The inadequacy of the current U.S. public and private pension systems may warrant the establishment of a universal pension system (UPS), which would cover all workers—full-time and part-time—and require them to contribute at a level that can help provide them with adequate incomes when they retire. This paper develops options for a system of individual accounts to which, starting in 2007, each employee or self-employed worker would be required to contribute 3 percent of covered payroll (i.e., 3 percent of up to $97,500 in 2007). The UPS we describe would raise the total "replacement rate" for average wage men to 49.0 percent of final wages—provided Social Security is fixed—or 39.8 percent if not

Many pension plans pay out benefits over a worker's remaining life. Perhaps inadvertently, they then discriminate against groups with shorter life expectancies. Losers include those with poorer health, less education, and more physically demanding jobs. Racial groups with higher mortality rates, like blacks, also lose. This discrimination, however, can largely be overcome with compensating mechanisms.

For the first time in history, many older Americans will likely retire with large stockpiles of money and will have to determine how to carefully manage these assets. Our study results suggest that converting retirement wealth into an annuity that guarantees a lifetime income may help retirees manage their spending and ensure they will not outlive their savings. This brief is related to the longer paper "Annuitized Wealth and Consumption at Older Ages."

The growing popularity of Individual Retirement Accounts and defined contribution (DC) pension plans, which generally provide lump sum payments instead of annuities, will likely affect spending at older ages. Retirees with little annuitized wealth risk spending too quickly and depleting their assets before they die, or spending too slowly and not enjoying as comfortable a retirement as they could afford. This study finds that older adults with little annuitized wealth spend more, and implies that the shift from defined benefit pensions to DC pensions or privatizing Social Security without requiring annuitization may promote even further spending of retirement resources.

The evidence that retirement and pension incentives have done much recently for national saving is weak. Total personal saving in the United States is now below the annual revenues spent in supporting retirement and pension plans. One major reason is that all government subsidies are for deposits, not saving. A second is the extraordinary complexity of the laws. Yet another negative influence on saving is that most people now retire in late middle age. Finally, the incentives provided to low- and moderate-income households often are also fairly small and sometimes nonexistent. This testimony discusses various ways to try to deal with these issues.