained government budgetary decisions in the future since they need to facilitate a growing pension bill.
Matters on intergenerational equity relate in the same domain, in terms of apprehension over possible affliction to be placed on future working groups to fund the public pensions of many future retirees. However, other countries are concerned with the low actual retirement age in their country (W KALISCH & AMAN, n.d.). Some of the reasons are longer trends for diminishing labor force participation for older men, high supplanting of older workers from employment, public gains that encourage early retirement, and probably better wealth of the present generation impending retirement than previous generations.
Pension restructuring is neither simple, even when done correctly. Governing how much to save for retirement is a complex responsibility. It requires that the consumer process, gather, and project data on pension literacy, risk diversification, and debt management. Although the utmost importance of finding out what consumers know and how this channels their retirement planning and saving designs, minimal research has inquired how real-world households assemble this information and relate it to make retirement saving evaluations. These topics are vital, especially when families are progressively responsible for saving and investing their financial wealth and pension wealth.
Pension reform always does not offer instant resolutions. Most alterations are phased in over several years, not to disadvantage those who have actualized retirement plans and are now close to retirement and affluence any possible public concern over the nature of the changes themselves. The phasing in variations in response to the aging of their population will not matter, as long as the new strategic position is operational and applicable for the critical, most appropriate time. Nevertheless, it does point to the need to execute reactions to take account of the primarily long phasing in of the many fluctuations.
Governments need to be aware of the need for additional change. The social and economic environment is subject to significant change over the last thirty years, and there is no cause to expect that the rate of change will withdraw. New plan methods adopted now may spearhead further declines in the actual age of retirement. There are confines on the efficacy of public policy to realize specific results. Many of the factors altering the retirement decision of individuals and couples, such as employer appointment and firing exercises, preceding growth in living ideals and asset accrual, partialities for leisure, and the health status of those considering retirement, are not within the direct jurisdiction of the government.
However, the public plan can familiarize with adequate incentives and remove any awkward appropriations or incentives currently provided. This paper has extensively documented the guidelines of recent pension proposals to improve the nation’s retirement system for all peers to refining their chances of leading a financially stable retirement. Other countries are still in the process of establishing the nature of anticipated reforms. What remains views whether the modifications will turn to be enough and achieve the desired outcomes presumed to be the refinement of the existing pillars.
Cooper, C., & Li, Z. (2020). Saving for Retirement: Household Decision-making and Policy Options (p. 1). Congressional Research Service.
Elder, H., & Rudolph, P. Does retirement planning affect the level of retirement satisfaction? (8th ed., pp. 117-127). Financial Services Review.
Mesa-Lago, C., & Valero, D. (2020). The New Wave of Pension Reforms in Latin America. In Economic Challenges of Pension Systems (pp. 255-274). Springer, Cham.
Mitchell, O. (2011). Financial literacy (p. 2). Oxford: Oxford Univ. Press.
W KALISCH, D., & AMAN, T. RETIREMENT INCOME SYSTEMS: THE REFORM PROCESS ACROSSOECD COUNTRIES (3rd ed., pp. 8-30). OECD.
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