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Voices on Capitol Hill

Saturday, May 2, 2009
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Testimony before a U.S. Senate Special Committee on Aging on Feb. 25 offered some insight into many of the issues affecting employees, especially baby boomers, who have seen their retirement savings plummet due to the downturn in the stock market.

Here are snippets of some of that testimony as well as an excerpt from testimony by the Congressional Budget Office before by U.S. House of Representatives Committee on Education and Labor. Click on the links for the full statements.

In his welcoming statement, Sen. Herb Kohl, D-Wis., chairman of the aging special committee, said: "Over the past year, 401(k) plan and other defined contribution participants have experienced devastating losses. In these hard times, American companies have also had to cut back benefits. Thousands of American employers, large and small, have stopped providing 401(k) matching contributions to their employees.

"With the volatility in the stock market, many Americans are left wondering whether they should continue investing in their 401(k) at all. The answer is, yes, they should continue to save for their retirement, but perhaps with updated strategies and more reliable investments.

" ... None of us can say when we will see the end of this economic downturn. The best we can do is reassess, reallocate, and recommit to finding stability in a volatile economy."

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Sen. Mel Martinez, R-Fla., said in his opening remarks: "To address this problem, I support the Conrad-Gregg bill that would help Congress and the President find the political will to address the nation's long-term fiscal imbalances. The bill would establish a task force that will recommend changes to current law related to spending and taxes, especially on entitlement programs.

"The task force will consist of equal Republicans and Democrats, and two members from the Administration. This effort will ensure a bipartisan solution to entitlement reform and long-term fiscal stability.

"The plan the task force sends to Congress would require a supermajority for passage meaning we would truly reach a bipartisan solution to one of the most vexing issues facing our nation today. Decisions on entitlement solvency have been delayed for far too long. This bill will force Congress to vote on a bipartisan plan to make sure that future generations do not bear an incredible burden of debt."

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The testimony of Deena Katz, an associate professor at Texas Tech University and board member of the Financial Planning Association, included these thoughts: "The most common "solution" is to search for a "safe" investment, yet most retirees believe that a safe retirement portfolio should be 100% in bonds, reasoning that only fixed income vehicles can generate the income they need post-retirement. Our paycheck mentality demands that we try to replicate our periodic payment methods at retirement. It's a concept we are used to.

"Unfortunately the focus on bonds confuses certainty with safety. The payment on bonds is certain but it's certainly not safe, especially in terms of purchasing power."

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Testifying on behalf of the Center for Economic and Policy Research was its co-director, Dean Baker: "The crash of the housing bubble and the subsequent collapse in the stock market has left the baby boom cohorts very poorly prepared for retirement. Since the vast majority of the members of these cohorts do not have traditional defined benefit pensions, they were forced to rely on their homes and defined contribution pensions as their main sources of wealth in retirement. These assets proved not to be safe mechanisms for preserving wealth.

" ... The main lesson from the experience of the last two years is that family wealth is subject to much greater risk than had been generally appreciated. Even after the stock market crash of 2000-2002, most families continued to underestimate the risk associated with holding stock. Clearly they were encouraged in this attitude by many professional investment analysts who promoted stocks as financial assets that were associated with relatively little risk if held for a long enough period of time. While the market could always rally and reverse much or all of its decline over the last 18 months, there are few investors who would be prepared to take that bet at present.

"Even more striking was the failure to recognize the risks associated with home ownership. Very few homeowners understood that their homes could lose much of their value. They planned their consumption and saving with the assumption that their house price would continue to appreciate, or at least not decline in value.

" ... The government could, at very little cost and risk, make available a system that provided a guaranteed return on a modest voluntary investment."

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Among the research findings offered by Dallas Salisbury, CEO of the Employee Benefit Research Institute, was this data: "EBRI research has found that if 401(k) participants between the ages of 56 and 65 had been in the average target-date fund at the end of 2007, approximately 40 percent of the participants would have had at least a 20 percent decrease in their equity concentrations.

"Based on counterfactual simulations from years 2000 through 2006, inclusive: If all 401(k) participants had invested in target-date funds with the age-specific average equity allocations, their median 401(k) balances would have been larger at year-end 2006 for all four age cohorts analyzed. When the most aggressive target date funds were compared to actual participant directed decisions, the median 401(k) balances for three of the four age cohorts would have been larger had they been in target date funds.

"When the most conservative target date funds were compared to actual participant directed decisions, the median 401(k) balances for those up to age 45 would have been larger had they been in target date funds; however those over age 45 would have ended up with smaller median 401(k) balances if they had adopted target date funds."

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Barbara B. Kennelly, president and CEO of the National Committee to Preserve Social Security and Medicare offered these thoughts: "Social Security is a rock in a chaotic financial world. Unlike what you have just heard about the condition of private retirement savings, Social Security checks keep on coming every month like clockwork.

" ... Some economists have been pushing for cuts in Social Security benefits as a way of addressing our long-term budget deficits. I'm here to tell you that would be an extraordinarily bad idea. Benefits are modest to begin with, and benefits for future retirements are already being reduced as a result of the phase-in of an increase in the retirement age. Although essential to keep the elderly from completely losing ground to inflation, Cost-of-Living Adjustments can't keep up with the dramatic increases in the cost of health care over the long term.

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In the House hearing, Peter R. Orszag, director of the Congressional Budget Office, testified on its behalf: "Studies that have examined the impact of the stock market boom of the 1990s and the subsequent decline of the early 2000s on retirement decisions show mixed results.

"One paper, for example, found no evidence of an increase in the retirement age among people in households owning stocks after the stock market decline of 2000. Another paper, however, showed that survey respondents who held corporate equity immediately prior to the bull market of the 1990s retired, on average, 7 months earlier than other respondents.

"Although severe stresses in financial markets almost inevitably cause wrenching adjustments by workers and employers, the risks can be attenuated by sensibly designing pension plans. For example, although workers enrolled in defined-contribution plans may not be able to avoid bearing the risks associated with broad price changes in financial markets, they can avoid unnecessary risks associated with a lack of diversification.

"Such unnecessary risks can arise, for example, by overweighting portfolios with individual stocks rather than diversified index funds.

"In recent years, many firms have adopted automatic enrollment in defined-contribution pension plans. Such automatic enrollment dramatically increases participation rates, especially for subgroups such as workers with low income, for whom participation is otherwise very low. Perhaps of more relevance to a discussion of financial market risks, however, the Pension Protection Act of 2006 requires that the allocation of assets by automatic-enrollment pension plans meet certain criteria that protect against excessive risk for participants. As a result, pension assets for automatically enrolled workers tend to be weighted toward more-diversified portfolios.

"Such protections against nondiversified investment portfolios can help avoid excessive exposure to financial market risks. By design, however, workers in defined-contribution plans must inevitably bear the risks associated with broad market fluctuations."

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