save is the alternative. if we don't have a retirement savings system that applies to all and is -- allows people to start at one company and move to another and continuously save, inevitab inevitably, we are going to see the data that jack had initially, where people do not have sufficient retirement savings, and they're going to come to congress and they're going to say, please, sir, we need more taxpayer benefits. we don't have the money for that right now. >> also endorsed by the brookings institution -- it's important. ms. miller, could you tell me why you've endorsed the i.r.a. proposal that i've offered? >> yes. we're very supportive, because it really does build on the current employer structure. and we think once employers -- first of all, people need to have an opportunity to save at work. and you just can't do that without having the employer involved. when you get over that hurdle, then we feel that once employers are used to doing payroll deduction, and feel comfortable with that, it will be easier to approach them and is say, listen, you've been doing this, can you afford to do a little more? maybe a simple plan would work for you. or a 401(k), and once they're in the system, they'll feel more comfortable moving up and providing some employer contributions as well. >> and we require no matching contribution from the employer. >> require no matching contribution from the employer. and just the way -- you know, 30 years ago, a different story. but right now, the -- with the development of electronic systems, it would be so easy and so -- so little trouble for the employer to make this work. >> particularly good for the small employer. mr. hardic, why do you like the proposal? >> the good thing about the proposal is we need to do all we can to get more employers into auto enrollment and auto escalation. the proposal would be a big step in that direction, as dr. john indicated. it gives incentives to employers to do that. and making it attractive to employers to go in that direction is something that i think is well worth exploring, providing those incentives, getting more employers to do it, and giving employees the option to do the auto i.r.a. if they don't have a plan of their own is valuable. so it expands the reach. i think there is a question how quickly you can get there. >> thank you. >> thank you. mr. buchanan is recognized. >> thank you, mr. chairman. and i also want to thank our witnesses today. as you know, we've got 10,000 baby boomers retiring every day. they claim for the next 30 years, 20 years. of but a lot of them are very uptight, frankly, about, you know -- planning on retiring with all these concepts they had, and now they're getting to the point where they can retire, 60, 65. they don't know if they're going to have enough money, if they're going to get the rereturn on the assets, because they can put them in more conservative assets going forward. and the other thing, they're not sure if maybe at one point they thought they were going to live to 75, now my mother-in-law is 92. so they're all kind of -- what -- concerned about it. what can congress do, do you think, if anything, to help bring a little bit more security and dignity? what incentives, or what would be one thing that we could do that we're not doing to make a difference? because i can tell you, i'm slowly getting to that age, a lot of our friends are -- that thought they were fine ten years ago in terms of retirement are concerned today, working longer, not sure. any thoughts on that? i'll start with you, ms. miller. >> yes, thank you. when we're talking about baby boomers with such a short time frame, i think one thing that you should do is when you're looking at tax reform, keep those catch-up contributions in there. because as a baby boomer, i can say that i'm a lot more conscious of how much i need to save now that it's too late. and it would be very good to keep those options there. i think looking further down the road, it's really important to engage younger people. and automatic enrollment and auto escalation are critical. but i also think that we need to look more at e-delivery of things. we're all very supportive of all sorts of disclosures. but when people get a stack of paper they don't necessarily look. and if we could approach -- you know, people more with something that's interactive, it would be easier for them to plan, easier for them to get engaged. and really would like you to enable more electronic delivery. >> mr. john, would you comment? let me just mention, i was reading i think in front of usa today, they were talking about, you know, where they're at in terms of retirement. i think with of 60%, enormous number just relying on social security, and they don't have much beyond that. it's pretty scary to think you work 40 years of your life and there's not something in place. do you have anything you want to add to that? >> well, let me add two things, if i may. first, of course, is that to take this as an object lesson, the fact is, if you've reached 55 or 60, you don't have nearly the flexibility that you used to have. and we need to make sure through the auto i.r.a. and a wide variety of other things, to make sure this doesn't happen to the next generation. but we've got a second crisis that's coming with the baby boomers. the first one is going to be not having enough money. and the second is not managing it properly, so that they run out of money at the time when they're 80 or 85. we need to very carefully examine the question of guaranteed lifetime income, annuity-type products. when they are ones that kick in at the age of 80, whether they're ones purchased at the time of retirement, to make sure we don't have the same individuals who are worried now even more worried when they're 85, and their bank account is empty. >> okay. let me ask, and i want to get one more quick question in, just in terms of congress. helping small business. you know, i'm concerned there are a lot of small employers out there where employees would like to have some kind of retirement, they don't offer it. what -- you know, that's tax deductible. what incentive can we help with small businesses to make sure that as many of them provide some kind of retirement package, 4 4 4 401k or whatever else is available out there. do you have any comments on that? >> i think many members of this committee, both republicans and democrats, have supported incentives, start-up credits for small business to once again send that signal that if you set up this kind of plan, we will help you with that initial administrative expense. i think doing more on that front, i think mr. neil now has a bill in. but others on this committee have in the past supported that concept. and it could easily be expanded on. that's where our problem is, in those small businesses that aren't covering. because -- partly because of the costs. electronic delivery would help there, too. it is amazing how expensive it is to send out all this paper. >> yeah. thank you. mr. chairman, i yield back. >> thank you. mr. marchand is recognized. >> thank you, mr. chairman. mr. vanderhei and ms. miller, you both state in your testimony that despite what some may claim, studies show that current tax incentives for savings, for retirement, are quite progressive. what would be the effect on progressivity if you lowered the top marginal rate to 25%? >> that's a very complicated question, and depends in part on what else you've done when you've lowered the marginal rate to 25%. it is a fact that as the top rate declines, there is less incentive for tax deferral. because you're saving less money when you contribute. if that -- but there are other competing ways to save. it depends in part on what's happening with capital gains and dividends. if you have no tax to be paid on an investment, as david would like to see generally, then it becomes very difficult to incentivize an employer to put in a plan, unless you specifically have a targeted tax credit or some other specific benefit to encourage that employer to put in a plan. so i think that this is something that is particularly sensitive to what else -- what else is happening. and that -- but it is true that as the rate declines, the incentive, the cash that's freed up by putting in this plan also declines. and so you'll have to be careful not to give it a double hit, certainly, by also, you know, maybe you need to increase the contribution limits in order to maintain an incentive there for employers to put in plans. >> thank you. mr. vanderhei. >> i agree with what judy said. and i would like to just amplify it a bit. we had done some work last summer, looking for at the simpson/bowles type proposal. but i think a lot of that could be expanded to this type of proposal. if it you're reducing the marginal tax rates, especially for the small business owners, you're changing the calculus of what their cost benefit analysis is of providing that to the employees. and judy has in her written testimony a graph that we worked on last year that actually shows -- i believe we had as much as an 11% decrease in the number of small plans defined as plans with less than 100 employees, because of the 2020 limits. if that's something you would be interested in, we could very easily modify that to look at what the impact of decreasing marginal tax rate would be, apart from the 2020 limits, and i could get back to you on that if you're interested. >> i think we would be interested. that's in all of our proposals, that that tax rate be capped at 25%. and for mr. john, what would be the overall effect on retirement savings of adopting the 2020 proposal as was proposed by the bowles commission? >> i'm not a micro or macro economist, so i don't model it. i usually tend to defer to jack on issues along that line. >> okay. well, jack. >> the 2020 -- actually, we have a figure in the written testimony that takes a look at what would happen. i don't think surprisingly the biggest hit would be on the highest income quartile. we found, for example, that people currently 36 to 45, if it were applied today, would have about a 15% reduction on average if their retirement balances. what i think comes as a surprise to many, though, is that the second biggest hit actually comes on the lowest income quartile. and that's because of the 20%, not the 20,000. and one thing that many people ignore is that oftentimes people will come back into the work force later on in their age, they may be a spouse, and they may find that because of catch-up or whatever, they have the ability to put much more of their income in. we find that they are the ones who typically end up trigger the 20,000. but even for what we found for 36 to 45, almost 10% for the lowest income quartile, 10% reduction in average account balances, because of 2020. >> i think that's actually understated for the lower paid, because small business owners, they would have about zero incentive for putting a plan in, and the safe harbor contributions they make for rank and file workers would be gone. and so i think that really understates the negative impact. >> thank you, mr. chairman. >> thank you. mr. thompson is recognized. >> thank you, mr. chairman. and thank you for holding this hearing. i think it's extremely important, and it's an area where we ought to have a lot of common agreement. this is something we can actually do to help people, a lot of young folks out there who could really benefit from some good work that this committee could do. i want to follow up on a couple of questions that were asked by other members. mr. buchanan asked about what to do to encourage small business folks to participate. and ms. miller, in your written testimony, you mentioned that employers who don't offer any sort of retirement plan for their employees cite business concerns. can you elaborate on what those business concerns are. >> sure. >> and did your research show any downturn or any of the folks who were offering it, did they jettison those programs during this recession? >> yeah, i don't have any data on that last piece, although our members certainly anecdotally -- you know, if a business is -- goes out of business, obviously the plan is gone. and certainly as a small business, when your resources are drained, you will cut back on contributions, if nothing else. but the -- when employers say they didn't -- they're not putting a plan in for business reasons, there could be -- a few top line regions. one is they don't think the employees care. and if the employees say give me cash, the employer would rather just give them cash, if they have it. second is that if you're -- small businesses are notorious for not lasting long. and if you aren't sure you're going to survive, then, you know, you're hesitant to do something that really says, hey, i've arrived, i can plan long-term too. and the third is the cost. i think there's some -- some employers don't understand how inexpensive it is to actually set up a plan. but most commonly, the issue is that they don't feel they can afford to make a contribution or to promise to make a contribution. and that's why really we're supportive of the auto i.r.a. proposal, because it could get employers in without out-of-pocket costs themselves. and think they'll find employees actually do appreciate it, and we can kind of get over a couple of hurdles at the same time. >> well, i think mr. neil's bill would speak to that issue. >> absolutely. yes. >> public record. i told him to submit it and i would coauthor the bill. >> good. >> i think it's a good one. >> yes. mr. john, you've done some research on retirement savings plans in other countries. >> i have. >> was there anything there that really knocked your socks off? >> there were actually a couple, both good and bad. if we look, for instance, at new zealand. new zealand has a form of the auto i.r.a., but given the fact that they only have 3 million people, it's a much more centralized form. but it works exceedingly well early on. the one that is the huge mistake is the united kingdom. the united kingdom went through and back in 1997, then chancellor -- inspector gordon brown, increased the taxes of retirement plans by about 5 billion pounds a year. the net result, obviously, was a collapse. the second thing that they did was that the uk continuously tinkers. they come up, they set up a program, they actually have a brilliant program called n.e.s.t., national employment savings trust, that starts to go into effect this fall. except that the government just announced within the last week or so that now they're looking at a completely different approach. and what that does is to breed confusion and distrust. >> so is there anything we should take from the different foreign programs that you evaluated and looked at putting in place here? >> the ones that worked the best are the ones that have the broadest coverage, and start people young and keep them saving throughout. australia has a mandatory system, which works exceedingly well. i'm not suggesting that the united states move to something along that line. but the broader the coverage, the better it is. and it is possible to do a very simple system, like the auto i.r.a., and keep it very cheap. frankly, we studied overseas systems very extensively in developing it. >> thank you all very much for being here. i yield back, mr. chairman. >> thank you. mr. berg is recognized. >> thank you, mr. chairman. obviously, the goal in this whole thing, how do you make it simple and easy to pick the right plan for each individual? and i -- obviously, someone's understanding of the financial markets and what's best for them and trying to make a -- lifelong decision rather than, you know, a shortterm decision. so i was kind of intrigued by the automatic i.r.a.s. and you know, part of their testimony, mr. john, you talked about simplifying things, but also having an automatic i.r.a. so kind of my question to you, does the simplification come first, or do you do the automatic i.r.a.s and then simplification after that? >> i anticipate that given the direction of things, that the auto i.r.a. comes first. the auto i.r.a. is crucial, because if people don't save, if they don't get started early on, it doesn't matter if you simplify or not. >> okay. thank you. i just had one kind of out of the box question. and it seems like, you know, so many people are going through a lot of different jobs today. and so kind of the new normal is several different careers, several different jobs. and a lot of younger people that i know have been to two or three different employers in a very short period of time. and so each time you're trying to analyze what's the best retirement program, here's what the employer is offering, has there been anything done kind of out of the box and kind of looking at a plan that would just be a individual's plan, and this plan would follow the individual, even though they're an employee, but, you know, again, they would make the decisions on what's the right package for them for their working career? and as they went in and out of different careers and different jobs, those employers might pay into their individual plan rather than, you know, the employer sponsored a separate plan? >> there have been some examinations of that sort of thing. but the key factor is that most people, especially when they're starting out, don't have the expertise to make that kind of choice. and the natural human reaction when you're faced with a choice that you don't understand is you do nothing. so people stop. that's the value of both an employer-sponsored plan where you have the payroll deduction and the auto enrollment and the auto escalation. and what we find as time goes on, a certain proportion of people who started out in auto enrollment later learn, and take more control over their activities. >> any other comments on more of an individual plan that follows an individual? >> i think it's very hard to motivate an employer to participate in that kind of an arrangement, because, you know, the employer, once they have -- feel financially secure enough to put in a plan, they are looking at the tax benefits. they're also looking at what works for their company. and what sometimes i think gets forgotten in talking about a single, simple plan, and -- is that employers will use -- they still use vesting schedules. if they're putting in a contribution for workers, it might be fully vested because it's a safe harbor. if there is something more than that, they don't like the idea of giving money to somebody that's coming and going right away. and so the money won't necessarily all be vested right away. and it will vest after a few years. or maybe a graduated schedule that's five years. and so that really doesn't work when you have an individual account. and so there are things that employer flexibility that the employer has under employer-based arrangement that would disappear. and i think make them less engaged. >> thank you. i'll yield back. >> thank you. mr. reid is recognized. >> thank you, mr. chairman. to follow up on mr. berg's kind of sentiment, one of the issues i see is the need. we talk a lot about employers and the government kind of -- here in washington being the ones to choose best what individuals should do with their future, especially when it comes to retirement and we kind of have this attitude up here sometimes that i try to fight every day of washington knows best, just trust us, we'll take care of it. and i want to get to the -- ways to try to enhance individual accountability and responsibility for people, allowing them to control their own destiny. are there things we could be doing to encourage literacy when it comes to financial planning, any ideas, thoughts from the panel as to where we could really change the mind set of individuals as they go into the workplace of actually being aware that, you know, 20, 30 years will come, and we need to have something in the bank to take care of us. is there any proposals that anyone could share with us that they would say we should be taking a real close look at and advancing. >> i have to get back to electronic delivery and really getting people engaged. there are some amazing things going on out there in terms of enrolling people and having their own individual information set up on their ipad or, you know, handing them out when people come in to get enrolled, and letting them work through and see what it's really going to be like. and yet there are constraints that -- on how everything has to be handled right now that minimizes what you can do. and so it almost ties -- you know, this -- this market is incredibly competitive and creative. and can't always, you know, get to do everything it could do. because -- >> could you give me some examples of those constraints, when you say there are constraints? regulatory constraints? >> yes, regulatory constraints. for example, right now we are -- we have all this paper that's due out for disclosure on investments. and it's going to be -- we support the disclosure, but people are going to be getting a stack of paper, and i don't think they're going to read it. and if you were able to -- if you had their e-mail address, i mean -- we give people at work an e-mail address. can't necessarily use that if they aren't routinely part -- that's not a routine part of their job and all this other stuff. and even though they may have used our website. so if somebody uses the website, you should be able to drive them to that website to get this information. once they're there, there are fun things you can do. there are people working on games to encourage people to save. and, you know, you need to really be able to get them involved. but right now, you have to assembled them that stack of paper unless they went through certain steps and it's just really -- it's a major expense. and it really discourages creativity and truly engaging people, especially younger people that are so much into electronics. you know, if we can't deliver this information on their iphone, you know, they're not reading it. and right now we can't. >> mr. john, i see you nodding over there. >> i agree with everything judy has said. as i usually do. but there are other areas. for instance, the uk has something called the platform account, which combines a retirement savings account with a variety of other types of savings and investment vehicles. and one of the things that they found that works exceptionally well over there is that because the employer knows how old this employee is, and what stage of life they are, they can shoot them little target videos. so if the individual has just got a child, they can shoot them a video talking -- in two minutes -- about here's what you can do to start saving for your child's future. or if it you've just married, here's what you can do to start saving for a house. and we found in studies that these work exceptionally well, and they work even better if they -- a person who is being recorded is someone that is something like a co-worker or someone who has some sort of a connection to that individual. >> how about in the educational -- like our high schools, elementary school, any thoughts on that? >> yes. my older daughter, who is 25, went through one of the finest high schools in the united states up in it montgomery county. and she took a variety of courses in it photography, cooking with amazing results. she didn't have to take a single financial literacy course. >> that's a great point. with that i yield back, mr. chairman. >> thank you. mr. lewis is recognized. >> thank you very much, mr. chairman. mr. chairman, i want to apologize to members of the panel. i had to run out and speak to a group of eighth grade students, and so they kept me for a while. i heard your testimony, and i want to thank you all for being here. and i thank you for your service. ms. miller, it is good to see you again. thank you also for all that you do. ms. miller, many other people who criticize the question of tax incentives for retirement saving argue that they are for the wealthy. they say these laws favor high-income people. in your experience and research, do you find this to be true? do you have any ideas as how we can further increase participation among low and middle-income workers? how can we make it easy for people to save for retirement? >> that's a very good question. i think if you look at the retirement savings incentives, first of all, there is a cap on compensation that can be considered. and it's a 250,000. so when we hear a lot of talk about, let's cut incentives for people making over $250,000, i can't help but think we already cap it. you already can't include compensation over $250,000. so -- and that's also when you're testing for nondiscrimination. so somebody might make $1 million, but when you're comparing their percentage of pay in the plan to the lower income person's percentage of pay, you use the $250,000. so we already have something that's built in to limit that. the nondiscrimination rules generally will say if a business owner wants to put in the maximum of $50,000, those workers are going to be getting a contribution. 3%, 5%, depending on the arrangement. they're going to be getting employer money. and there's -- you know, it really is additional money. there have been some people will say, oh, they would have been getting that as pay anyway, but there was a really good recent look at this by eric toter and somebody else, i forget, showing that for lower-income groups, if there is a 401(k) plan, it's new money. it's largely new money. they have like 89%. but i think for a small business, it's more like 100. it really is additional money. so i think these nondiscrimination rules do that. it's a matter of getting access to more people, and that's why, again, we're strongly supportive of something like the auto i.r.a. program. that would just make these arrangements available, you know, to more workers and just grow what we have here. >> you mentioned that in another time and another period, that the banks would stay open. and i remember rushing down to the bank with -- when i was much younger, had all my hair, and with my wife, before the banks closed to get a $2,000 i.r.a. what happened to that spirit? what happened? should we bring it back? >> well that, was one of the things that we proposed doing in the -- in the -- the bush administration simplification proposals. what happened was, in -- was that we put income limits on who could make contributions to i.r.a.s. so when you and i were seeing the lines going in and the banks staying open, that -- it meant that everyone could make a $2,000 i.r.a. contribution. now everyone cannot make a $2,000 -- or 5,000 -- you can't make a deductible i.r.a.
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