at seven pm eastern. >> coming up, the senate

finance committee hears testimony. tax and retirement policy analysts speak about the gap between how much americans are saving and savings needed. this runs two hours. >> the finance committee will come to order. when you take a look at the state of retirement savings in america, america, it is clear that something is out of whack. the american taxpayer delivers $140 $140 billion each year to subsidize retirement accounts, but still millions of americans nearing retirement have

little or nothing saved. the fact is, the, the incentives for saving and the american tax code just are not getting to those in need them most. a pair of new studies spells out the issue. the federal reserve found last month that an employee with middle of the tax savings has about $59,000 set aside for retirement, yet according to the government accountability office some 9,000 taxpayers have ira accounts worth more than $5 million. it would take several lifetimes of work for the typical middle-class american to say that much money. so how so how did those massive ira accounts come to be? in many cases they seem to be sweetheart stock deals that most would never have

access to. executives buy stocks at a a special rock-bottom price, sometimes fractions of a penny per share and use an ira as a tax shelter. the stocks start out dirt cheap, cheap, but just like that they turn to gold. now, wise investors have every right to use all the tools available to them,, and no one should begrudge them their success, but the ira was never intended to be a tax shelter for millionaires. it was designed to help the typical american safer retirement. the the finance committee continues to work on modernizing the tax code. it needs to take a good a good bipartisan look at fixing this issue. taxpayers dollars need to be

used as widely as possible. the same study from the federal reserve included another alarming piece of information. nearly 1/3 workers have no pension and nothing set aside for retirement. it is a fact of today's economy that millions of americans are walking on an economic tight rope and are unable to save. report after report is showing americans middle-class is at best struggling to stay afloat. five years after the great recession and remains tough for many people to find and keep a steady job. the cost of the college education continues to rise. millions of americans americans have their wealth tied up in their homes and are not yet close to a full recovery. many working families continue to see their take-home pay drop. at the same time workers are changing jobs more frequently than ever before

and find it difficult to save without portable savings accounts. women face special challenges that have to be addressed as part of tax reform. that is also true of part-time workers. this leave it to beaver idea of coworkers spending 40 years with one firm and retiring with a generous pension and gold watch is sorely outdated. retirement policies need to keep up with the time, and the finance committee is beginning to examine savings issues. one proposal worth looking at is being pursued by my home state of oregon. less than half of oregon businesses offer retirement plans, plans, and many have trouble saving anything at all. the state set up a retirement savings task force to look at solutions. solutions. just yesterday they recommended the state set up and auto ira program for any

work or not covered by an employer retirement plan. a percentage of employees paychecks would go into the savings accounts, and the contributions would rise with time. it would not be mandatory. employees can opt out, but it has the potential to be a first step toward retirement security. in my view the tax code should give all americans the chance to get ahead. making it easier to say is one of the best ways to accomplish that. that is why it is important to look at how to improve the savings incentives and an ensure they help middle-class americans prepare for retirement and not just set up tax shelters for millionaires. i look forward to working with you as always. >> thank you very much.

i think this is an important hearing and topic. we have an outstanding panel of witnesses. i think we are going to have an interesting discussion. retirement policy has always been an important topic. it has also always been bipartisan. most most of the major pieces of retirement legislation have been named for senators from the committee. legislation which in the other body came to be known for the two excellent legislators that i i am proud to say her now colleagues of ours. i believe this tradition can and will continue. mr. chairman, we we agreed to work together on a multi employer pension reform done in the spirit of

bipartisanship. i have a pension reform bill that just last week received high marks from the urban institute. i hope you will work with me. it is my my sincere hope the tradition of bipartisanship will continue and the next retirement bill that comes out of this committee to become law we will be known as white and hatch. we have always had incentives to encourage saving for retirement. there are no bad savings. incentives on occasion with an eye toward improving the incentives and increasing savings. for example, in 2001 congress increased the limits on contributions so that today a worker may contribute $17,500. congress also added a catch-up to allow workers to contribute several thousands

of dollars more beginning in their 50s. workers including women who might have left the workforce for a time finally have the opportunity to save again. as reported at the time congress believed it was important to increase the amount an employee elected deferrals. allow deferrals to better enable planned participants to save for their retirement. well, it worked. it worked. since 2,000 retirement assets have grown from 3 trillion to nearly 6 trillion despite the market downturn. iras have grown from 2.6

trillion to 6.5 trillion. increased contribution limits work so well that in 2006 2,006 congress made those provisions permanent. the retirement policies we have pursued have always been about helping americans to help themselves save more of their hard-earned money. in the last 25 years democrats and republicans worked together to ascribe to a a mutually shared goal expanding savings. lower income workers. democrats agree small business owners and managers needed to have some tax benefits given the game to take on the burdens of adopting and maintaining. in these areas members from both parties have resisted partisan impulses and as a result we have been able to craft good policy. i have become concerned there is a political strategy to turn pension policy into just another partisan backdrop.

they returned retirement policy to another front in the class warfare that consume so much energy in congress. i worry the someone to disregard the we will. that would be unfortunate. mr. chairman, what i hope to to here today from the witnesses, we need to no how much income americans are projected to need, how much they are projected to have and if there is shortfall a shortfall what policies they recommend we enact. what i hope to not here our upside down tax incentives, bang for the buck, pension stripping without substantial. we need to hear serious policy proposals. i want to thank you all again for holding this hearing. hearing. i would like to personally extend a special welcome.

they've done excellent work. i am especially grateful that you would travel all the way to be here today to help us make this a useful hearing. >> thank you. i i think you are very right to stress the bipartisan tradition of this committee focusing on these kind of savings incentives, particularly to create opportunity for folks to get into the middle class. i look forward to pursuing that with you. in pursuit of an approach that is fact driven that is why we asked the government accountability office to help us get an assessment of the most recent development. whenever the bills are called you and i will be

able to lead the community and a bipartisan way, and i i look forward to pursuing that. we have six witnesses, one who is still very talented, still battling amtrak delays. we're hoping she we will be with us. as usual figured usual figured a way to navigate through that. we are glad he is here. the founder and and former ceo of vanguard. chief economist chief economist at the investment company institute. the senior vice president of national benefit services. doctor bridget, the professor of public policy and corporate management at the john f. kennedy school of government. i believe the first academic to do research on automatic enrollment. i know a number of our colleagues are interested in

discussing that. our fifth witness is a resident scholar at the american enterprise institute. i told senators delano that i was wearing my doc type today. for two weeks out of respect to sen. senator stevan and the state of michigan. >> there will be another day >> am glad the fight is between two democrats. we will wait. >> welcome, and we look forward to your presentation. sen. brown has a senator brown has a tight schedule. we will turn. >> good morning. >> ranking member, other

members of the committee, i am honored to be with you. my career in the financial services field began more than 63 years ago. i found the vanguard group. three trainings to $53 trillion worth of other people's money. the the principal reason for that success is that since 2008 the single firm has accounted for almost one half of the mutual fund industry entire cash flow, we were founded with a single focus, mutual fund investors, a management company, and this is important, owned not by its managers nor by the public nor by us or foreign insurance companies or financial conglomerates.

today the industry has a corporate structure. owned by mutual funds which are owned by our 20 million mutual fund shareholders. we are uniquely mutual mutual fund. we operate the funds on an app cost basis. the substantial substantial profits we might otherwise make war and were in effect rebated to shareholders in the form of lower costs. i am also founder of the world's first index mutual fund,, the vanguard 500 index portfolio. the index fund simply mimics the portfolio. largely because it pays no investment advisory fee because it does not require any advice. it carries a rock-bottom expense ratio is low is 0.02%. as 0.02 percent. that is what we call 225 basis points compared to other fund groups charging maybe 200.

the index has accounted for more than 350 percent of us equity mutual funds that cash flow taking in $750 billion. the picture is pretty clear and now constitutes 33% 33 percent of us equity mutual fund assets. at vanguard $1 trillion more than that is owned by investors for corporations large and small. among all defined contribution retirement plans we are now the largest provider.

we have a huge stake in assuring our nation's retirement plans are structurally efficient and fiscally sound. a stake in minimizing the management cost. outside of outside of vanguard does tosser grossly excessive. unfortunately our retirement system today is neither structurally efficient or fiscally sound. each one of the three legs is headed for a serious train wreck. witnesses seem to assume that pension funds are soundly financed. unequivocally they are not. moderate the growth of benefits and increased contributions. defined-benefit plan, now most deeply underwater by $4 trillion or more we will require much more realistic assumptions of future investment returns as well

as higher employer contributions and lower employee benefits. defined contribution plans, the largest and fastest-growing component cries out for structural efficiency and cost reduction. retirement funds investors accumulate are slashed when plans and curve vastly excessive costs. if they invest in low-cost mutual funds and investors return could be increased by 65 percent. and that and that example from 561,927,000, $366,000 advantage just by taking the

cost of the system down to where it ought to be. we need larger contributions , reduce the withdrawal savings, have some requirement that employers maintain their contributions, expand access and we need to limit the participation of high-cost purveyors in dc plans. we plans. we also need a federal standard of fiduciary duty for institutional money managers now including fund managers so far virtually ignored by policymakers, regulators, and legislators. i will explain these more fully in my prepared testimony. thank you for hearing me out >> very helpful. >> thank you, chairman chairman and ranking member for the opportunity to testify.

chief economist of the investment company institute. the us members manage assets of more than 17 trillion and serve more than 90 million shareholders mutual funds manage about half of the defined contribution plan and individual retirement account. devoted devoted years of research and considerable resources to making and communicating an accurate assessment of america's retirement system. today such an assessment must recognize three key facts. america's retirement system is working to build retirement security. the tax incentives based in deferral of taxes, not tax exclusion or deduction are key to the successes and strengths of that system. while there are opportunities to improve

changes should be built upon our current structure. those statements may contradict much of what you often hear. not only the social security cover most of americans in 2013. a wide range of government, academic, and industry research demonstrates the american retirement system has become stronger in the past half-century. the poverty rate among the elderly has fallen since 1966 from nearly 30 percent to nine, the lowest among all age groups. since 1975 the amount of assets earmarked for retirement per household in the united states has increased sevenfold after adjusting for inflation. retirees receiving private sector pension income has increased by more than 60%, and the median private

sector pension income that retirees receive after adjusting for inflation has increased by 40 percent. these statistics speak to the impact of congress is bipartisan efforts at transforming social security into a a strong foundation for america's retirement system and create a framework of laws and tax incentives on which voluntary private employer plans have grown and thrived as as important as the tax incentives are, the nature is often misunderstood. the tax incentives take the form of tax deferral because contributions and earnings to traditional retirement plans are taxed when a retirement that cause the income. this is fundamentally different from attacks to induction or exclusion where the initial tax reduction is never recovered. in economic terms the after-tax rate of return is the incentive to save. tax

deferral effectively taxes investment income at the zero tax rate. thus rather than creating an upside down incentive for savings tax deferral equalizes the incentives to save across all retirement savers and all income groups and encourages support from employer-sponsored pension plans. the american people people overwhelmingly support today's defined contribution retirement plans. 86% disagreed with disagreed with the idea of eliminating the tax advantages, and 83% opposed any opposed any reduction in employee contribution limits. despite the strength and successes it can be improved. ici supports members to promote retirement savings, savings, put social security on sound financial footing as a progressive plan for all americans, foster

innovation and growth, help smaller employers by offering simply planned simpler plan features and easier access to multiple employer plans and providing flexible approaches to retirement income. what is central to these ideas is they build upon and do not undermine a replace our current retirement system which depends critically on the tax incentives congress has provided. proposals to reduce the tax benefit of employer-sponsored retirement plans would not merely affect upper-income workers, instead they would undoubtedly reduced the number of employers and sponsored retirement plan in depriving workers of all ages and incomes of the many benefits of plan participation. in short, short, our retirement system has many strengths and successes. enhance the retirement security for generations to come. thank you, and i and i

look forward to your questions. >> next witness. >> thank you, chairman, ranking member, members of the finance committee for the opportunity to talk with you. my name is scott betz, senior vice president of national benefit services. a fee-for-service third-party administrator. more than 225 employees located in west jordan, utah and supports more than 7500 retirement benefit plans. 7500 retirement benefit plans. our goal is to give every working american the ability to save for a comfortable retirement. i have been working with employers for almost 20 years and can tell you firsthand that qualified retirement plans a proven

successful for millions of workers. what i see every day is born out of some important statistics, middle-class statistics, middle-class families representing the overwhelming majority of participants, 80% make less than a hundred thousand dollars a year. 43 percent make less than 50,000. an analysis by the nonpartisan employee benefits research institute found over 70% of of workers aren't between 30,000 and $50,000 participated $50,000 participated in employment sponsored retirement plans whereas less than 5 percent without access contributed to an ira. in other words, workers in this group were 15 times more likely to save for retirement at work than on there own. own. if increasing retirement and financial security is the goal increasing the availability of workplace plans is the way to get their which is why it is so important that no harm be done to the current structure.

the the tax incentive for retirement savings is unique , a tax deferral, not a permanent permanent right off. contributions made this year are not tax this year. also, the tax incentive for employer-sponsored plans unlike exclusions, with nondiscrimination rules and limits to ensure contributions do not discriminate in favor of more highly compensated employees. the result is tax incentive that is more progressive. in chart three you will see families earning under $50,000 pay 9% of income taxes that received 27 percent of the benefit of the tax deferral. the good news is over 60 million working americans currently benefit through

participation in employer-sponsored retirement plans. the bureau of labor statistics reports report 70 percent of full-time civilian workers have access and 81% of those workers participated in these arrangements. in spite of these positive numbers there are millions who do not have plans available. more can and should be done. employees can say for their retirement. there are some changes that can and should be made to streamline plan operations, eliminate pitfalls and penalties. you're safe retirement act has the right focus and strikes the right balance. the starter 4o1k plan proposal would allow business owners a way to offer employees a chance to save. another important change

proposed would allow employers to adopt a qualified retirement plan after the end of the year when the final results of business for the prior year are available. this would literally open a window for more plans to be adopted and more employer dollars contributed. also permits small employers to band together in multiple employer plan arrangements while providing critical safeguards through creating a new designated service provider. finally, we also address many of the inefficiencies and traps for the unwary employer. retirement system works well, but we need to do more enact reforms that will further and sent employers to provide a retirement savings vehicle.

your bill is big step in the right direction to removing complexities and expanding the availability of workplace plans some more business owners will be able to provide a better retirement plan. thank you, and i'm happy to answer any further questions >> thank you, you, and thank you for being here. >> chairman, members of the committee, thank you for the opportunity to speak with you today and share my thoughts. public policy has historically promoted savings using financial incentives. in the united states the primary inducement to save is the exemption of retirement savings plan contributions. the joint community on taxation places the magnitude of this tax expenditure at $127 billion annually. lower income taxpayers are eligible for the saver's credit have a further -- has a further enticement. public policy encourage employers to provide there own financial inducements,

namely the provision of an employer match. a match. a large body of academic literature has examined the responsiveness of savings. a rather consistent finding is that the behavioral response to changes and incentives is not particularly large. in a recent paper i surveyed academic literature on the impact of one kind of financial incentives on savings plan participation and contributions. the studies using the most credible empirical methods find strikingly similar results using a variety of different data sources. matching contribution of 25% increases savings plan participation by roughly five percentage points. modest at best. conditional on participating in a savings plan financial incentives can impact how much individual save, but this does not come from the magnitude is so much as ron

the fact that at some.the incentive expires. and many plans the employer provides a match a match but only up to a certain fraction of pay. the savers credit gives eligible low and moderate income households of financial incentive to save for retirement but only for the first $2,000 contributed when financial incentives to save our limited to savings below a certain threshold this threshold becomes a a focal.as individuals decide how much to save. data shows data shows that savings plan participants overwhelmingly choose contribution rates that are either multiples of five or the match threshold. this finding suggests the match threshold may be a much more important parameter than the match rate. the relatively small impact of financial incentives suggests that a failure to save is not primarily the result of an adequate financial incentive, rather

there are other barriers to savings not addressed by traditional policy solutions the literature on behavioral economics points to a marriott afflictions that impede successful saving, procrastination, lack of financial literacy coupled with the complexity of determining how much to say and how best to invest, inattention, and the temptation to spend. in many cases countering these corrections leads to increases in savings plan participation and the accumulation to surpass the financial incentive. before discussing policy alternatives to financial incentives that are informed by behavioral economics let me note that from a behavioral economic standpoint the tax code is particularly ill-suited to generating financial incentive. first, the tax code is complicated. it is difficult for the average taxpayer to assess the financial incentives he or she faces.

for example, in a research project am working on my co-authors and i have found that most individuals do not accurately understand the tax implications of saving and in a roth versus a regular 4o1k. the low or moderate income taxpayers assessing the incentives would likely be a daunting task. indeed, i attempted to do so and repairing -- preparing these remarks and quickly gave up. individuals are more responsive to immediate and delayed financial incentives that many of the financial incentives to say that operate through the tax code in the late. the benefits are delayed, as are the benefits of tax to the actions or credits that are not processed through payroll deduction or reduced taxes. ironically what could be a very effective financial

incentive to encourage individuals to enroll in a workplace savings plan, a small but immediate financial reward is not allowed in savings plans under current law. financial incentives are not a a savings panacea. the most effective method is automatic enrollment. the impact the impact of automatic enrollment on participation rate can be sizable and is greatest for the groups with the lowest saving rates initially younger and lower income workers. expanding the reach of automatic enrollment is the most promising policy step we can take to increase american saving for retirement which means continuing to increase the number of employees with savings plans, increasing the number of employees who offer savings plans and providing simple savings alternatives for individuals who are self-employed for employers who do not and are unlikely to ever sponsor a savings plan. policy initiatives that support these measures include auto ira proposals and legislation to facilitate multiple employer

plans. paradoxically a savings system that in the absence of automatic enrollment makes saving complicated by the same time making it easy for individuals to tap into their retirement savings, another policy response needed is to encourage retirement wealth accumulation, reduce leakage in conclusion, the lessons are clear. if you want individuals to save, make it easy. if you want individuals to save more, make it easy. if you want employers to help the workers save, make it easy. if you want you want individuals to spend less, make it hard. >> i got the draft. i just want to make sure everyone understands something. you have been a leading scholar. you still you still give the individual the last word. the individual can choose not to automatically enroll.

>> yes. >> okay. welcome. >> chairman, ranking member, thank you you for the opportunity to testify today the word crisis is often overused. generally this is harmless. the perception of a crisis sometimes causes people to leave before they look. this is the case today. one well-known study claims that when 50% of 50 percent of americans are at risk of insufficient retirement income. another study another study claims 85 percent. the total retirement savings can reach 40 40 trillion. americans collect only a pittance. in response some are proposing expensive expansions. others argue that they are not working. these claims are overblown and the policies are not

solutions. this this kind of analysis is necessarily complex. first,. first, the majority of today's retirees are doing well. 75% tell pollsters tell pollsters they have enough money to live comfortably. data on poverty and other measures show that most retirees today are able to match the preretirement standard of living. the best research out there from a model developed by the social security administration using input from the best retirement experts projects that future generations will have about the same level of retirement security as today's retirees specifically ssa projects in retirement generation x will have the same replacement rate as individuals born during the depression who supposedly enjoyed a golden age.

this model incorporates some of the same data from the federal reserve study you referenced earlier. the earlier. the employee benefit research institute projects retirement security for future generations will roughly hold steady. put those two facts together and you come to this conclusion. if we don't have a crisis today it does not appear we we will have one in the future. around 25 percent are unprepared for retirement with relatively modest savings shortfalls. these are targeted. one study finds that single, less single, less educated women are likely twice to fall short for retirement. while we do not need to reinvent the wheel, we need to do something. i am in favor of auto enrollment pension plans. ..

so personal savings can only go so far for these individuals. at the same time though social security treat single women far less well than it does married women so they are not getting much help from that end of things either. that's one reason i and others have proposed reforming social security to provide a flat universal benefit for all retirees regardless of income

participation. on top of that individual would save in accounts provided through their employer or of not available through the government. this approach is qualitatively similar to that of the u.k. australia canada and new zealand. in the u.s. context you can affordably reduce the elderly poverty rate from today's level of roughly 9% to approximately 0% while increasing the retirement savings among the middle and high high-income workers who truly should be saving more. the lesson in all this is that there is no simple problem and no simple solution but a small if more complex problem is better in the retirement crisi crisis -- then a retirement crisis. >> senator brennan we have a hearing in a few minutes we will start with him. >> thank you mr. chairman. thank you for this special dispensation here. 1970 a political scientist named ben wattenberg decided to try to find out what person represented

america the best, who was the prototypical american and he settled on a white woman in dayton ohio married to a union machinist who had a pension plan, a defined benefit pension plan. in those days of family income was about 60,000. she was right in the middle. half of america was poorer than she and half of america was wealthier than she. today that machinist wife in dayton probably wouldn't, she certainly wouldn't have a defined pension benefit. she and her husband would probably have less equity in their home. depending on the estimates if she is in her mid-50's she would have savings of somewhere in the vicinity i know scholars differ on this from as little as $11,000 she would be worth. if you look at fed numbers to up to $50,000 take the middle, whatever that number is she will have to rely on social security

for most of her income when she retires. in fact today in my state ohio is not much different from other states the majority people on social security rely on social security for more than half of their income. the person in the middle will get no more than 13 or $1400 a month so we know an enormous percentage of the american worker she is in the middle. half are poorer than she is. for this number social security is in doubt. you make a number of important points about adequacy. one point is about the high cost funds and too many choices can rob sophisticated investors those in the middle or slightly lower can rob in their ability to adequately save. my question to you is should congress make it mandatory to auto one role and auto escalate into low caste -- low-cost index

funds? >> auto enroll is easy to say why not have it mandated. i for one would be the champion for index funds. for heaven sakes let's look at this way senator. all of the investors in america all of us total the us total stock market together. they are a giant index fund so they can go to an index fund -- or the stock market for two to five basis points and if they want to fight among themselves to see who is the bus and get managers to help outguess the others they will get the return less 200 basis points. so it's mathematically correct and i probably shouldn't get into this here but it's probably politically undoable. it is should be made a more important qualification for entry into the system. >> is auto escalate good? >> auto escalate as good.

>> is people's income go up a slightly higher percentage will go into that fund. >> these things are right and correct as principles and the fact of the matter is every family is different. should you want to escalate for a man with six children all going to college and a wife who is maybe ill? in other words when you go from generalities and particulars it's a tough. >> but that mr. bogle is why you have the option to opt out. thank you mr. bogle. dr. madrian he said he should not have to be in the middle class to get access to tax preference same as vehicles. they should be designed to help workers get into the middle class. what policy changes do we need to make to ensure this happens for instance ways -- raise the minimum wage? what policy changes do we need

to give people a lift to give assistance to get into the middle class to get access to these vehicles? >> in my mind the biggest problem with the current system is that many workers don't have access to save for retirement through payroll deduction because their employer is not offering a savings plan or they are not eligible for the savings plan that their employer is offering. so i think initiatives to encourage small employers to offer a savings plan and a small employer is a lot like the individual investor. joe from joe's pizza doesn't have an mba, doesn't have dedicated human resources professional and is no better at picking a savings plan for his employees and his employees are at picking from 8000 mutual funds what's the best way to

save for retirement is. so having an option that the ec for joe's pizza and other employers like joe would help close the access gap. so allowing communities to have the chamber of commerce sponsor a multiple employer pension plan where joe doesn't have to worry about fiduciary liability, picking the right or wrong investment options and the employees who are in the same workforce and locality have a similar benefit plan. they can talk about it and they can learn about it. things like that would go a long way towards closing the access gap. providing incentives for companies to open a savings plan to all employees so if some companies part-time workers are excluded. these are simple measures that could go a long way. another point that i brought up in my testimony is current law

right now does not allow for companies to give a small financial incentives to sign up for the savings plan in the first place so if he didn't have automatic enrollment or even if you did to encourage employees to opt in rather than opt out you could not for examples they sign before the end of the month and you will get a $50 amazon gift card or sign up by the end of the month and we will let you in a drawing for an ipad. things that banks have used in the past to get people to sign up for a savings account, phone companies that used to get employees to sign up for their cell phone plan. those are not allowed under current law even though the literature on employee behavior suggests small and medium financial rewards are in fact very effective types of incentives. >> we have to move on at this point. thank you senator brown. senator hatch. >> thank you mr. chairman. i would just assume you go ahead

of me. mr. betts you have been trying to convince small employers to adopt a retirement plan for their workers. can you explain further number one what are their motivations when they make a decision to offer a plan and what would convince him to say no to setting up a new plan? >> thank you senator hatch for the question. working for many years it's been that the incentives that the government has allowed in these plans incentivizing employers to set them up. incentives motivate the employers to buy this retirement plan for their employees and there's a very powerful incentive. many employers like to do it because it's the right thing. it's also many jobseeking employers that have the 401(k) plan but that incentive is a key piece. if that were changed or removed

any employer would end those plans. also the incentive is what allows new employers to start and get benefits in these plans. so i think the power that is their bit as demonstrated in the numbers of americans that are saving today. >> thank you dr. betts and dr. biggs the end result many proposals i read about what effectively cap employee deferrals. all of these proposals seem to align on the premise of lower contributions for workers to increase their savings rate. the proposals also assume their reduced tax incentives for companies would have no effect on the willingness of the business to keep its plan in operation or to start a new pl plan. i don't believe that. i think if we go back to the time it was enacted increased tax incentives to save two

things will happen at a minimum. first businesses venturing to pension plans because they are too complex and expensive to put up with without adding tax incentives and secondly employees saving so much because the tax incentives will be left for most workers. i don't think academics generally understand either of these points. mr. betts what is your real world experience working with business people making these decisions tell you and after you finish maybe dr. madrian he would care to comment. >> is very powerful and the middle-class americans making these decisions the tax incentive to contribute is very motivational. i agree with a lot of the auto on romans that has added to the number of americans participating but it's really the incentive that motivates people to enter those plans.

>> dr. biggs. >> there are two points i would like to make here. the first is about the tax incentive and what is the incentive to save? this is really the key question. as you know the current system for retirement savers is that we do for our taxes so when we make a contribution we do not pay income taxes on the money we put in or the earnings they build up but when we take money out of the traditional retirement plans a 401(k) or an irs we pay the income tax when it comes out. it's therefore a deferral not a deduction or an exclusion exclusion in what the deferral does is it effectively gives a zero tax rate on investment income in that plan and that is the incentive. if we move the tax and allows the return for the investor to come to a market return as opposed to a below market return. why is that important? some of these proposals to cap the upfront deduction would

actually turn on its head the tax incentive. one example for instance is the upfront deduction that 20% will give you credit. anybody with an income tax level above 20% let's say 35% would have to pay a tax going into the plan and then they would pay their full tax rate coming out the plan. what this effectively would do is disincentivized someone who is putting into that plan in the upper income level and actually make it almost preferential to put into a taxable account. they would have to hold the money that retirement plan for 13 years to catch up for that extra tax hit at the beginning. i think these proposals to cap the deduction may get a credit and put a tax penalty on a would be very detrimental because hiring calm, many of them would be -- the second is the

contribution limits are important. one reason that contribution levels are important is because people's ability and willingness to save for retirement changes over their lifetime so we find individuals as they move into their 50's and 60s are more likely to participate in good shape at the limit. 15% of people in their 50's and 60s there can contribute in at the contribution limit. >> thank you mr. chairman. >> senator hatch please go ahead. >> i would like to ask a question of dr. madrian. while behavior economics has shown a couple of successes some of us are concerned that the field contains some who rather than providing a nudged to help people navigate difficult decision-making would provide full-fledged -- of private citizens. it seems as though some behavior is the notion of academic and government technocrats are infallible and need to tell private citizens of their mistakes and how they should leave their -- lead their lives

greatest example the former treasury professor has written about a fairly informed financial services regulation unquote. one of the proposed schemes is to nationalize all late fees on credit cards, gift card issuers a small amount determined by some government technocrats and hughes funds for financial education and other ways to help private citizens. dr. madrian what do you feel about such a proposal and you believe infallible government technocrats need to effectively make decisions for private citizens on credit cards or retirement savings under the notion that those citizens are not doing what the technocrats wanted to do? >> i will have to confess i wasn't prepared to answer that question when i walked into the room. i knew who you were talking about and i have read the articles more than once that you refer to. i guess i would say.

>> take a swing at it. [laughter] [laughter] >> how about if i answer slightly different question which is i mean i guess my view is behavior economics is, what it does is it tries to expand the scope of understanding of what is driving behavior and what are the tools you could use to influence behavior? and what you want to take a light handed approach or a heavy-handed approach that is a matter of personal preference so if we were painting all behavioral economist with the same brush i think you are going to find people along an entire spectrum. that i would be happy to go back and look at that article and send you a response. >> i would like to have that. mr. chairman i have to leave but i want to mention this is an excellent panel. i have apologized apologize that

we have run out of time. >> thank you senator hatch and as you and i have talked on the past it's going to be a focus bipartisan tax reform. senator stabenow. >> thank you very much mr. chairman to you and are distinguished ranking member. this is a very important issue and i appreciate the focus now and i look forward to working with you. i really felt like saying i'm a little surprised at what feels like an optimistic view that more people are saving and somehow people are going to have enough and they are doing well. i would throw out a couple of different numbers. retirement research in 2010 we have $6.6 trillion deficit in terms of what people were saving. last year, 2013 national institute on retirement security said 92% of working households did not meet the targets they needed for savings. somewhere between 6.814 trillion

so i'm concerned about the differences there. but i want to ask specifically about a group of folks that i think we haven't talked about this morning. that is as we look at what happened in the great recession and people losing their jobs in their homes and they lost their equity in their homes which was a major way that people saved, middle-class families as well as retirement and we look at what has happened to so many folks. we know that a lot of people took withdrawals from their retirement accounts and they were told they increase as much as 40%. folks were saving it than they had to take a hardship withdrawal because of what was happening to them. i am very concerned about folks who are now in a deficit position who were doing the right thing and were caught short because of what happened

that was way beyond their control in all of this. mr. bogle i would ask you first come are their options that you would suggest that would help these workers build secure retirement who got behind the eight ball because of the recession? >> that is a problem to be solved senator but i do think we have to face up to the fact that according to the ici 33% of our population of households have no retirement plan at all. the federal reserve who is a very reliable source about a quarter, only a quarter for households are preparing for retirement. i look at that kind of data, those kind of data is more important than how many dollars are here and how many dollars are there. here's a a case where i think common sense should override

complex data which includes just about any answer you want. how to help someone who is in real trouble is not easy. we should face the fact that the lower quintile of american incomes are $20,000 a year before taxes. unchanged on a real basis with living adjustment since 1979 of those people are not able to save. if we want to help them there is no recourse and increase benefits at the lower end of social security. it's complex but the money has to come from somewhere and that would be the best answer i could get to your question. we have to look elsewhere in the private retirement system. >> i would ask each of you if you could respond. right now it's costing $800 billion over the five years alone as we look at retirement accounts and pension contributions. i certainly support this is a major area where we are focusing

our tax policy but we also do no according to the cbo the top 20% of households received nearly twice as much of the tax benefits for retirement savings is the bottom 80% combined. we understand why that is but that is that the questions as that is that the questions as we are looking attacks reform you know the households that need the least help in retirement are getting the biggest help in the people who needed the most are getting the least help. so how would you suggest or would you suggest that we do anything to improve the targeting of the tax incentives for retirement and also if anybody else has a thought on how we help the folks who got put in a hole during the recession i would appreciate that. >> first looking at the high-end of that and i will stand in for ellen schultz because i read her book. >> so did i.

>> the people behind income the income scale have so many retirement plans. things that are in my opinion socially outrageous if you can handle an opinion that strong get all kinds of benefits above and beyond what we can do and think about in our retirement system. i would say that's a good place to begin reform and whether those savings are making retirement so easy for wealthy citizens can somehow be transferred to those lower on the income scale. i can tell you how to do it today. >> thank you very much and i will ask everybody briefly dr. reid? >> a couple of things here. the first is if you look at the entire retirement system just putting employer plans together with social security it's still a progressive system. and it's really a combination of the two that creates the joint incentive. the second point is that i think this is where we provide caution

is that if you begin to scale back and really right now the contribution limits are pretty modest relative to where we were historically win a race i was first i was for setup and individuals to take advantage of them have to be in their peak earning years. if you begin to carve that back or began to tinker with how the tax incentives are created you could have higher income employers and employees may decide it's better to give him current compensation and not offer a plan. we could end up reducing overall participation. the example of that is a 1986. he removed the ability of high income workers to participate in the ira in the following year higher income people no longer participating. it's complex when it happened but i think it's a precautionary tale.

>> i guess what i would say mr. chairman is -. >> i would increase incentives or remove the disincentives out of the plans that can be put in by employers so they can expand the access. >> and you would do that for everyone? >> their disincentives built into the system that are difficult for the small employer to start these plans. senator hatch has a number of ways to remove those disincentives to make it easier for small person to start so americans -- more americans can be saving. >> if you are worried about low-income and global taxpayers i think many individuals are not particularly financially literate and you can create all sorts of complicated tax incentives and you're not going to get a lot of attraction because the tax incentives aren't solving the problem. a recent households aren't

saving is because they are facing small tax incentives because they don't know what to do or their employers don't offer a plan. a far more sensible margin for saving public dollars would be to create the incentive for employers to offer savings plans and automatically in world the low-income workers because that solves the problem of inaction and individuals not knowing what to do. >> anything to add? >> i would reiterate a point for my testimony which is the folks who end up retiring without a lot of savings and wealth are often people who are sporadically attached to the workforce during their working years. these are folks for whom and lawyer based savings plans are going to do much but they are also folks who evolved from the social security. social charity serves a lot of people not particularly well because it's an earning base programming because it has odd distribution benefits even with

low-income people. i think we do need to rethink who was fallen short and what do we need to do for them? >> i'm going to have to stop you at this point. senator grassley. >> i'm going to start with mr. betts. in your testimony state that a current savings tax system is quote more progressive than our progressive income tax. that's an important important point from my standpoint because critics of current savings incentives frequently argue just the opposite. i'm going to give you a chance to elaborate on how the current savings incentives are progressing. >> thank you senator grassley. yes in my testimony it demonstrates that americans who earn less than $100,000 basically represent 28% of the tax collection. the same group of americans received 49% of the benefits to

the employer-sponsored retirement plans. that seems quite a bit more progressive. in addition what is not noted are the many employers that provide employer contributions in these plans because of the way they are designed. the nondiscrimination rules offers incentives for employers to put more dollars in that are covered in this. >> for dr. reid as you know there are currently several proposals that would limit the ability of upper income individuals to deduct retirement contributions, the 20% limitation is an example. he discussed this with senator hatch from the employee standpoint. i would ask you how does your research suggests employers offer defined contribution plans would respond to proposals such as the president's? >> it's important to keep in mind senator that a 401(k) plan

is an employee benefit in something that when an employer is looking to attract an employee they know to attract high-quality employees they want to offer an incentive like they would any other benefit. if you have a benefit to some attractive for a group of potential employees employers will say i'm going to use my resources elsewhere. i may simply increase wages or something else and not offer a plan. the example that i gave them was by putting a cap or a credit in place what will happen a certain individual employees would have to pay a tax going into the 401(k) and they would have to pay the full tax rate coming out. actually for some of these employees would be better off putting their savings in a taxable account outside of their employers plan. the employer that begins to happen will say that's a benefit

that some of my employees want. i'm not going to offer that anymore and as as many of the panels appointed out of having that employer employer plan there and in place and being able to in many cases auto enroll people that increases participation and i think we would be taking significant steps backwards from the actions that congress has taken over the last 50 years. we would actually potentially reduce plan participation. >> i want to go back to mr. betts. employer-sponsored retirement plans are an important component of any retirement plan. while 80% of full-time workers have access to a retirement plan this number is only around 50% for employees working for small employers with fewer than 100 workers. mr. betts is someone who worked for businesses and the administration of their retirement plans what do you see as the biggest barrier to employers particularly small employers offering retirement plans but probably a more

important question would be the second one so spend more time on this. what single reform is implemented would do the most increased number of small businesses offering retirement plans? >> thank you. there are several older rules in the nondiscrimination rules put in place early on in these plans. newer rules have done better at managing the nondiscrimination requirement in these plans. one of the ones that could be removed would be the top every requirement. that has disincentivized many small employers because of the risk for how much employer money they may have to put into a plan to satisfy that rule. another big step in the right direction would be senator hatches start k to provide an employer plan. employers can contribute where there's nowhere to the employer contribution until such time that an employer becomes more financially stable and can benefit from a large plan.

>> my last question would be to mr. biggs and mr. reid what would push retirement savings into ira's and should congres congress -- or is it important for individuals to have more options? >> senator we are all in favor of simplification. one of the concerns we would have in terms of potential -- as some of the proposals like senator hatch's better trying to find ways to make it simpler for small employers to offer plans to actually narrow the options and make it more difficult for small employers to offer a plan. that is why we have been in favor of concepts like start k to iraq or the scope of an employer offering a retirement

plan. >> mr. betts do you have anything to add? i am done. >> thank you senator grassley. senator cardin. >> mr. chairman for solving you for holding this hearing and i agree this is a critically important issue. it's been 15 years since congressman portman and i recognized we had a significant problem in our economy and 15 years ago our economy was growing. our workforce was growing and income was growing. we let the world be a economic indicator. we also recognize we do not have enough money and retirement security for americans particularly low-wage workers and younger workers. so we tried to do something about it and we were able to get a couple of significant provisions incorporated into our tax code. i want to sort of build on that. our first principle was to simplify and to increase the limits particularly the catch-up contributions from the point of

some of you have raised. when you're young you have a family and you have homes in you have all these issues come education and you don't think about retirement until later in life and the limits prevent you from building up enough to provide for retirement security. and it's pretty simple and that's access to retirement plans. if an employer does not offer a plan there is going to be limited access. if you simplify the limits are high enough to make a worthwhile they will provide plans and that's been the result of higher limits and more simplified pla plans. we also recognize that when employers put money on the table more people will participate. the federal thrift plan. our workers participate in it. why? because they don't want to put money on the table so when employer setup of match it's more likely the workers will participate. that's one of the things we try to encourage. the alternative to that is to

try to put money on the table for the government because as important as the tax deferral is it's not enough for lower wage workers and younger workers to participate at the levels we would like them to. the savings credits works. millions of americans today are using the saver's credit so we have been able to get more participation. automatic enrollment was important not just for people and rolling mr. chairman but also the default investment option is more sensitive to persons age which means there will be better investments rather than making decisions themselves. lastly you mention financial literacy and investment advice. all of that is part of what we try to do over a decade ago. as a result we made progress. more people have retirement plans that wouldn't have retirement plans and more retirement options -- you know we have gone through a recessi recession. in a recession you try to

encourage people to spend, not save in as a result we have lost ground. there's no question about it. we have got to do a lot more. we have been on the defense and last for five years trying to preserve the options we currently have. that has been our strategy. we now have a strategy to move forward and that is why i was pleased about this hearing. how can we build on what has on what his work and how can we do with the issues that many of you have talked about with old-age workers and younger workers not putting enough money away for retirement. mr. chairman there are many things we could do. senator portman and i have introduced legislation to deal with the plan clarification. it deals with the practical problems that your plans have with erisa and another thing we can do we have the freeze legislation because you have companies that have defined contribution plans and they're trying to do what's right by preserving those options but th

challenging. we should act on that. i would hope these modest changes could be done quickly because they are affecting the retirement options and we shouldn't wait for the comprehensive when we can get some progress made. we should move forward and approve the saver's credit. you should improve being automatic enrollment and continue to try to simplify but i would like to ask dr. reid a question. one of the things that has frustrated me is that when we design these plans we made it too easy in my view for people to take retirement money out for things other than retirement. you also made it easier for them to take lump sums than earned income. one of our objectives is to have retirement retirement security to have an income source it takes the pressure off of social security which was never intended to be the sole-source of income for people who are retired. what can we do to encourage more lifetime income options for retirement funds that are there

rather than having money taken out too early through a lump sum or other purposes? >> i think the current system certainly if you look at what people do with in their 401(k) or ira please find the vast majority of money is rolled to ira and we find individuals tend to start tapping the money as 7.5. it's a minority of individuals that don't. i think ideas to help individuals to spread out the savings over their lifetime are valuable. our concern is driving tax incentives for particular product. for many low-end moderate income households they are -- to social security and they may have that lump sum for emergency purposes or health care needs or something like that. you wouldn't want to penalize these individuals were wanting to keep the lump sum to be able to tap but other types of proposals that help people spread that savings over time

would be valuable. we just want to make sure that these are good approaches. >> one of their proposals is to give an exemption for a certain amount of retirement funds for minimum distribution for the purposes that you just said. so you can keep a nest egg. one of the concerns is that people take money out that shouldn't and we want to do incentives and not for any one product but incentives for income flows that could help people not outlive their income which happens to break only. thank you mr. chairman. >> thank you senator cardin and also want to be clear that i'm very interested in working with you and senator portman. for those who are following this this important legislation does what it sounds like. thrift plans and retirement plans that generally aren't subject to erisa so we have a situation where you ought to preempt state law to add auto

enrollment features that are so popular. i wanted to know we have it pending. we are going to work with what i think is a sensible suggestion. >> thank you mr. chairman. >> senator casey. >> mr. chairman thank you and i want to thank the panel for your work on these issues. i will start with mr. bogle not only because of his pennsylvania residents and his impact in our state and our country. i want to ask you about the basic dynamic that has played out over a number of decades n now, the shift from defined benefits benefit to defined contribution and implications of that. as you noted the transfer of trillions of dollars in savings and risks to individual investors and from corporations.

give me a sense if you can as we try to design policy around the question of giving those individual investors the tools they need to deal with that basic change. the question of educating investors, what more can we do, what model works in terms of giving them at least the opportunity to become better educated? >> to begin with what we have to do is make what was designed the 401(k) for example turn it into a retirement plan. if we can just think that one through we will get close to where we want to be. in terms of greater utility in efficiency for investors there's no question in my mind that their investment returns will be improved if they get the cost of the system. by owning an index but even more than that lets call it owning

the stock market senator. it's such an easy thing to conceptualize, picking the right manager and what he or she doesn't do well in picking another manager and we find investors in mutual funds and this is my testimony because of the confusion and the idea you can pick a good manager for a lifetime for infesting simply does not work. investors lose because they have a cost built-in at 2% a a year work is a staggering number in making the wrong fund choices is another 2% a year. 4% is -- so if we would simplify the system and take the cost out of that investors would have a lot of the mystery removed and be much more willing to sign up for a plan. >> is there any experience based upon your work were based upon the work of vanguard as to the period of time in an

individual's life where education can be especially significant? in other words is starting earlier? i now we have had legislative attempts to make sure even students at a very young age are exposed. is there any strategy that vanguard has that has been successful? >> to give you my own person the way we introduce young people to investing is to have the stock picking contest, sending exactly the wrong message to them. we should start with the compound interest table and show them how a percentage point difference in returns mounts up over a lifetime to an end astonishing amount. when you get to a higher level of age i don't think there's a single, well very few to be fa fair, business school or finance school who wouldn't tell you what i'm telling you.

if it is an inefficient system and its serving mutual fund investors. i have in my prepared testimony a statement that's stronger than that by david swanson the manager of -- and the person of impeccable integrity. you could easily say i have a vested interest but anyone can start one. i would like to have more competition in the index area but it comes down to simplification and owning the market and managers if you are investing for a lifetime. >> i will be able to submit questions for the record for mr. bogle and others and less than a minute i have dr. madrian i want to ask you about the appointed reference to automatic enrollment, the benefits of

that. if you have to look at this purely from the point of view of the tax code either where we are today or where we hope to be any recommendations for improvements we can make to the code to make it more effective in light of ours should say make changes to the tax code to make savings incentive? >> i have a one-word answer. simple. >> simplified. but mechanically what's the best way to do that? in other words when you look at where we are today the code as it stands today what change would you hope we would make? >> that is an excellent question. i think the tax code overall is very complicated. i think for middle and higher income taxpayers the alternative minimum tax and how that

interacts with the rest of the tax code makes it a complete mystery. you have no idea what the incentives are that you are facing or the penalties. on the lower end of the income scale you have interactions between the tax code and all of our social welfare programs. i think very few individuals accurately understand the tax incentives that they are facing. i think the saver's credit, the motivation behind that is to give low-income families and incentive to save his well-intentioned but a few comments someone with a ph.d. in economics for m.i.t. can't figure out in 10 minutes it's too complicated. i think the fact that we have so many different ways to save makes it complicated so am i better off saving and it's not just a retirement system. if i'm an employee and my employer offers an employee

stock purchase plan, a 401(k) plan and a health savings account and i have a limited budget for how much i can save it's very complicated to figure out where should i put that money plus we have 529 plans. we have lots of different ways to save so some simplification and some consistency across these different plans would be helpful. why a 403b plan has to have different plans than a 401(k) versus an ira, a lot of that doesn't make sense to me. i think there a lot of things to do to make things simpler and more straightforward for employers offering plans and for individuals trying to decide how do i save for health care for education retirement and for mortgage? >> thank you very much. >> senator portman i don't know if you were here that you are on a roll this morning with your church clarification plan so as

to promote iowan womb is so just keep going. >> excellent. well thank you. did you say you agreed with it and it will be an active? >> we are bringing forward as quickly as possible. i think it's a constructive idea and we are looking forward to working with you. >> i appreciate your just in the your just in the area and having the hearing today and i was here earlier to hear some of the great testimony. what a terrific panel and thanks for what you are doing. ben cardin was here earlier and as you know we did work together in a house on these issues and we have this plan recently but also soon we will introduce a bill on the whole issue of the nondiscrimination testin testins something we have talked about to treasury in open testimony and i think this will be a good clarification plan. i'm excited about what we have been able to do over the years. it has made a big difference and i'm looking at statistics here.

i know some are critical of these programs and here's the reality friend with her tough economic times we have had during the financial crisis. we have gone from $45 trillion in assets and 401(k)s and iras's to 10 trillion last year. so that's not bad given again what happened during 2008, 2009 in 2010. we have to figure out how to get small businesses to provide these plans and that is the key, encouraging every small business owner so every employee has the opportunity and keeping it simple. we have a simple plan that came out of the house for small business actually called simple but there is more work to be done in terms of taking out some the complications and the costs and liabilities.

the saver's credit i think it's worked well. i would like to hear your views on how we can make that better. i wonder on that issue. when i talked to companies and i know you talked about this earlier but we go from 75% to 95% and that's obviously a great opportunity. there is more opportunity there i believe obviously to expand that to more companies and recently senator warner and i introduced a bill which is simply in the thrift savings plan moving the option from being government bonds to a lifecycle plan. i don't know what you think about that but the lifecycle fund to me makes a lot more sense for federal employees. so i ask you all what you think of that for a savings plan and maybe dr. reid you could start.

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