Tuesday, October 7, 2008, Rep. George Miller chaired a hearing on the current economic crisis and its impact on retirement security. link
In his opening statement, Rep. Miller observed:
During his testimony, Lehman’s CEO, Mr. Fuld, showed no remorse for his catastrophic mismanagement of the company. In fact, he repeatedly denied responsibility for running the storied Lehman Brothers investment house into financial oblivion.
He refused to admit that his own reckless management – and his industry’s success of keeping regulators at bay – directly contributed to this historic financial crisis that is costing taxpayers, shareholders, and the nation’s current and future retirees billions of dollars from their nest eggs.
All the while, he insisted on taking obscene multi-million dollar bonuses for his executive teammates.
Unlike Wall Street executives, American families don’t have a golden parachute to fall back on.
It’s clear that their retirement security may be one of the greatest casualties of this financial crisis.
The current financial and housing crises are stripping wealth from American families at a record rate.
A new poll just found that 63 percent of Americans are worried that they will not have enough savings for their retirement. Tragically, they may very well be right. Due to the collapse of the housing market and the financial crisis, trillions of dollars that Americans were counting on has been lost.
Jerry Bramlett, CEO BenefitStreet, Inc.
Dr. Teresa Ghilarducci, Irene and Bernard L. Schwartz Professor of Economic Policy Analysis at The New School for Social Research Department of Economics
Dr. Peter Orszag, Director, Congressional Budget Office
Jack VanDerhei, Research Director, Employee Benefit Research Institute
Dr. Christian Weller, Associate Professor of Public Policy, University of Massachusetts-Boston, Senior Fellow, Center for American Progress
Most of the testimony is too complex to summarize succinctly. However, I am including two excerpts from Weller’s paper here.
In my testimony today, I would like to focus on the lessons that can be learned from the current financial crisis for retirement income security. In particular, the long-term trend in declining retirement security has been exacerbated by the recent turmoil in the financial markets, and thus ever more poignantly underscores the need for swift and broad action to vastly improve the retirement income security for the majority of American families. Too many Americans rely too heavily on their homes as their primary source of household wealth. Declines in house prices quickly decimate this wealth, especially when families are heavily leveraged, as has been increasingly the case in the past few years, when mortgages grew faster than home values. And, even those families who have some retirement savings – about three quarters of American families nearing retirement – increasingly rely on their own luck and investment savvy to reach their retirement savings goals. Yet economists have long known that the success of “Do It Yourself” savings plans is severely hampered by the underlying investor psychology, which often leads individual investors to buy and sell low in crises like these.
These data point toward three policy goals. First and foremost, more Americans need retirement savings in addition to Social Security and outside of their own home. Second, Americans need to save more for retirement, encouraged by progressive saving incentives and supported by their employers. Substantially raising Americans’ retirement security is a heavily lift, as the data further below show, and thus can only be accomplished as a shared responsibility between individuals, employers, and the public. Third, Americans need to be reassured that the money that they will save for retirement will actually be there when they need it. The exposure to large market swings, as we have experienced twice in the past decade, can send individual investors scrambling for an exit at the most inopportune time. This prevents them from saving enough, and actually increases their exposure to financial market risks.
The policy response to these challenges has to be comprehensive, consistent, and progressive.
The decline in workers’ retirement security is not a new occurrence, but rather a troubling trend, which is especially evident over the course of the current business cycle. We may have very well dodged a bullet last week with the actions taken by Congress and the administration. However, the long-term problems that were highlighted by the recent turmoil in the financial markets, including the overall weak retirement security of Americans overall, will not simply go away. The strength of America’s workers’ retirement security has been declining for many years and will likely continue to worsen, regardless of what happens as a result of last week’s activities. It is because of this, and because of what America owes its workers, that we cannot stand idly by as this happens. We must instead improve retirement security by building a better DC [defined contribution] plan and strengthening DB [defined benefits] plans so that all Americans can look forward to a comfortable retirement and actually have the means to finance it. Importantly, there is no single “silver bullet” policy response. Instead, policymakers should take a pragmatic approach. They should consider all efficient policy options to increase the number of workers with a retirement savings plan, to raise retirement saving – especially among lower-income workers, those who work for smaller employers, and minorities – and to reduce the risk exposure of retirement savings.
So, so true.
And while we are on the economy, GAO issued a new report Tuesday that takes on this subject from a different perspective. Private Equity: Recent Growth in Leveraged Buyouts Exposed Risks That Warrant Continued Attention GAO-08-885, September 9, 2008
Note the date. It was held back from release for a month after it was published.