Sound retirement security policy for future retirees requires planning. Ensuring the goal of adequate asset accumulation at retirement necessitates sufficient savings throughout an individual's career. To that end, workers need to be engaged; employers need to be responsible; and policymakers must ensure that pension law, tax law, and the Social Security system operate in a manner that promotes opportunities for private saving, appropriate retirement asset management, and sustainability and predictability. Together, these programs should complement the goal to strengthen the financial security of our workforce.
Pension issues represent a policy area of great concern and with serious long-term consequences. In my view, funding challenges facing defined benefit (DB) plans and inadequate asset accumulation and risk management within defined contribution (DC) plans are under-appreciated long-term risks facing future retirees. These risks are both macroeconomic and microeconomic in nature. From a macroeconomic perspective, inadequate national savings reduces investment, a key determinant to future economic growth and prosperity. At a microeconomic and organizational level, inadequate funding of DB plans poses risks to employers; retirees; and the government backstop, the Pension Benefit Guaranty Corporation.
Proper preparation for workers' eventual retirement is a critical public policy. Yet, while numerous policies exist for this purpose, too many workers' retirements are underfunded. And this underfunding was only exacerbated by the recent financial crisis and recession.
With this in mind, my testimony is organized into three sections, intended to provide a framework for moving forward in the realm of pension policy. First, I will examine the size and scope of the retirement system and the shift in recent years from DB plans toward DC plans. Then, I will discuss the financial crisis and great recession's effects on pension plans and retirement savings. And finally, I will conclude with three policy observations for consideration as the Committee proceeds with its oversight of these areas.
Alex Brill is a research fellow at AEI.