Once upon a time, millions of American worked most of their careers at the same company, retiring after 30 or 40 years with a party, maybe a gold watch and, most importantly, a defined benefit pension that they couldn't outlive.
But the paradigm has shifted dramatically in recent decades, introducing complexity and uncertainty to a once-straightforward system. Defined benefit pensions, which pay retirees a set monthly amount based on earnings history and length of employment, have largely given way to defined contribution plans like 401(k) plans and individual savings arrangements like IRAs. Roughly one-third of private-sector workers (approximately 68 million people) do not have access to any kind of retirement savings through their jobs.
With an aging population and the retirement wave of the enormous Baby Boomer population underway, a retirement crisis is looming. Americans are justifiably anxious about spending their golden years in poverty; according to one 2010 survey, by a greater than four-to-one margin, Americans ages 44 to 49 with dependents were more afraid of running out of retirement savings than they were of dying.
President Barack Obama is committed to doing everything possible to defuse this ticking time bomb. He has worked to strengthen Social Security, so that it is there for our grandchildren just as it was for our grandparents. His reforms have driven down the growth in health costs, one of the largest financial burdens for America's seniors. He has taken steps to promote savings and protect those savings through a proposal to ensure that retirement advisers act in their clients' best interests. And every budget offered by the president has included a proposal that would automatically enroll workers into payroll deduction IRAs if their employer does not offer a retirement plan. But Congress has rejected this proposal each time.
To fill the void, state governments like Maryland's are stepping in to play a familiar role: public policy innovator. In September, the leaders of the Maryland General Assembly established a new commission to explore steps to increase access to employer-based savings vehicles. This commission will build on the work of an earlier task force, appointed by Gov. Martin O'Malley and chaired by former Lt. Gov. Kathleen Kennedy Townsend, which offered an analysis of the problem and a menu of policy options.
A progressive state like ours must lead on this issue. Inaction is not an option when one million Marylanders working in private business have no employer-provided retirement savings opportunities.
But the challenge is this: Many states have asked for guidance as to whether their plans would be preempted by or run afoul of the federal Employee Retirement Income Security Act of 1974 (ERISA), which sets standards for most private retirement plans.
The Labor Department has consulted at great length with state officials on this issue. And today at President Obama's direction, the department is releasing a proposed rule that will clarify a path forward for state retirement plans, providing guidance about how to create systems that would be consistent with the current ERISA structure. The proposal will also be published in the Federal Register in the coming days, giving the public an opportunity to provide comment and feedback.
Since the federal courts are the ultimate arbiter of the legality of state retirement plans, the Labor Department cannot provide a 100 percent guarantee for states as they move ahead. But with the rule proposed today, we can minimize the risk of a lawsuit.
The proposal does not prescribe options or pre-determine outcomes. While some states like California and Illinois are choosing auto-enrollment IRA-based proposals, others might pursue the creation of state-run 401(k) plans that would operate under ERISA's rules. For those states, the Labor Department is also releasing a separate Interpretive Bulletin today to help guide their efforts. There is no one-size-fits-all approach to this problem. The goal is to provide flexibility, remove barriers and allow states to be the policymaking laboratories they have always been.
Middle-class life in America rests on a few pillars: a good job that can support a family, education that helps you get that job, a safe roof over your head, affordable health care that is there when you need it.
But even with all those pillars standing sturdy during your prime working years, it can all come crumbling down unless we strengthen the fifth pillar: building a nest egg for a dignified, secure retirement. Doing so demands federal-state partnership and cooperation. States are implementing creative ways to help people save for retirement. With today's step, the Obama administration affirms its commitment to encouraging and facilitating those efforts.