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.

 

GOP-Controlled House Votes on Resolution to Undo Federal Regulations Supporting State Efforts to Provide Retirement Savings Accounts to Uncovered Workers

Today’s vote in the U.S. House of Representatives to overturn regulations supporting state efforts to provide retirement savings accounts to private sector workers risks denying retirement savings plans to 63 million workers without access to employer-based plans. This includes 23 million people who will lose coverage in the seven states that have enacted plans, including California, Connecticut, Illinois, Maryland, New Jersey, Oregon and Washington, and 40 million people who will lose coverage in the 28 states that are considering similar legislation.

“If Republicans succeed in rolling back DOL regulations, they will destroy the best chance 63 million American workers have of getting access to a retirement plan,” said Teresa Ghilarducci, director of the Retirement Equity Lab (ReLab) at The New School. “These states took the responsible first step to save their residents from a retirement crisis defined by low coverage and inadequate savings and protect their taxpayers from the fiscal crisis resulting from millions of indigent elderly. This would be a painful step backwards for the millions who are shut out from the dwindling number of employer-sponsored plans.”

State by State Uncovered Workers

According to ReLab’s calculations using the U.S. Census Bureau’s Community Population Survey, of the 161 million workers in the United States, over half - 54.2% or 87 million workers - do not have access to a retirement plan at work.

The U.S. House of Representatives is set to vote today on a Republican-sponsored Congressional Review Act resolution to overturn the Department of Labor’s final rule, “Savings Arrangements Established by States for Non-Governmental Employees,” that provides legal support to city and states who have either enacted or are considering plans to provide retirement accounts to private sector employees who are not offered a plan through their employer. The regulations clarify and define the ability of states and certain cities to enact plans in coordination with the federal law known as ERISA (the Employee Retirement Income Security Act of 1974). ERISA provides federal protections for workers participating in most retirement and pension plans sponsored by private employers. Without this support, state plans will be left with legal uncertainties that could prevent implementation or enactment of state-administered IRA accounts for uncovered private workers.

“Evidence has shown again and again that access to employer-sponsored plans is the linchpin of retirement security. Without workplace plans, people simply don’t save enough to support themselves in retirement,” said Ghilarducci. “The breathtaking pace of state efforts to increase coverage reflects the political will to address a need that is not being met in the private market. Few workers without access to an employer-sponsored plan invest in an IRA, many of which come with high fees. In contrast, state plans will default uncovered workers into low-cost, state-administered IRAs.”

Since 2011, 35 states have proposed or enacted retirement reform to provide private sector workers access to retirement savings accounts. State plans, also known as Secure Choice Plans or SCPs, are state-level retirement plans designed to provide retirement savings accounts to private sector workers who do not have access to such a plan at work. Under SCPs, designated private-sector employers are required to automatically deduct a percentage of their workers’ pay and forward it to state-sponsored individual retirement accounts (IRAs). Accounts are individually owned and professionally managed administered by independent boards headed by state-appointed trustees. Under these plans, employees would have the right to change their contribution rates or opt out of making contributions.

On October 16, 2016, Richard Wolff of the University of Massachusetts Amherst hosted SCEPA Director Teresa Ghilarducci for “The Pension Crisis” (minute 30-58) segment of Wolff’s Economic Update. According to Ghilarducci, the guiding principle in any retirement system should be that “we all deserve time at the end of our working lives for our own lives, to control the pace and content of our time.” Wolff and Ghilarducci go on to discuss, what are pensions?, how have they changed?, and what is “the pension crisis”?

Ghilarducci highlights that the Social Security Act of 1935 (SSA) created the Social Security system and made old age benefits universal. Victories for labor unions continued into the 1950s and 60s, as negotiations held firms accountable to the standards set by the SSA. Pensions were originally defined-benefit plans, or a secure amount of compensation one would receive upon completion of their working life.

A well-functioning retirement system stabilizes the economy. A secure retirement allows people to make other long-term investments throughout their life, such as a home, real estate and education. It can be a path to upward mobility or at least a safeguard against downward mobility for future generations.

Our current pension crisis is characterized by the erosion of retirement security. Defined-benefit plans gave way to the current 401(k) defined-contribution system. In the defined-contribution system, benefits are voluntary, and more than half of workers do not have access to an employer-sponsored retirement plan. Lower earners are less likely to have access to a retirement plan, and higher earners can save more throughout their working life. This is the basis for a twin crisis of inequality and retirement insecurity. Without secure employer-sponsored plans, lower- and middle-income workers are working later in life, squeezing the years of retirement time that ought to be enjoyed. Even those who do have plans pay high fees on their IRA and have confusing and sub-par investment options, leaving many IRAs with negative returns.

“We need to revive that ambition we had to ensure quality of time in end of life,” says Ghilarducci.

Referring to the ideal of universal support set by the SSA, Ghilarducci calls for mandatory retirement savings. The pension system should benefit employees and the real economy rather than financiers of retirement accounts. She proposes Guaranteed Retirement Accounts as a well-managed public-private system to ensure retirement income for all workers. Twenty-nine states are currently in the process of pension reform toward public-private systems. Finally, there are steps individuals can take to support the need for retirement reform, including voting for representatives that would expand Social Security and Medicare.

January Unemployment Report for Workers Over 55  

The Bureau of Labor Statistics (BLS) today reported a 3.5% unemployment rate for workers ages 55 and older in January, a decrease of 0.1 percentage points from December.

The low headline unemployment rate hides a racial gap in the physical job demands faced by older workers. At all income levels, older black workers are more likely to experience physical demands at work than older white workers, Tweet: #JobsReport : At all wage levels, older black workers face more physically demanding work.  bit.ly/2ky5Knj pic.twitter.com/DPmCcwbRpA including requirements to lift heavy loads, stoop, kneel or crouch during most of the workday.

The racial gap, which exists at all wage levels, is largest among older low wage workers. The gap among those earning less than $22 an hour is 22 percentage points, with 62% of Blacks in physically demanding jobs compared to 40% of Whites. For workers earning between $22 and $40 an hour, the gap is 11 percentage points, with 43% of Blacks are in physically demanding jobs compared to 32% of Whites. The racial gap persists even for higher earners. For those in the top 20% of the earnings distribution making more than $40 an hour, the gap is 8 percentage points, with 24% of older Blacks are in physically demanding jobs, compared to 16% of older Whites.

This persistent racial gap means that proposals to increase Social Security’s Early Retirement Age would require black workers to continue to do physically demanding work at older ages. To enable all workers to retire - whether due to physical necessity or choice - policymakers should both expand Social Security and create Guaranteed Retirement Accounts (GRAs). GRAs are are individual accounts requiring contributions from both employees and employers throughout a worker’s career. They provide a safe, effective vehicle for individuals to accumulate personal retirement savings and receive lifelong income as a supplement to Social Security.


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Dr. Lauren Schmitz, a New School Economics PhD and National Institute on Aging postdoctoral research fellow at the University of Michigan, joined ReLab's Political Economy of Aging series to present her research on the interplay between historical measures of average schooling at the state level in childhood and genetic propensity for educational attainment on years of education, degree completion, and lifetime earnings.

Her study, summarized below, finds that inequality in educational outcomes by genotype emerges among individuals who were educated in states with lower average educational attainment during their primary schooling years.

The Political Economy of Aging speaker series is a forum for academics and practitioners to share and engage in cutting edge research in social policy and the political economy of aging. The series is designed to forge interdisciplinary connections and examine how to progressively manage an aging society. The series is sponsored by SCEPA's Retirement Equity Lab, led by economists and retirement experts Teresa Ghilarducci and Tony Webb.

Paper Abstract: 
This study exploits administrative earnings records matched to detailed genetic and sociodemographic data in the Health and Retirement Study (HRS) to estimate whether the educational environment, as captured by state-level differences in average years of schooling, modify the associations between genetic propensity for educational attainment and individual schooling, and genetic propensity for educational attainment and lifetime earnings.

To capture the complex genetic architecture that underlies the bio-developmental pathways, behavioral traits, and evoked environments associated with educational attainment, we calculate polygenic scores (PGSs) for respondents in the HRS derived from a recent genome-wide association study (GWAS) for years of schooling.

We find evidence that both individual genetic endowment and the state-level educational environment contribute to individual schooling and lifetime earnings, with limited evidence for any interaction between them. The exception is completion of a secondary degree, where we find that individuals educated in states with higher average educational attainment during their primary schooling years were more likely to obtain a GED or high school degree—regardless of genotype—whereas individuals raised in states with below average educational attainment were approximately 7 to 24 percent less likely to obtain a secondary degree than individuals with similar PGSs in higher achieving states.

November Unemployment Report for Workers Over 55 Tweet:

The Bureau of Labor Statistics (BLS) today reported a 3.5% unemployment rate for workers age 55 and older in November, a decrease of 0.2 percentage points from October.

Older Workers in Rust-Belt States Flip

While “Older Workers at a Glance” shows steady growth in real earnings for older workers, national averages mask long-run stagnation and decline in the four rust-belt states - Michigan, Ohio, Pennsylvania, and Wisconsin - that unexpectedly voted for Donald Trump after voting for President Obama in 2012. 

Before Reagan, older workers in these four states received higher wages than older workers in the rest of the country. Now they are doing worse. In 1979, rust-belt older workers were making $3,600 more than their counterparts elsewhere. In 2015, they were earning $4,000 less. Between 1979 and 2015, the median real wage for older workers in the four rust-belt states that flipped to Trump increased only 1% compared to 17% in the rest of the U.S.

Stagnant and declining real wages erode workers’ ability to save for retirement and increase their reliance on Social Security. To address the economic insecurities of working families, the Trump administration needs to create a path to a secure retirement by expanding Social Security and providing universal access to secure retirement plans through Guaranteed Retirement Accounts.

 

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NEFE 2 graphUSA Today reporter Michael Molinski's article, "Don't Be a Retirement Saving Sucker: 401(k)s Not for Emergencies," discusses a report by SCEPA's Retirement Equity Lab (ReLab) titled, "Household Economic Shocks Increase Retirement Wealth Inequality." 

Economic shocks, such as job-loss, have a particularly adverse effect on the retirement savings of workers in low-income households, exacerbating retirement savings inequality. Low income households are more likely than moderate- and upper-income households to experience economic shocks. Workers in low-income households are also more likely to withdraw from their retirement account after a shock. ReLab's study shows that these shocks have significant effects on the finances of low-income households, causing up to a third of all withdrawals, and possibly more.

“It is not that low-income households are making the wrong decisions, they just have too many obstacles to overcome,” said Siavash Radpour, a research associate at SCEPA. The policy recommendations of this research include a prohibition on pre-retirement withdrawals and a contribution mandate in the form of Guaranteed Retirement Accounts.

Older Workers are Increasingly Concentrated in Low-Wage Jobs Tweet:

The Bureau of Labor Statistics today reported an unemployment rate of 3.7% for workers aged 55 and older in October. However, the unemployment rate fails to reflect the increasing concentration of older workers in low-wage service jobs.

Women are in the majority of low paying jobs for older workersFirst, older workers are more likely than younger workers to be in low-wage jobs. A low-wage job pays less than two-thirds the median wage, or $539 per week. In September, 27.1% of full-time workers aged 55 and older were in low-wage jobs compared to 19.0% of younger workers.

Second, the share of older workers in low-wage jobs has increased over time, while the share for younger workers has stayed the same. The September share of older workers in low-wage jobs, 27.1%, is 1.4 percentage points higher than the share ten years ago (25.7%).

Third, women are the majority of workers in seven of the top 10 low-wage jobs for older workers, primarily service occupations. They make up more than 75% of older workers in four of the top ten jobs, despite being a minority of older workers.

Older workers in low-paying service jobs face extra difficulty saving for retirement. This may be a particular problem for older women workers who are unlikely to have access to a retirement plan. Living paycheck to paycheck, even those with coverage have little room to cut consumption to increase retirement savings.

To enjoy a secure retirement, low-wage workers need a retirement plan, not a low wage job. The need is becoming ever more pressing as the Social Security Full Retirement Age is increased, equivalent to a cut in benefits for those who do not delay retirement. Guaranteed Retirement Accounts (GRAs) supplement Social Security in combating old-age poverty by providing all workers a retirement savings vehicle with low fees and guaranteed growth, allowing even low-wage workers a path to secure retirement.

 

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SCEPA Director Teresa Ghilarducci was named to Next Avenue’s 2016 list of Influencers in Aging for her work to reform the broken retirement savings system by giving every American a Guaranteed Retirement Account. Each year, the Influencers in Aging list recognizes 50 thought leaders at the forefront of changing how we age and how we think about aging. Influencers are leaders in improving the lives of older adults and their families and communities. Below is Next Avenue's insert describing Ghilarducci's work. 

Influencers in Aging Description

GRAs Would Supplement an Expanded Social Security

GRAs would not compete with or supplant Social Security. As social insurance against disability and poverty in old age, Social Security must be protected and expanded.

As I wrote in the Huffington Post, "The first step to solve the coming retirement crisis is to make Social Security solvent, without reducing benefits for lower- and middle-income persons....Instead of cutting benefits for these persons, we believe it would make more sense to expand the revenue available to finance Social Security. In our judgment, this represents a far better approach to improving retirement security for all Americans." 

downward mobility imageGRAs are individual accounts that would supplement Social Security. Social Security was not designed nor intended to provide an individual with all the income they would need in retirement. Rather, Social Security is considered one leg of a three-legged stool. The other legs are income from a retirement plan and personal savings. Over the last 40 years, traditional employer-provided defined benefit (DB) pensions have been displaced by defined contribution (DC) plans, including 401(k)s. Not only are 401(k)s ineffective retirement savings vehicles, they are only provided to half of American workers. 

The result of this trajectory is a retirement crisis. Workers without retirement plan coverage cannot save enough for retirement. 401(k) participants are often little better off than those without any coverage, as evidenced by the numbers. Those nearing retirement, including those without access to plan, have a median retirement savings of $12,000.  

GRAs are Designed Like Traditional Pensions to Lower Fees

GRAs are designed to mimic the best practices of traditional DB pensions. DBs provide workers with the benefits of pooled savings, low fees economies of scale, and lifelong income in retirement. These characteristics also allow DB plans to provide better investment returns than 401(k)s or IRAs.

The GRA doesn't obligate fund managers to invest in private equity. It merely allows the trustees, operating under the GRA's fiduciary requirements, the opportunity to invest in private equity if it benefits the participant. DB's have proven this to be true - that the inclusion of alternative asset classes has earned participants higher returns at lower risk.

GRAs would require that private investment managers compete against each other for the work, keeping fees as low as possible. Professional fund managers, including private equity funds, are in DB funds now. The issue is not whether they should be used, but whether or not they receive excessive compensation for poor returns. The GRA ensures that taxpayers and GRA contributors are not taken advantage of and get the best possible deal. This is done through transparent governance, pooled accounts and competition – three hallmarks of DB plans.

SCEPA Director Teresa Ghilarducci was named to Philadelphia’s Task Force on Retirement Security for Private Sector Employees. Chaired by Councilwoman Cherelle Parker, the 16-person group is charged with issuing a report to the Council recommending policy solutions to address the city’s retirement crisis.

In 2016, SCEPA produced a report for the City Council at the request of Councilwoman Parker describing the retirement crisis in Philadelphia. It found that only 47% of Philadelphia’s workforce has access to a retirement plan at work, compared with 53% of workers nationally. Philadelphia’s seniors are more likely to be poor or near poor, with 50% having incomes below 200% of the poverty line, compared with 31% nationally.

Philadelphia is the latest in a series of cities and states to recognize and confront the retirement crisis. Ghilarducci sits on a similar commission for New York State and has been asked to advise on plans in some of the 29 states that have proposed or implemented retirement reform in the past five years.

“Philadelphia is not waiting for the federal government to act on the upcoming retirement crises” according to Ghilarducci. “We at SCEPA found the average 401(k) and IRA balance for older workers is $14,500 and half the workforce does not have access to a retirement plan at work. Middle class retirees risk working into their 70s or living an impoverished retirement. We hope to help all Philadelphia workers retire by contributing to a professionally managed, low fee retirement account that pays a pension for life.”

In the absence of federal action, cities and states have taken the lead in proposing solutions to the retirement crisis. But to provide everyone a viable path out of the retirement crisis requires a national solution. Ghilarducci proposes Guaranteed Retirement Accounts -- mandatory, universal savings accounts with a guaranteed rate of return -- as the best way to ensure that everyone can retire with dignity.