Analysis: The Federal Government Gave Up on Retirement Security

The scandal is that the one-time payment doesn’t even have to be equal in value to the pension. It can be worth less—in fact, under rules passed by Congress and regulations issued by the Treasury, it usually is.

Lawyers for Treasury and Labor are famous for requiring voluminous disclosure of incomprehensible minutiae, yet neither department has ever required companies to mention their profit-taking at their employees’ expense. Employees, in theory, are free to figure this out on their own, but companies know that most will not.

How did this happen? Traditional employer-backed pensions that paid a lifetime income used to be the main form of retirement plan in the United States. In 1974, Congress enacted the Employee Retirement Income Security Act to preserve and protect these pensions. Responsibility for implementing ERISA was then split between Labor and Treasury. (The Pension Benefit Guarantee Corporation, which I ran from 2010 to 2014, also has some duties.) The departments turned out to be so inflexible that employers decided to abandon traditional pensions. Companies quickly learned that rather than being on the hook financially and legally for paying a lifetime pension, they could switch and offer a 401(k) savings account that pays a lump sum. Having done that, employers also wanted to unload the pension obligations they had already taken on, so Treasury gave them the option of offering employees an up-front payment instead of a lifetime guarantee.

Most people who retire today get a lump sum from their retirement plan. They then have to guess how to invest it, how long they’ll live, and how much to spend.

Labor and Treasury aren’t much help. It’s not that their employees are insensitive, but retirement security is neither department’s main job. They have different laws to administer and different views about retirement security. Labor’s focus has been on regulating employers who sponsor benefit plans, not the financial-services firms that now actually dominate retirement. Treasury’s focus has been on interpreting and implementing a ridiculously complex tax code written increasingly by lobbyists. Both are afraid of offending the financial-services industry, so neither agency has ever required even a disclosure of how long your retirement might last as you spend it down. Most of the time, you’re on your own.

Occasionally, one department or the other will step in. In 2015, the Obama Treasury, feeling guilty about being an accomplice to the destruction of retirement security one lump sum at a time, decided to limit the scam: It said that companies couldn’t offer these buyouts once an employee had already started receiving pension payments. Sadly, Treasury continued to allow the buyouts for employees who hadn’t yet started retirement. The current Treasury Department apparently doesn’t even feel that modest pang of guilt. It went back to the old practice of allowing companies to shortchange both those who are already living on a pension and those who have yet to retire.

Treasury and Labor often spend more time arguing than working together. (Their congressional oversight committees don’t often see eye to eye either.) Where Treasury and Labor do collaborate, however, it is to make sure that no one else gets on their turf. The Consumer Financial Protection Bureau was created in 2010 specifically to help defend the average American from risks hidden in fine print, but Treasury and Labor made sure that the new entity could not regulate any retirement products—easily the most complicated consumer financial products—unless both departments agreed in advance. Thus far, that hasn’t happened.

In Washington, D.C., protecting your “turf” can be more important than protecting citizens.

You might ask, Where are our elected officials? Well, they do make speeches about retirement security and they sometimes make proposals—though rarely ones that require anyone to actually do anything. Recently, for example, President Donald Trump issued a “retirement-security executive order.” It will allow financial-services companies new ways to collect and, for a fee, invest our money—in addition to the thousands of plans they already offer. Ironically, the “retirement security” comes from delaying retirement and continuing to work. That’s probably not what the authors of the Employee Retirement Income Security Act had in mind.

People looking for lifetime retirement income from their retirement plans will be out of luck. Fortunately, we still have two important national lifetime retirement-security programs: Social Security and Medicare—at least until they start running out of funds (in eight years for Medicare, 15 years for Social Security). Here, too, there is more rhetoric than action. President Trump just announced a budget that purports to make no changes to Social Security. In fact, it proposes $84 billion in cuts to Social Security’s disability programs, and does nothing to make sure that Social Security is fully funded. The last president to propose actually paying for Social Security, instead of cutting it, was Bill Clinton, two decades ago. (To their credit, Democrats in the current Congress have reintroduced legislation, the Social Security 2100 Act, that would fully fund Social Security for the remainder of this century. It has, however, not a single Republican co-sponsor.)

It doesn’t have to be this way. In plenty of other industrialized countries, individual workers are not forced to be their own accountants, actuaries, and pension-fund managers. If Americans insisted on genuine security when they retire, our president and Congress could deliver it.

In the next two years, politicians will ask for our votes for president, Senate, and the House of Representatives. Ask them what they will do—concretely—to make our retirement plans, our Social Security, and our Medicare more secure. Maybe if we threaten their retirement, they’ll finally do something to protect ours.