U.S. workers face a number of risks in both accumulating and preserving pension benefits, the Government Accountability Office says in a new report.
The agency notes alternative retirement plan designs, such as those used in several European nations, may help cut those risks. But they also present trade-offs and costs for workers and employers
Important disadvantages may arise with mandating coverage and contributions, guaranteeing investment returns and annuitizing benefits, the report said.
For example, “mandatory approaches reduce risks but also raise concerns about the impact of higher benefit costs, particularly on small employers,” the report said.
The report, prepared at the request of members of the House Education and Labor Committee to provide options for dealing with problems with the current U.S. pension system, also touches on use of annuities as a source of adequate income in retirement.
A problem with annuities is that because not every citizen buys them, insurers inevitably have to charge higher premiums to cover “adverse selection”–wherein annuity buyers tend to be people who have reason to believe they will live long lives.
The report suggests that to reduce premiums for annuities, efforts could be made to increase the number and type of workers who buy annuities and by providing access to group rates, which tend to be lower than rates for individual annuities.
Workers may not have enough retirement income because only half of the U.S. workforce was covered by a pension plan in 2008, according to a national survey cited in the report.
Moreover, those covered by deferred compensation plans risk making inadequate contributions or earning poor investment returns, while workers with traditional defined benefit plans risk future benefit losses due to a lack of portability if they change jobs.
“Preretirement benefit withdrawals, high fees and the inappropriate drawdown of benefits in retirement also introduce risks related to preserving benefits, especially for workers with DC plans,” the report said.
But problems also exist in alternative approaches, such as those offered by the private pension systems in the Netherlands, Switzerland and the United Kingdom, the report said.
For example, in the Dutch and Swiss systems, sharing investment risk requires assets to be pooled and thus limits individual choice.