Guaranteeing Retirement Income
SCEPA’s Retirement Income Security Project, led by labor economist and retirement expert Teresa Ghilarducci, has developed a plan to guarantee safe and secure retirement income for all Americans. Known as Guaranteed Retirement Accounts (GRAs), it would create individual retirement accounts on either the state or federal level to supplement Social Security. The plan could provide a pension to the 63 million workers who currently have none. It would also boost savings rates, increase investment, stabilize labor force participation among older workers and increase efficiency and security in investment returns.
SCEPA is excited to announce that "New Policies for an Older Unemployed Population," a SCEPA Working Paper by Director Teresa Ghilarducci and Economist Joelle Saad-Lessler, has made the top ten download list for the Social Science Research Network, (SSRN) for three different sub categories; Food Stamps and Food Assistance, Medicaid and Rates of Coverage. The paper outlines issues facing older unemployed workers, such as living with low incomes and without health insurance for longer periods of time due to increases in the duration of unemployment. The authors recommend expanding and reforming retraining programs to better accommodate the needs of older workers and the creation of tax incentives to encourage employers to hire older workers.
by Teresa Ghilarducci, SCEPA Director
January 29, 2014
The President's "myRA" proposal is an old idea with a slight twist. It would allow employers to send workers' contributions to a guaranteed non-profit government bond plan. This is a good move. The program would extend tax breaks that are currently only avaliable to high income workers. This is both a fair and good move.
However, the proposal would move myRA accounts to commerical IRA accounts when savings exceed $15,000. These accounts could then be tapped before retirement, which is a bad move. Another detriment - the program is voluntary, which will limit an individual's ability to accumulate adequate funds for retirement.
Unfortunately, these possibilities for leakage make this proposal woefully inadequate to deal with the retirement crisis. The President should support expanding Social Security, Social Security contributions, and a universal guaranteed prefunded account on top of Social Security.
On December 10, 2013, SCEPA Director Teresa Ghilarducci will testify before the Nebraska Legislature’s Retirement Systems Committee hosted by its chairperson, Senator Jeremy Nordquist. The hearing discusses LR344, legislation calling for an interim study to examine the availability and adequacy of retirement savings of Nebraska’s private sector workers.
In the last 10 years, Nebraska has seen a decline of 9% in the number of employers offering retirement plans to their workers, dropping from 66% to 57%. As a remedy to a looming retirement crisis caused by a lack of retirement income, Ghilarducci proposes opening the state's public pension system to private sector employees by creating State GRAs. This would provide residents access to professional money managers and allow them to choose among a variety of investments, including a guaranteed fund similar to the Thrift Savings Plans offered to federal employees and the TIAA-CREF plan offered to university professors.
On October 28, 2013, SCEPA Research Assistant Kate Bahn presented SCEPA's report, "Are Connecticut Workers Ready for Retirement?" at the first meeting of the state's Retirement Security Plan Roundtable. The ongoing series is spearheaded by Connecticut State Senate Majority Leader Martin M. Looney and House Majority Leader Joseph Aresimowicz. The series will focus on how to prevent a looming retirement crisis in the state by establishing a state-administered retirement saving plan for low-income, private sector workers. This proposal, modeled after SCEPA's State GRA plan, was described in Senate bill senate SB 54.
Bahn's presentation documented the decline in employer-sponsored retirement plans in the state, making it harder for Connecticut residents to prepare for retirement and leaving them vulnerable to downward mobility as they get older.
On July 5, 2013, Vice Chairman of the Greenwich Democratic Town Committee Bill Gaston cited SCEPA's "Are Connecticut Workers Ready for Retirement?" in an op-ed, Growing Potholes in the Road to Retirement. He quotes our documentation of a dangerous downward trend in employee access to retirement plans through their employer.
• 50 percent of Connecticut's working-age residents are not covered by any employer-sponsored plan
• Between 2000 and 2010, employers offering a retirement plan declined from 66 percent to 59 percent.
• Four out of 10 workers residing in Connecticut do not have access to a retirement plan at work
Gaston acknowledges that the current system, dominated by what Thomas Friedman's calls the "401(k) world," works for the wealthy, but not the middle class. He cites significant research into why this failure is not individual but structural, including the switch from DB plans to high-risk, high-fee DC plans that serve Wall Street better than Main Street.
Gaston calls for a "voluntary, portable, state-administered defined benefit plan, funded by workers and their employers." SCEPA has testified before the Connecticut legislation in support of such legislation, which is modeled on SCEPA Director Teresa Ghilarducci's State GRA plan.
On October 23, 2013, the Maryland legislature will hold a hearing on Senate Bill 1051, the Maryland Private Sector Employees Pension Plan sponsored by Senator James Rosapepe. The bill will be heard in Annapolis by the Maryland Joint Committee on Pensions. SCEPA submitted written testimony regarding the state of future retirees in Maryland based on our March 2013 report, "Are Maryland Workers Ready for Retirement?" The report received headlines in the state last spring for its findings that '40% of older households in Maryland are ill-prepared for retirement' and that '49% of those working in Maryland are not enrolled in an employee-sponsored retirement plan.'
SCEPA testified at a hearing in the Maryland House of Delegates on similar legislation sponsored by Delegate Tom Hucker that would increase access to a retirement savings plans by giving workers the option of opening an individual Guaranteed Retirement Account (GRA) through the existing Maryland State Retirement and Pension System. The Guaranteed Retirement Account (GRA) is based on Ghilarducci's STATE GRA plan, which was recently enacted in California.
SCEPA published an updated Fact Sheet on the retirement account balances of near retirees based on new data from the U.S. Census Bureau's Survey of Income and Program Participation.
The analysis reveals that 59 million Americans ages 50-64 in 2011 will not have enough retirement assets to maintain their standard of living when they retire. Three-fourths of near retirees have annual incomes below $52,536 per year and their average retirement account balance is $27,207. Furthermore, the median value of retirement account balances for half of near retirees is zero, showing that half of older working Americans have absolutely no retirement savings.
These facts - coupled with a weakening labor market, especially for older workers - documents the growing trend toward a retirement income security crisis.
The Fact Sheet, "New Retirees Have Inadequate Retirement Account Balances," updates last year's analysis, which was the first report to provide a breakdown of defined contribution (DC) retirement account balances by income.
A recent article in Institutional Investor by Fran Hawthorne, "Claims that 401(k)s Beat Defined Benefit Plans Stirs Controversy," analyzes the findings of an Employee Benefit Research Institute (EBRI) Issue Brief that claims that defined contribution (DC) plans do better than defined denefit (DB) plans for all income levels.
Hawthorne's critique points out the weaknesses of the EBRI study. These include the fact that the study includes only data on voluntary 401(k) plans, which have higher contribution rates than the more prevalent automatic enrollment plans, that it uses unrealistically high rates of return on stocks, and that it ignores the fact that employers contribute 'free money' toward DB plans, but do not need to contribute to DC plans.
Hawthorne is thorough. However, she overlooks two significant problems. First, EBRI overstates the retirement plan coverage and participation rates for workers, especially following an unemployment spell; this is especially important in the aftermath of the Great Recession. Second, the study uses an implausibly high growth rate of average hourly earnings. EBRI's findings are partly a result of these skewed assumptions.
These concerns are spelled out in a Huffington Post Business blog, by SCEPA Director Teresa Ghilarducci and SCEPA Research Economist Joelle Saad-Lessler.
On July 9, 2013, The New York Times reported that U.S. Senator Orrin Hatch (R-UT) announced a new proposal to allow the life insurance industry to manage public pensions.
Senator Hatch's high hopes that insurance companies are better insurers of public pensions than municipalities and states is based on three false beliefs.
- States regulate insurance companies better than their pension funds.
- Insurance companies will insure pension funds cheaper and more efficiently than state and local pension funds.
- Insurance companies are more secure than state and local governments.
Each of these assumptions is wrong.
Governments have promised their employees these benefits, so they can't simply "get the obligation off their books" by privatizing the management of the funds. Further, insurance companies are for-profit institutions – shareholders come first – so they charge more than state and local pension funds. Also, as we have seen, insurance companies can fail, requiring huge government bailouts. Examples abound, with AIG foremost in memory. At the state level, Executive Life took over California's pension funds in the 1970s and then went belly up. Pension beneficiaries lost everything.
Senator Hatch argues he is earnest. He wants to help state and local governments, not insurance companies. His theory is that pensions would come off municipal books and benefit from more reliable contributions.
But state and local governments could pay their pension obligations with a simple administrative and actuarial fix - by looking at their assets and liabilities and figuring how much they have to pay each month. This is called 'easy math,' a concept familiar to anyone with a mortgage.
The problems faced by some state and local governments are not structural. Rather, a minority of governors and mayors took pension holidays. They liked paying nothing, diverting funds from their pension obligations to other budget lines. Rather than creating a new structure for public pensions, Senator Hatch, the ranking Republican on the Senate Finance Committee, could hold hearings highlighting this political failure and calling for these localities to pay what they owe.
Contrary to Senator Hatch's intention, this proposal would expose public pensions to more insecurity, not less - while boosting industry profits.
On June 9, 2013, NPR's story, "Golden Years Tainted as Retirement Savings Dwindle" reports on a new study on the next generation's ability to retire. "Gen. X looks to be the first generation that will not exceed the wealth of the group that came before them, and to potentially face downward mobility in retirement," says Erin Currier, director of economic mobility for the Pew Charitable Trusts.
SCEPA's Retirement Income Security project has documented the current retirement system's failure to support future retirees. NPR quotes SCEPA Director Teresa Ghilarducci: "There has to be new institutions that guarantee a modest but safe continual rate of return," she says. "And we can do that by adding to the Social Security system, a place where people can save their money and get a rate of return that's safe."