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Exclusive Interview: Teresa Ghilarducci Worried About de facto Poverty in Future Retirement

Exclusive Interview: Teresa Ghilarducci Worried About de facto Poverty in Future Retirement
February 20
00:03 2019

If you don’t know Teresa Ghilarducci, then you’re simply not paying attention. As a labor economist, she has spent her career working to ensure retirement security for all American workers. She joined The New School for Social Research as a professor of economics in 2008 after teaching at Notre Dame for 25 years. At The New School, she also directs the Schwartz Center for Economic Policy Analysis (SCEPA), which focuses on economic policy research and outreach. Her recent book, co-authored with Blackstone’s Tony James and titled, Rescuing Retirement, charts a visionary, bipartisan, and simple path to solving the retirement crisis.

FN: Teresa, our audience enjoys reading about the significant life events that have brought our interview subjects to where they are today. Describe some of yours. When did you determine this is how you wanted to spend your career and what was the precipitating event?
Ghilarducci: My mom was a single mother with a high school degree and a few college classes under her belt. Her jobs were awful until she got a unionized job at the Sacramento Bee selling classified advertising. Being the oldest kid, I became involved in our economic life at a fairly early age. At 11, I knew our budget, helped manage the Medicaid applications, food stamps, and watched for the best opening in public housing. When I went to Berkeley, a research job at the Labor Center opened up, and I started researching employee benefits. One of my assignments was helping my mother’s union — the Newspaper Guild — negotiate their DB pension! Who gets to advocate to improve their own mothers’ pension?!  I also helped the union of Stanford University employees construct their pension platform. When I was PhD student at Berkeley in Economics, The Greenspan commission had released their report, and I became the resident Social Security geek. Still am!

FN: You’ve been on the academic research side of the retirement industry for quite some time. Some of our most important improvements come from academic research. There are times, though, when practitioners have a hard time applying some of the research. What conditions must exist to allow practitioners to smoothly incorporate research findings into their systems and procedures?
Ghilarducci: Good question. Partisan politics can stymie the application of research findings that can help make our society more equal and provide necessary basic resources. While Republicans and Democrats disagree on a lot these days, we can all agree on basic principles. After a lifetime of work and years of contributing to our economy, every American worker deserves the dignity of a secure, comfortable retirement.

Right now, that basic assurance is not there for the majority of workers. Research from our Retirement Equity Lab (ReLab, see https://www.economicpolicyresearch.org/retirement-equity-lab) shows we need to act now to reverse the dangerous course we are on. We’re heading for a future in which nearly half (40%) of middle-class older Americans workers are at risk of falling into de facto poverty in retirement. First, we need to recognize we have a problem that affects all Americans and then work to find the basic solutions we can agree on. The longer we wait, the more people will suffer and the more expensive it will be.

FN: In the last twenty years or so, what do you feel has been the academic world’s most valuable contribution to the retirement industry and retirement savers? Why is this so?
Ghilarducci: The most important academic contribution has been to shift the focus away from badly-behaved savers to a poorly designed retirement system. The American system has gone too far, resting on the belief that workers should “do it on their own.” When in fact, our system fails to help American workers age. Academics, such as our work at ReLab, have shown the failure of our system in three important ways. First, DC, 401k-type plans were not designed to be our primary retirement savings vehicle. But unfortunately, they have become just that for many American workers, if they are lucky enough to have access to a retirement plan at all. The research shows that poorly-designed 401k plans hurt workers because they lack automatic enrollment, favor predatory and high-fee investment choices, prohibit rollovers, and do not require employer contributions.

Second, tax deductions for retirement savings create inequality as the majority of tax breaks go to high earners. If middle and high-income workers both save the maximum, they are treated differently. The higher earner gets a higher after-tax rate of return.

And last, academics have shown that active management is far worse for savers than index funds. We can see the huge impact academic research had in motivating and informing President Obama’s fiduciary rule, which has unfortunately been killed in this administration. But the rule would have helped working class Americans, who—research shows—lose $17 billion every year because financial advisers put their own interests ahead of their clients’ interests. Because advisers are not required to act in their clients’ best interest (and have their own mortgage and vacation homes to pay for), they often end up steering savers down fee-ridden paths with lower returns.

FN: Let’s talk about your recent book. Co-authored with Tony James, Rescuing Retirement: A Plan to Guarantee Retirement Security for All Americans outlines both the nature and the extent of the retirement crisis, as you see it, and proposes several policy initiatives to address it. First, what do you say to those who say the retirement “crisis” only pertains to some and, indeed, may not pertain to them at all? [Ed. Note: For example, ICI recently came out with a survey revealing a majority of Americans prefer to keep their 401k just as it is. And then there’s also this: “Much Ado About Nothing Saved for Retirement? Why Social Security Alone May Be Enough,” (FiduciaryNews.com, March 13, 2019)]
Ghilarducci: Our own focus groups and surveys that represent American workers show an opposite result from surveys sponsored by the money management industry. Young and older workers—both Republicans and Democrats—believe the system needs an overhaul. They also want an alternative to the voluntary, non-guaranteed 401k and its cousin the IRA.

Also, everyone likes a 401k compared to nothing. The ICI and I can agree there. Our system is better than a sock in the nose. I would like to challenge ICI to review our methodology. Did ICI’s survey include people without a plan? Money managers? We interviewed a sample of American workers.

We can also agree that one key part of our current retirement system works well: Social Security. Ensuring Social Security is solvent for future generations should be a priority. But can retirees live on Social Security alone? Realistically, the answer is no. And half-baked solutions, like cutting your budget, living off your home, or working into old age, just won’t cut it for most Americans. All of these options rely far too much on hope and chance. Hope that workers will continue to find employment in an unfriendly, ageist job market. Hope that health problems and costs won’t get in the way.

Certainly, many Americans are adapting to survive in our current retirement climate. But those who have adjusted their lifestyles and budget to survive on less are at risk. This is the problem of using an excel spreadsheet model for our retirement system. The system assumes that Americans will work consistently until they can afford to retire and that their wages will increase every year. But this is not real life. In real life, people face periods of unemployment in older age, they are forced to retire early, and they face health problems. So even though some people may get by with this system, their retirement is not truly secure. And the situation is only worsening as pensions disappear, so the next generation to retire will face far bigger challenges in retirement. We need a system that reflects the reality of the workforce today instead of asking hard-working Americans to downsize and struggle in old age. If we do nothing, 8.5 million working-class people will fall into poverty or near poverty in old age.

FN: Now, on to the solution: The Guaranteed Retirement Account (“GRA”, see (https://www.economicpolicyresearch.org/images/docs/research/retirement_security/Retirement_Security_Guaranteed_digital.pdf). The GRA is an individual account where both the employee and the employer make contributions. It’s pooled like a profit-sharing plan and pays out like a defined benefit plan. In what ways is the GRA similar to Social Security and what advantages does it provide that Social Security doesn’t?
Ghilarducci: Social Security is important, but it was designed as a safety net and expanding the program would likely focus on lifting up the poorest and oldest elderly. Pre-funded pensions earned on the job were supposed to guarantee a middle-class retirement by supplementing Social Security. However, we now live in a time when 50% of American workers don’t have any kind of retirement savings plan at work.

GRAs are add-on accounts that would change the way people at all income levels save by providing the tools for a secure and comfortable retirement. Unlike Social Security, GRAs rely on actual cash in every person’s individually-owned retirement savings account. This is real capital that provides real, high-performing investments with the potential to close the retirement savings gap. While expanding Social Security requires increased FICA taxes, under the GRA model, employees would be placing their own money in their account, and contributions of low earners would be offset by a tax credit. Contributions from employers would be offset by savings from no longer having to administer retirement plans. Like Social Security, pre-retirement withdrawals are prevented in the GRA model.

FN: In what ways is the GRA similar to a 401k plan and what advantages does it provide that 401k plans don’t?
Ghilarducci: 401k accounts depend on voluntary individual contributions which people may or may not make throughout their lives, and employer contributions are voluntary. But to be effective, contributions must be made consistently throughout a worker’s career, starting at a young age. GRAs address this by mandating a 3% contribution — split between workers and employers. This will apply to all workers including part-time and self-employed workers.

GRAs invest your money differently than 401k plans to ensure that an account owner’s savings works harder for them. Savers experience lower investment returns in a 401k due to high fees and a bias toward short-term liquid stocks and bonds, when in reality workers are saving for the long term. Beneficiaries are also forced to choose from a narrow selection of managers without the expertise to do so. In a GRA, you would invest in long-term vehicles with higher payouts. Also, your money would be invested as part of pooled strategies, combining the retirement savings with other GRAs across the country. Individuals would choose their own manager from a national exchange, ideally administered by a federal agency. By pooling, investors would combine their power and build stronger portfolios than any one individual could alone.

Also, people who save in 401k plans are likely to withdraw their savings before retirement and incur high fees and taxes. The U.S. is one of the only nations that allows tax-preferred retirement savings to be withdrawn before retirement. To protect savers, the GRA model prevents pre-retirement withdrawals and encourages separate savings for rainy day funds.

FN: The GRA represents a variation of the “Universal Retirement Account” (similar to the one outlined here nearly a decade ago: “401k 2.0 – A Proposal,” FiduciaryNews.com, December 7, 2010). The term de jour is “auto-portability.” Ted Benna has pitched the concept he calls the “Benna401k,” where companies use existing retirement savings laws to create individual (and portable) retirement savings accounts for their employers, (see “Ted Talks! The Benna401k Comes Alive,” FiduciaryNews.com, September 19, 2017). Unlike these ideas, the GRA requires each person establish an individual account for retirement savings through the federal government. This is similar to how some states are promoting retirement saving. What is the upside and downside of this government mandate approach?
Ghilarducci: The reason the GRA would be established at the federal level is scale. Without scale, individual savers won’t get access to the best performing portfolios and lowest fees. Without scale, individuals won’t be able to annuitize in any affordable or efficient way. And without scale, individual savers won’t be able to get access to affordable insurance for their principal. The GRA takes care of all that.

FN: Speaking of state initiatives, many states are also moving forward with their own “Fiduciary Rule,” now that the DOL’s Rule has been vacated. Give us a sense of history on this. How have states taken the lead in retirement and fiduciary issues in the past (e.g., Prudent Investor Act) thereby creating a critical mass of support for the policy for which the federal government then adopted a universal law?
Ghilarducci: Time and time again, we have seen that innovation at the state level can pave the road for federal reform. We saw it with Social Security before the Social Security Act of 1935. Wisconsin, for example, put the first workers’ compensation program in place in 1911 and the first state unemployment insurance program in 1934. Similarly, state efforts to raise their own minimum wage levels have consistently led to a boost in the federal minimum wage.

And today, states are taking action on retirement reform with programs like OregonSaves, an auto-IRA program which requires employers who do not offer a retirement plan to automatically enroll their workers in a state-sponsored savings program. By the end of last year, employees enrolled in the program accumulated more than $10 million in savings that they otherwise would not have saved. And Oregon is just one of nine states that have enacted plans to provide private-sector workers with plans through their employers. While the state programs are not the long-term solution to the retirement crisis, they prove the need for coverage and show that people will use it if offered. You can read more about the progress and importance of state retirement reform in ReLab’s report here: https://www.economicpolicyresearch.org/images/docs/research/retirement_security/States_of_Reform_FINAL.pdf.

FN: Finally, what do you see as the primary advantages of having children save through an IRA and what do you think can be done to encourage more parents to help their children establish a Child IRA? How would encouraging Child IRA take the pressure off of Social Security down the road? [Ed. Note: You can read more about it here: http://childira.com/ – just scroll down below the sliding picture and click the links to the relevant articles.
Ghilarducci: Encouraging Child IRA won’t realistically take the pressure off Social Security because there is not enough scale to matter. Private efforts will never replace Social Security. Social Security is insurance. For people to save enough to insure themselves is simply not practical. Self-insurance takes a lot of capital — more finance capital than 99% of people have. This is a band-aid solution, but what we need is bold federal reform.

FN: Teresa, it’s been a pleasure and a delight to be able to speak with you. You’ve certainly given our readers a good chunk to chew on. I’m sure your words have initiated the thought percolation process in their heads even as we speak! (And that’s a good thing.) Thanks again and we look forward to chatting with you again in the future.

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Christopher Carosa, CTFA

Christopher Carosa, CTFA

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