Remarks by Karen Friedman at NASI's 25th Annual Policy Research Conference (January 31, 2013)
PRC's Executive Vice President and Policy Director spoke at the 25th Annual Policy Research Conference sponsored by the National Academy of Social Insurance today. Below are her remarks on "Saving for Retirement in Addition to Social Security."
Thank you so much to the National Academy of Social Insurance for inviting me today.
I am focusing my remarks today on the retirement income crisis facing this country and the need to develop visionary, comprehensive solutions. Specifically, I am going to focus my remarks on the need to build a new universal, secure, and adequate pension system – on top of a strengthened Social Security system.
I know that some in the audience may be skeptical, even rolling your eyes saying, “A new pension system? After the health care debate? Come on, Karen, Congress is bitterly divided, and there’s no way that we can do more than the status quo.”
But after listening to President Obama’s inaugural address, I realized that being visionary is what this country is all about. We look at what can be, not just what is.
And to paraphrase the President, when we see a problem, we seize that moment for change. We don’t say, “No, this can’t be done.” We instead face problems together, and together we find ways of shaping the right solutions, keeping what works and building on top of it. Now all I need now is a six-hour parade with marching bands playing to reinforce this message.
But the truth is, even without the bands, we have to face the music.
Without reform, millions of people are facing an inadequate retirement. About half of private-sector workers currently have no pension or other retirement plan to supplement Social Security, and that has been stubborn fact for more than a quarter of a century. And too many employers who sponsor pension plans that provide lifetime, guaranteed incomes are freezing, terminating, and otherwise cutting back those plans and replacing them with less‐secure 401(k) plans.
Back in 1980, one out of two private‐sector workers who participated in plans were in old-fashioned guaranteed defined benefit pension plans, and now that figure is closer to one in five. And it is no secret that 401(k) plans have left millions of workers and retirees with insufficient assets for retirement.
The fact is, while 401(k) plans can work as supplemental savings plans, they have not worked well as the primary retirement vehicle for most Americans.
401(k) plans, unlike guaranteed pension plans, put all the risks and responsibilities onto individuals, who then have to decide whether to participate, how much to contribute, what to invest in, how to resist withdrawing the money before retirement, and finally, figure out how to make the money last.
That’s a lot to put on folks when they’re trying to keep a job, pay for health expenses, keep a house afloat, and provide for a family.
According to 2010 data, half of all households had less than $44,000 in their retirement accounts and, for those approaching retirement, the median account balance was just about $100,000 – not nearly enough to last throughout retirement.
Furthermore, a recent study by HelloWallet shows that one in four American workers “with 401(k) and other retirement savings accounts take out that money before retirement to spend on other needs, amounting to more than $70 billion in withdrawals every year.”
The fact is we have to do more than just tell people to save, because this strategy just isn’t working.
According to the Elder Economic Security Standard Index, developed by Wider Opportunities for Women and the Gerontology Institute at UMass-Boston, single individuals need anywhere from $19,000 to almost $29,000 a year to live modestly, depending on what part of the country they live in, whether they own their own home, and other factors.
As everyone here knows, the average Social Security benefit for retirees is much less than that (only $15,000) a year – and without pensions or other retirement savings, millions of people are out of luck.
Public opinion polls reflect America’s mounting anxiety. In a recent Gallup poll, the top financial concern for most Americans was not having enough money for retirement, surpassing concerns about paying for healthcare or paying the mortgage.
What this all adds up to is a massive and growing Retirement Income Deficit. According to the Center for Retirement Research at Boston College, the Retirement Income Deficit facing Americans is an astounding $6.6 trillion.
That number represents the gap between what people have saved as of today and what they should have saved to achieve a level of sufficiency in retirement. And that number will only go up if there are cuts in Social Security.
Using a different methodology, EBRI says there is a $4.3 trillion deficit. And McKinsey & Company estimates that if nothing is done, by 2035, “a staggering $27 trillion shortfall will prevent Americans from enjoying a dignified retirement.”
What are the solutions to this problem?
I’m going to start with the principles we should use to design a new system.
To that end a few years ago, the Center, along with labor unions, progressive think tanks and retiree groups, launched Retirement USA to start the country dreaming big on the retirement front. This initiative, started with the AFL-CIO, SEIU, EPI and others, developed 12 principles that we think should underlie a new system and that borrow from the best parts of defined benefit pensions and 401(k) plans.
I’ll go through the principles quickly, and then talk about proposals and ideas that meet some or most of these principles.
It goes without saying that all the groups in R-USA believe that, if there were the political will to do so, expanding Social Security would be the most efficient and effective way of strengthening workers’ retirement security – and I know that Duncan will discussing this during his presentation.
But the Pension Rights Center and our R-USA partners recognize that retirement security in America has historically been a mix of public and private systems. For that reason, our principles focus on features that we believe must be part of a new private system to supplement Social Security.
The overarching principles are:
- Universal Coverage. A new retirement system that supplements Social Security should include all workers, unless they already are in plans that provide equally secure and adequate benefits.
- Security. Workers should be able to count on a steady lifetime stream of retirement income to supplement Social Security.
- Adequacy. The average worker should have sufficient income, together with Social Security, to maintain a reasonable standard of living in retirement.
I’ll highlight a few of the other key principles, and you’ll see the whole list on the power points.
- Both employers and employees should contribute, and the government should subsidize the contributions of lower‐income workers.
- Also, pooled, professionally managed assets are key to a secure retirement.
- There should be no leakage, and benefits should be paid as a lifetime annuities.
These are not unreachable ideals, and we have looked to many plans and proposals, both here and abroad, in developing our principles and ideas for a new system:
- One of the oldest and largest pension plans in the country, the TIAA portion of TIAA‐CREF – the plan for academics and educators – has employer contributions, uses pooled investments, and pays out benefits as guaranteed lifetime annuities.
- The Guaranteed Retirement Accounts proposal, developed by Teresa Ghilarducci and the Economic Policy Institute, is similar in many respects to TIAA but uses a national government clearinghouse to collect equal contributions from employees and employers that guarantee a modest benefit.
- And, if we look to other countries, the Netherlands has developed an interesting model in which employees’ savings are pooled and investment and life expectancy risks are shared among employees and retirees – rather than all of the risks being borne by each individual.
Senator Tom Harkin has released an outline of a proposal that builds on the Netherlands’ concept of decentralized approach to help solve the retirement income problem in this country. His blueprint for USA Retirement Funds, outlined in a report he released last year, calls for employers and employees to contribute into these funds, which are run by competing independently-run financial institutions.
Like TIAA and the GRA proposal, the money would be pooled and professionally invested, and lifetime benefits would be paid at retirement. And like the Netherlands, investment and life-expectancy risks would be shared by employees and retirees. The blueprint requires all employers who do not offer an employer plan to participate in these funds (Senator Harkin’s report also contains many reforms of Social Security). We have heard that Senator Harkin intends to introduce this proposal sometime this year.
Many of these concepts are gaining traction, not just among participant-oriented groups but among employers as well, because there is a growing consensus that we must both improve what exists – by preserving today’s DB plans and improving 401(k) plans – and also by developing new kinds of plans that better serve tomorrow’s retirees.
To that end, the Pension Rights Center joined with Covington & Burling, a law firm representing some of the largest corporations in the country, and the Urban Institute to co-sponsor an event last year called “Re-Imagining Pensions,” to talk about new plan designs that share risks between employers and employees. The eight plans discussed were all voluntary for employers, so they were not universal, but like the GRA and Harkin proposals, they had many of the principles incorporated in these plans. I can share some of these ideas in the Q&A.
The conversation to expand coverage and adequacy is moving to the states as well.
Over the past year, a number of states have explored using the efficiencies of large public-sector retirement systems to administer new kinds of retirement savings plans and pension plans for private-sector workers.
In October, California enacted the California Secure Choice Retirement Savings Trust Act, which has the potential to cover about 7 million private-sector workers. The Act lays the groundwork for a state-administered retirement savings plan that is based on an automatic IRA but that has key features that meet our principles:
- The money, rather than being individually invested would be pooled and professionally invested.
- The money is locked in until retirement when it is paid out as annuity.
- There is a modest guarantee.
All employers who don’t already offer a retirement plan would be required to offer this option to employees, who have to ability to opt out.
States would use their significant negotiating power and economies of scale to lower costs for employers. Because these plans would operate separately from the retirement system that covers state employees, they will not add to state budget deficits or add to liabilities of state pension systems. The law requires that a feasibility study be done before the plan is implemented.
Besides California, Massachusetts has passed a state-administered plan for employees of nonprofit organizations, and Connecticut, Minnesota, Rhode Island, New York, Oregon, and other states have expressed interest in exploring these approaches.
Just as the states led the way in developing new plans for health care expansion, these models for pension expansion could become the incubator for a comprehensive national solution. These proposals, while not perfect, can lead the country toward more comprehensive reform.
Some may say that in this time of fiscal constraint we can’t afford to do comprehensive reform.
We believe that, even with budgetary constraints, we must find ways to develop better solutions – or individuals will fall off their personal fiscal cliffs in the future.
As Congress debates the efficacy of the tax subsidies for retirement plans, the Center believes that we can redirect at least a portion of the $50 to $70 billion a year that we are now spending to subsidize the 401(k) system on better approaches to help the average American worker save for retirement (for instance, lowering the maximum amounts that individuals are allowed to contribute to 401(k)s back to earlier levels).
Harking back to Obama’s speech, I think we should aim high – by working together to create a blueprint for a coherent, rational retirement system that could work better for Americans today and tomorrow.
Maybe we can’t create the perfect system now, but at least we can improve the current system and start working toward a better one for the future.
So, as we face the music, let’s look at ourselves as composers of new ideas – and working together we can develop a great symphony of retirement solutions. Let’s see if my fellow panelists can outdo my bad metaphors!
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Retirement USA is a national initiative that is working for a new retirement system that, along with Social Security, will provide universal, secure, and adequate income for future retirees. Visit the website.