With the New Year right around the corner, hopefully many Americans are breathing a little bit easier. The unemployment rate finally seems to be dropping, and consumers are purchasing more this holiday season than they have in the past two years. 

But even should we see strong economic growth in the coming year, challenges remain in terms of Americans' retirement security. Each of the three legs of the retirement stool—a traditional, defined benefit (DB) pension, Social Security, and individual savings—is under strain. Private sector employers have been less interested in offering traditional pensions for decades. Americans’ ability to save is being squeezed by unemployment, stagnant incomes, and rising debt burdens, even as many employers have recently decreased or suspended their 401(k) matches during the Great Recession. Finally, Social Security, the major source of retirement income for most Americans, is already reducing benefits, in the form of a higher retirement age, and faces long-term financial challenges.

Yet there is much that policymakers can do to strengthen traditional pensions in the new year and beyond. Here are NIRS’ 2012 retirement resolutions for policymakers:

1. Changing Pension Law so that Plan Funding is Less Volatile. NIRS research shows that funding volatility, not pension costs, is the primary reason that defined benefit pension coverage has declined for private sector workers.  This is largely due to onerous laws and regulations enacted since the 1970s, which complicated funding rules, and increased contribution volatility when employers need steady, easy-to-estimate costs from year to year.

One way to decrease volatility would be to ease funding regulations on private plans. For example, if longer smoothing periods were reinstated, plans would have more time in which to make up for losses due to large market downturns. This could help to ensure that plan funding is not quite so subject to market swings, which could in turn encourage more employers to establish DB plans for their employees.

2. Enabling Pre-Tax Employee Contributions. IRS rules make it difficult for private-sector DB plans to allow employee contributions. However, most state and local DB plans already are employee contributory, which helps to ease the funding burden on employers somewhat.  Research suggests that, should a similar shared financing model be adopted in the private sector, the cost of the funding plan may become easier for the employer to manage. 

3. Creating an Avenue for Third Party Sponsorship. Private sector multi-employer plans may provide a workable model for incorporating third-party sponsorship of a DB plan. Multi-employer plans are jointly administered and governed by a board of trustees, which includes equal representation from employees and employers.

Perhaps because they are so different in design and structure from single-employer private sector plans, multi-employer plans—though also in the private sector—are not under quite the same regulations as corporate pension plans. These plans are able to incorporate longer smoothing periods, and as a result, see much less volatility in plan funding. An added benefit is that these plans offer more portability than traditional, single employer DB plans. Generally, if an employee changes employers but stays within an industry covered by a multi-employer plan, that employee can stay within the same DB plan, with no penalties or lapses in coverage.

Indeed, there is no shortage of ideas on how to strengthen the retirement security of middle-class Americans. And our opinion research shows that strengthening retirement security could even pay off politically. Some 83% of Americans believe that government should make it easier for employers to offer pensions, and 81% believe that Washington leaders need to give a higher priority to ensuring more Americans can have a secure retirement.

Yet, the more difficult task remains—translating ideas into action in order to raise the bar on Americans’ retirement security. Let’s hope that policymakers take heed of this in the coming year. 

Posted on December 30,  2011, by Ilana Boivie, NIRS Director of Programs