Congressional proposals to increase tax revenue by reducing or eliminating long-standing tax benefits extended to holders of life insurance, annuities and individual retirement accounts would have a devastating impact on the nation's retirement preparedness, warned a Washington lobbyist at a forum in New York City today.
Earl Pomeroy, a former Congressman from North Dakota and senior counsel for Alston & Bird LLP, Washington, addressed this and other policy concerns at a morning general session of the 2012 Marketing Summit of the Insured Retirement Institute, being held at the New York Hilton, April 1-3. The general session explored the legislative and political outlook for the year ahead.
Pomeroy said the tax-favored treatment currently enjoyed by holders of annuities, life insurance and individual retirement accounts remain critical for boosting the nation's abysmal savings and assuring seniors an adequate income in retirement.
"At a time when the nation is not saving nearly enough, putting into question the tax incentives that encourage saving would be outrageous," said Pomeroy. "We're sleepwalking towards a retirement disaster."
To help boost Americans' retirement preparedness, Pomeroy said, Congress needs to explore ways to strengthen the Social Security system and, where feasible, public and private pension plans. He added that defined contribution plans should act more like defined benefit plans by providing - via a "default" option in 401(k) and similar employer-sponsored retirement plans - for an annuity-like income stream at retirement.
To help boost retirement income, Pomeroy also said that older workers should consider postponing retirement, as the delay would increase their monthly Social Security benefit. A monthly SSI benefit starting at age 70, he said, would average $1,320, nearly double the $750 monthly benefit beginning at age 62.
The boost in monthly income could prove crucial to retirees with inadequate nest eggs. Pomeroy cited a recent survey from the Employee Benefits Research Institute noting that 28% of today's retirees have less than $1,000 in savings. In 2005, the savings rate had declined to below zero for the first time since 1933.
Pomeroy expressed cautious optimism that the retirement outlook for Americans will brighten in tandem with an improving economic picture. He observed that stocks, as measured by S&P 500, Dow Jones Industrial Average and Nasdaq markets, had their best quarter in more than a decade. But though a "virtual cycle of recovery may have finally arrived" unemployment remains stuck at 8.3%, well above the 5% norm.
Pomeroy highlighted factors that remain a drag on savings and household wealth. Among them: a still depressed housing market; and student loan debt that now eclipses all credit card debt, personal debt and corporate debit combined.
A chief concern of boomers now transitioning to retirement, said Pomeroy, is the progressive rise in healthcare costs. Out-of-pocket healthcare expenditures for individuals on Medicare now exceeds 22% of household income. Seniors age 65 and older - a group that is expanding at 10,000 per day - can expect to spend between $197,000 and $250,000 in healthcare costs not covered by Medicare.
Gridlock on Capitol Hill
Turning to election prospects, Pomeroy warned that Congress will likely remain polarized after the November elections; and that neither party is likely to consolidate power in the White House, Senate and House, making passage of key legislative initiatives an ongoing challenge.
Despite the improving economy and high approval rates among certain groups, such as women and young people, President Obama's prospects for reelection in November could dim if the unemployment rate remains rates high or if international events - a Greek default, marked rise in gas prices or tensions in the the Middle East - take a turn for the worse.
Pomeroy added the Democrats risk losing control of the Senate, and Republicans a majority in the House, because of an "anti-incumbent" mood prevalent among the electorate, especially independent voters who have been alienated by policies of both parties. The approval rating of Congress, said Pomeroy, now stands at just 9%.
"Whoever becomes president in 2013 will likely be dealing with a divided Congress an and an evenly split electorate," said Pomeroy. "This is depressing, especially considering the rigidity the parties have brought to key issues facing the nation, including a looming budgetary catastrophe and spiraling national debt."
"Medicare is fueling an uncontrolled rise in entitlement spending," he added. "The U.S. ranks 37th worldwide in the quality of healthcare, but we have the most expensive health care system."
Pomeroy disapproved of a budget plan formulated by House Republicans that seeks to reduce healthcare costs. The plan, which calls for providing Medicare recipients with vouchers, would increase out-of-pocket healthcare expenses by $2,200 per senior by 2030, he said. Pomeroy added the additional burden is unreasonable considering that 85% of all Medicare households already spend 15% of their annual budget on uncovered medical care costs.
"Asking seniors to pay more for healthcare will dramatically reduce the standard of living for many retirees," Pomeroy said. "There is no question that this plan is bad policy and makes for bad politics. Seventy percent of seniors don't want any change to the current Medicare plan."
To deal with the nation's burgeoning red ink, said Pomeroy, Congress will have to explore new sources of tax revenue, which now totals just 16% of gross domestic product, the lowest level since the 1950s. He noted that Congress needs to adopt a simpler and flatter tax code, one that eliminates many of the code's 200-plus loopholes or "tax expenditures." He pegged the estimated value of tax exclusions in 2014 at $1.1 trillion. Accounting for the top tax expenditures are health care benefits ($630 billion), retirement savings deferrals ($600 billion) and home mortgage tax breaks ($475 billion).
Given budgetary problems, Pomeroy noted in closing, insurance and financial service professionals will play an increasingly critical role in the coming years to help people transiting from the workforce to retirement.
"One thing must be clear to you and your customers: There will be no new federal program to rescue seniors from the cash flow challenges many will face in retirement," he said. "The federal programs we have now will either be sustained or eroded.
"The curse of good times is over," he added. "Your role in their lives - helping them to secure an adequate cash flow in retirement - is more important than ever."