How to Fix America’s Retirement Problem

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Teresa Ghilarducci.has studied retirement issues for her entire career.

Courtesy of The New School

When labor economist Teresa Ghilarducci was in graduate school, she helped her mother’s union in Sacramento, Calif., negotiate a new pension plan.

Today, she is campaigning to get mandatory pensions for all Americans. The 64-year-old professor at the New School in New York City envisions a plan that would invest in professionally managed funds and bolt on top of workers’ Social Security accounts. She and Kevin Hassett, who headed President Trump’s Council of Economic Advisers, recently published a paper advocating for a program modeled after the Thrift Savings Plan for federal workers.

In Ghilarducci’s mind, the U.S. took a wrong turn when it embraced 401(k)s and other tax-deferred retirement plans in the early 1980s and companies began jettisoning or freezing their defined-benefit pension plans. She says the “do-it-yourself retirement system” works well for the top 5%, but it has left tens of millions with no retirement income aside from Social Security.

Under the plan she and Hassett are proposing, workers would invest in a government fund, heavily in stocks at the beginning of their career. As they approach retirement, the money would gradually shift into income annuities to provide a stable, pension-like income in addition to their Social Security.

Ghilarducci has studied retirement issues for her entire career. Her views were shaped in childhood. When she was 10 years old, her father was laid off, her parents ultimately divorced, and the family’s middle-class life evaporated. Her family ended up living in subsidized public housing and receiving Medicaid and welfare benefits. She went to the University of California at Berkeley on a scholarship, and later received her Ph.D. there. “I subscribe to Catholic social teachings,” she says: “We don’t take care of the poor because they are poor and we are rich. We take care of the poor because we are all alike.”

The economist has advised Hillary Clinton and Bernie Sanders, but unlike some progressive politicians, Ghilarducci believes that market investments are the key to a better retirement for the most Americans.

We reached Ghilarducci on sabbatical in her native state of California. An edited version of our conversation follows.

Barron’s: Is America’s retirement system broken?

Ghilarducci: It’s really simple. You have to save money, invest it well, and spend so it lasts the rest of your life. These are the three things a pension system has to do, and in all three areas, we’ve gotten worse.

Why is it broken?

It’s broken because of government policies and the lack of worker power. We moved away from a system where government provided a social safety net to giving tax breaks to people so they could provide pensions on their own.

And the fact that government policies favored employers over unions meant that workers had no voice to bargain for a defined-benefit plan. The government also eroded the Social Security system by gradually raising the full retirement age to 67, which had the effect of substantially reducing benefits at every age.

Can it be fixed?

Yep. And it’s not hard. The way to fix it is to make sure that everybody saves for retirement at the very beginning of their careers, they save consistently, invest well, and spend down mostly in annuities. There are lots of problems, like healthcare costs and climate change, that are much more difficult to solve.

Your plan is modeled on the highly successful and much-studied Thrift Savings Plan. How would the money be invested?

In a low-cost life-cycle fund, a set of assets appropriate for the age of the participant. It would be a diverse fund; you won’t just have stocks and bonds. They could include private equity and real estate—all the assets that rich people get in a professionally managed [pension] plan.

And the incentive to save?

The government would match contributions up to 3% for middle- and lower-income workers, generally for those earning less than $50,000 a year.

When it comes to retirement withdrawals, you suggest annuities.

Annuities are an efficient way for people to ensure they won’t run out of money for the rest of their lives. It would need to be a low-cost lifetime annuity with survivor benefits, purchased by the individual’s account and provided by the government.

What about Social Security?

It would be in addition to, not a substitute for Social Security. You would either get two checks or a fatter Social Security check.

You’d do away with 401(k) plans?

I’d let them compete against a more efficient system: A universal government program that has low fees, is subsidized by the federal government with a match of 3%, and doesn’t have conflicted retail advisers who don’t have a fiduciary duty.

Large employers that need to attract employees will have their own 401(k) plan, probably more generous than the government plan. This plan is really directed toward the people who don’t have any plan at all.

Wouldn’t this add to the federal deficit?

No. We spend $250 billion now in deductions for the top-heavy, wealth-inequality-creating system. So if we just took that $250 billion and redistributed it to the 63 million people that have no pension plan at all, and just lowered the subsidies we give to high-income workers, there would be hardly any new expenditures at all.

It’s hard to believe that creating pensions for 63 million people wouldn’t be hugely expensive.

Because the people we’d cover are low-income people, giving them 3% of their pay isn’t that expensive. What’s expensive is giving huge deductions to people at the very top for their retirement contributions.

You’ve been called a socialist.

I’m not a socialist. I’m just really practical. I’m working now with Kevin Hassett to get mandatory pensions. So if I’m a socialist, Kevin Hassett, Trump’s top economic adviser, is a socialist.

In fact, a lot of socialists say I’m betraying progressive values by calling for an advance-funded pension that invests in the private market rather than a massive expansion of Social Security.

How many Americans don’t have enough for retirement?

Most. I just did the numbers—72% of Americans who are nearing retirement won’t have enough to maintain their living standards if they retire at 65. And if everybody works until they’re 70, about half still won’t have enough to maintain their living standards.

How does personal debt factor into retirement decisions?

You have more elders reaching retirement age who have a mortgage. That rate has doubled the last 20 years. Coming into retirement with debt makes you more fragile. You’re more likely to lose your house if something goes wrong. And you have a lot more older people with credit-card debt. You can tell a 90-year-old not to bother paying off their credit card. Just let it default. But older people aren’t shirkers or scoundrels, they pay off their debt—to great cost.

How do people know if they have enough money to retire?

I hate talking about this topic because when I do a seminar for ordinary people, I know most people won’t have enough money and I have raised the blood pressure levels in the room.

The rule of thumb is by the time you’re 30 you should have the equivalent of your gross annual income in your retirement account, by the time you‘re 50 you should have eight times, and by the time that you’re 65, you should have 10 to 12 times.

What should people do if their employer fires them before they are ready to retire?

That question relates to more people than you can imagine—52% of retirees say they retired earlier than they expected. They were either pushed out by layoffs or, actually, age bias, or they were pushed out because of their own health and physical or mental limitations, or those of a spouse.

So what should they do?

They should be prepared to have a longer unemployment period. It takes twice as long for an older worker to find a job, and it’s much more likely they’ll find a job that pays a lot less than they were earning before. They should probably plan on downsizing on a more permanent basis.

But for most people, except people with terminal disease or no dependents, waiting as long as you can, up to age 70, to claim Social Security is a good choice. You’ll get a much higher monthly benefit if you wait, and that benefit is adjusted for inflation for the rest of your life. Most people underestimate how long they’ll live.

You’ve done research on how long people live after retirement. What did you find?

People who have less wealth are likely to die a lot sooner. So I’m finding not only inequality in retirement wealth, and not only inequality in length of life, but a growing inequality of retirement time—because the people who have the most can retire sooner.

When do you plan to retire?

I’m a full professor and an endowed chair and so I control the pace and content of my job. So I expect to retire in my 70s. People who have control over the pace and content of their life tend to work longer.

Thank you, Teresa.

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