Retirement Equity Lab
SCEPA's Retirement Equity Lab, led by economist and retirement expert Teresa Ghilarducci, researches the causes and consequences of the retirement crisis that exposes millions of American workers to experiencing downward mobility in retirement. As a result, SCEPA has developed a policy proposal known as Guaranteed Retirement Accounts (GRA) to provide stable pensions to the 63 million workers who currently have none.
A smaller share of older workers are officially looking for work. The unemployment rate for workers aged 55 to 64 was 3.6% in April, down 0.3 percentage points from March. Older men’s unemployment decreased from 4.0% to 3.8%, and older women’s unemployment decreased from 3.8% to 3.6%.
Older workers have lower official unemployment rates than the national average, but face stagnating wages, growing long-term unemployment, physically demanding jobs, and age discrimination. One widely-advocated solution is for the unemployed to create their own jobs by becoming self-employed.
But this is wishful thinking. The existing self-employed are workers who have, to a greater or lesser extent, chosen self-employment rather than entered it as a last resort. It does not follow that if the older unemployed attempt to become self-employed, they will succeed. Analysis of Health and Retirement Study (HRS) data, a nationally representative survey of older Americans shows:
- Few unemployed workers over 55 enter self-employment – only 5.7% during the period 2010-2012.
- The low rate of entry to self-employment likely reflects a lack of resources, rather than insufficient entrepreneurial zeal among older unemployed workers.
Median household-level financial assets of unemployed workers over 55 are only $2,000. In contrast, newly self-employed older workers have average financial assets of $25,000, and older employees $10,000. Unemployed workers are also less likely to have housing wealth to draw on. Only 71% of older unemployed workers are homeowners, compared with 87% of the newly self-employed and 83% of employees, and unemployed homeowners have less housing equity than the newly self-employed and employees. With only $2,000 to start a business and little collateral, the older unemployed are unlikely to be able to finance viable businesses. Instead, self-employment likely means taking insecure, low-paid work in the gig economy.
America’s older workers should be able to choose to leave the labor force after a lifetime of work. Policy proposals that call for cutting Social Security benefits by raising the retirement age leave people at the mercy of a labor market unfriendly to older workers. Guaranteed Retirement Accounts (GRAs) open a path to retirement security by providing all workers retirement savings plans with guaranteed growth.
The Department of Labor today published a final rule to address conflicts of interest in retirement advice. According to the Council of Economic Advisors, conflicted advice costs American retirement savers about $17 billion a year, exacerbating the retirement savings crisis.
Proposed in April 2015, today's final rule addresses concerns by some sections of the financial services industry that, as initially proposed, it could have deprived households of valuable financial advice. In testimony before the Department of Labor, Retirement Equity Lab (ReLab) Research Director Anthony Webb argued that such concerns were misplaced. He stated, "the industry is not going to walk away from $1.7 trillion of assets and perhaps $17 billion of revenue rather than comply with the rule."
Today's fiduciary rule retains the structure of the 2015 proposal while making minor modifications to preserve investor choice and reduce compliance costs.
"We congratulate the Department of Labor for crafting a rule that protects American savers from self-serving advice and informs them of the real cost of what they are buying," said Teresa Ghilarducci, director of ReLab and professor of economics at The New School.
The reported unemployment rate for older workers often looks better than that for younger workers. Today’s March employment report shows an unemployment rate for workers aged 55 to 64 of 3.9%, an increase of 0.1 percentage points from the February rate of 3.8%. While older men’s unemployment stayed the same at 4.0%, older women’s unemployment increased from 3.5% to 3.8%.
However, older workers don’t always have an easy time finding jobs. Since the economic recovery starting in 2009, the labor market for older workers has recovered less robustly than for younger workers.
The headline unemployment rate (referred to as U-3) understates the true level of unemployment by only including those actively looking for work in the past four weeks. A broader measure of unemployment - called U-6 - includes both part-time workers who would prefer a full-time job and workers who would look for work if they thought they could get a job (including discouraged workers who have recently given up looking for work). Economists consider U-6 a good measure of slack, or excess supply, in labor markets.
The more inclusive U-6 unemployment rate for workers aged 55 to 64 shows a weaker recovery after the Great Recession. The February 2016 rate of 6.5% (the most recent data available) remains 48% higher than its pre-crisis low of 4.4%, reached in December 2006. In contrast, U-6 for all workers is only 21% higher than its pre-crisis low reached in March 2007.
Two important factors contribute to older workers facing particular difficulties in a recovering labor market. First, older workers are less likely to switch industries relative to prime-age workers. Second, older workers experience longer average spells of unemployment than prime-age workers.
Advocates for cutting Social Security benefits by increasing the retirement age point to headline unemployment rates, which have nearly returned to pre-crisis levels, as evidence that older workers can delay retirement. But the U-6 unemployment rate for older workers suggests otherwise - that delaying retirement is not a one-size-fits all solution for those nearing retirement age without enough retirement savings.
Rather than forcing older workers to fend for themselves in an unfriendly labor market, we need Guaranteed Retirement Accounts (GRAs) to allow workers a safe, effective vehicle to accumulate savings over their working lives so that those with limited labor market options can retire in dignity.
“A Comprehensive Plan to Confront the Retirement Savings Crisis” is a proposal for a new approach to national retirement savings by SCEPA Director Teresa Ghilarducci and Blackstone President Tony James.
The plan proposes a simple, immediately effective solution to address the fundamental flaws in today’s broken retirement system. If we stay on our current path, America will face rates of poverty among senior citizens not seen since the Great Depression. The strain of this population will have resounding effects across the economy, the government and future generations.
In response to this challenge, Ghilarducci and James have researched and developed a national plan that ensures every worker a more secure retirement. The plan details a single, sustainable framework that allows Americans to save consistently, generate the returns necessary and retire with guaranteed lifelong income. And by repurposing lopsided subsidies and strategically using existing government infrastructure, this plan can be implemented with no new taxes, bureaucracy or increase of the federal deficit.
This plan was developed by an unlikely partnership between Ghilarducci and James. Together, they’ve developed a simple, actionable solution to this impeding crisis.
- “A Comprehensive Plan to Confront the Retirement Savings Crisis” Report
- “A Comprehensive Plan to Confront the Retirement Savings Crisis” Summary
- “A Smarter Plan to Make Retirement Savings Last” in the New York Times
- “Pushing Aside 401(k)’s for Mandatory Savings Plans” in the New York Times
- “One Fix for the American Nest Egg: Make People Save” in the Wall Street Journal
- “Workers and Employers Would Be Forced to Save 3% of Pay Under New Retirement Proposal” in Investment News
- “The Plan That Could Render Your 401(k) Obsolete” in CBS News
- “National Retirement Savings Plan Proposed” in Benefits Pro
- “Is A Mandatory U.S. Retirement Saving Plan In Your Future?” in Reuters
The unemployment rate for workers aged 55 and older increased last month for the second month in a row, from 3.7% in January to 3.8% in February. The overall unemployment rate stayed constant at 4.9%.
More older workers are joining the labor market. From 2005 to 2015, the labor force participation rate for men aged 55 to 64 increased from 69.3% to 69.8%. The labor force participation rate of older women increased somewhat more - from 57.0% to 58.5%.
An increasing labor force participation rate for older workers represents an increase in the supply of labor. Whereas an increase in the demand for labor will increase job opportunities and wages, an increase in supply may be associated with reduced both wages and job quality.
The increase in the labor force participation rate from 2005 to 2015 was associated with a slowing in the rate of growth in wages of older workers, indicative of weak demand for labor. Between 1995 to 2005, real weekly earnings for men and women aged 55 to 64 increased by 7.1% and 23.7%, respectively. But between 2005 to 2015, real weekly earnings increased only 2.5% for men and 1.1% for women. This sluggish rate of growth of weekly wages wasn’t the result of a decline in the number of hours worked. The median hours worked among full-time older workers stayed constant at 40 hours per week between 1995 and 2015.
Without well-designed retirement plans, saving for retirement becomes difficult and delaying retirement becomes necessary. This could be why the Bureau of Labor Statistics predicts older workers’ labor force participation rate will continue to grow in the coming decade, especially for women, who have a projected participation rate of 62.9% by 2024. If older workers are unable to retire, it has a ripple effect on the entire labor market, as increasing competition from older workers decreases the bargaining power of younger workers.
We need to ensure older workers a viable path to retirement by creating reliable retirement savings programs to supplement Social Security. For example, Guaranteed Retirement Accounts (GRAs) require employee and employer contributions over a worker’s lifetime and provide guaranteed lifetime income in retirement. With the confidence provided by secure retirement income, older workers can choose to leave the labor market according their own needs, rather than hanging on to undesirable jobs out of financial desperation.
Notes: Data for median weekly earnings in current dollars for men and women age 55 to 64 as well as historical and projected labor force participation rates are taken from the Bureau of Labor Statistics. Inflation adjustments are made using the Consumer Price Index. Median usual hours worked per week figures for workers aged 55 to 64 are calculated by the author from CPS Annual Social and Economic Supplement.
SCEPA Director Teresa Ghilarducci spoke with The New York Times’s Noam Scheiber about the retirement savings initiatives in President Obama’s 2017 budget proposal. She believes they are an admirable attempt to make up for the long decline in employer provided retirement benefits, but don’t go far enough.
American workers are facing a retirement crisis. Experts recommend we have at least eight times our salary in savings by the time we retire. But the median account balance among families on the verge of retirement is only $12,000. Few have even close to enough savings. Many have none whatsoever.
President Obama’s 2017 budget proposal includes a few modest attempts at improving working Americans’ ability to save for retirement. One is the “auto-IRA,” which would that require all companies who don’t offer a retirement plan to enroll their workers in an IRA. Another is a proposal to make it easier for small businesses to join together and offer their employees pooled 401(k) plans at a lower cost than if they purchased them on their own.
These are notable attempts at reform, but will not solve the retirement crisis even if they make it through Congress. Instead, Ghilarducci calls for Guaranteed Retirement Accounts, managed by the Social Security Administration, to which employers and employees would split a mandated 3% of their income and which would generate a guaranteed rate of return. This is the best way to ensure all Americans can enjoy a comfortable and secure retirement.
The average unemployment rate is down. But it is up for older workers. Today’s jobs report from the Department of Labor reports an unemployment rate of 3.7% for workers over 55 in January, up from 3.2% last month, an increase of 0.5 percentage points. The overall unemployment rate went down by 0.1 percentage points from 5.0% to 4.9%.
Last month, we reported that unemployed older workers took longer to find a new job than younger workers. Drilling down to the different experiences of men and women, we find that that the long-term unemployment rate - defined as being unemployed more than 27 weeks - increased faster for older women.
In 2007, before the recession, a larger share of jobless men ages 55 to 64 (26%) were long-term unemployed than jobless women of the same age (21%). By 2015, well into the recovery, 37% of unemployed men and 35% of unemployed women were long-term unemployed. The share of unemployed women who are long-term unemployed increased 14 percentage points compared to an increase of 11 percentage points for men. For comparison, in 2015, 22% of unemployed 20- to 24-year-olds were unemployed long term.
Other studies confirm that older women face a harsh labor market. The National Bureau of Economic Research (NBER) found that older, college-educated women face more discrimination finding work than both younger women and older men. The Federal Reserve Bank of St. Louis also found that after the Great Recession, older job seekers, especially women, were hit hardest and longest by both unemployment.
It’s no surprise that long-term unemployment decreases bargaining power by increasing a worker’s willingness to accept a less desirable job. Older women nearing retirement already experienced a lifetime of wage disparity that makes it harder to adequately save for retirement during their working years. For women ages 50-64 without enough retirement income, cutting Social Security by raising the retirement age makes the situation worse. They will be forced to work or look for work longer in a labor market characterized by both age and sex discrimination.
Rather, we need to provide Americans with an adequate, secure income in old age. This will level the labor market playing field, allowing all older Americans to choose between retiring with dignity and taking the time to look for decent jobs that best match their skills. Guaranteed Retirement Accounts (GRAs)are one means of achieving this goal.
NOTES: The share of unemployed workers who are long-term unemployed by sex and age is calculated by dividing the number of women and men that are unemployed for 27 weeks or longer by the number of all unemployed workers. The Bureau of Labor Statistics provide the data for the denominator and numerator. The denominator is the number of unemployed men and women aged 55-64 and the numerator is the numbers of long-term unemployed men and women aged 55-64.
Older Unemployed Workers Take Longer to Find Jobs than Younger Workers
The unemployment rate is falling for workers in all age groups. For workers over 55, today’s jobs report from the Department of Labor shows an unemployment rate of 3.2% in December, a decrease of 0.5 percentage points from last month.
While this is good news overall, if an older worker is out of a job, it will take 10 weeks longer to find a new one than their younger counterparts. In 2007, the average time spent unemployed for workers 55+ was 23 weeks, compared to 20 weeks for younger workers, a gap of three weeks. In 2015, the gap increased three fold to ten weeks, with older workers spending 36 weeks looking for a job compared to 26 weeks for younger workers.
Whatever the cause, be it age discrimination or biased job training programs, older workers are less able to recover from the shock of losing a job. As their time looking for work stretches out, many turn to early retirement as an escape, paying a high price in decreased standards of living due to inadequate savings. Cutting Social Security benefits by raising the retirement age will fuel the increase in older workers’ income vulnerability. Systemic change requires a comprehensive program in the form of Guaranteed Retirement Accounts to ensure older workers have the retirement income needed to leave the labor market when they chose.
On January 1st, 2016, The New York Times published an oped by SCEPA Director Teresa Ghilarducci and Blackstone President Tony James, "A Smarter Plan to Make Retirement Savings Last." The article was mentioned in January 4th news updates by Daily Kos and Politico.
In the piece, Ghilarducci and James call for the creation of a mandatory savings plan as a necessary solution to the coming retirement crisis:
"We need a bolder plan, which we are calling the guaranteed retirement account (G.R.A.). Under our proposal, all workers and employers will have to make regular payments into a G.R.A., which builds until retirement age, then pays out a supplemental stream of income until that person and his or her beneficiary die.
The current system - a mix of 401(k)s and individual retirement accounts (I.R.A.s) - is broken."
The retirement crisis is forging unlikely alliances. The New York Times’ Mark Miller writes about how SCEPA director Teresa Ghilarducci and Blackstone President Tony James have joined forces to advocate for replacing 401(k)s with a mandatory retirement savings program on top of Social Security.
Since Dr. Ghilarducci first proposed Guaranteed Retirement Accounts (GRA) in 2009, the effort for reform has gained steam as policymakers recognize the chasm between what experts recommend people save and what they actually do. Most Americans, even in the upper-middle class, have saved nowhere near enough for retirement.
The will for reform is present abroad and at home. Britain, Australia, and New Zealand implemented mandatory retirement programs within the last generation - to great success. In Britain, workers can expect to receive 71% of their salary in retirement. Three U.S. states have enacted universal pension plans since 2012, and another 23 are considering a variety of proposals. According to Ghilarducci, state action is a response to federal inaction, and state policymakers would prefer federal reform.
Last month, the U.S. Treasury debuted its myRA program, which makes government-sponsored starter IRA’s widely available. However, because myRAs are voluntary and small, their impact will be limited. Nonetheless, the program reflects a broad recognition of the need for reform. The Ghilarducci-James alliance is another indicator that a comprehensive federal plan is both necessary and possible.