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.
On August 14, 2016, Financial Times' reporter Alistair Gray describes consumer "fury" over insurance companies' efforts to increase premiums for long-term care, sometimes doubling the cost.
Consumers thought they were doing the right thing because Medicare, the government health insurance program for the elderly, does not cover the cost of long-term care. The cost of care exceeds the financial capacity of most elderly households. Many uninsured households end up impoverished and dependent on Medicaid, the government health insurance program for the indigent. These costs are a signficiant factor driving increases in Medicare expenditure.
Is private long-term care insurance a means of both providing financial security to the elderly and reining in Medicaid costs? The answer is "no," for three reasons.
First, more than a quarter of all households with long-term care insurance at age 65 lapse their policies prior to death. For these households, long-term care insurance is worse than useless. They pay premiums for many years, often receiving nothing in return. Worse, those who lapse are the households most likely to subsequently require care.
Second, for each dollar in premiums paid, only 60 to 70 cents is paid out in benefits. This is not because long-term care insurers are making big profits - they are not. The remaining 30-40 cents is eaten up by the high costs of doing business - employing actuaries, underwriters, paying sales commission, and so on. In contrast, administrative costs represent less than one percent of Social Security expenditures.
Third, private long-term care insurance doesn't achieve the basic purpose of any insurance, namely to transfer risks from the individual to the insurer. This is because insurers have the right to increase premiums if they are able to convince their state insurance regulator that they got their actuarial assumptions wrong. Although a household purchasing insurance reduces the risk posed by long-term care costs, it takes on an entirely new risk, namely that the insurer increase its premiums. Insurance may do little to reduce the household's overall risk exposure.
So why allow insurers to increase premiums? The policy justification is that if insurers were not permitted to increase premiums, they might exit the market, and worse, might become insolvent. But allowing insurers to increase premiums makes it impossible for households to evaluate the merits of purchasing coverage. The household has no idea whether the company quoting the lower premium really represents better value, and whether it would be better off not purchasing coverage at all. We are not convinced that a prohibition on premium increases would result in insurers refusing to offer coverage. But even if it did, we may be better off with no market at all than with a market characterized by high lapse rates, high administrative costs, and little effective risk transfer.
The July unemployment rate for workers over 55 is 3.7%, an increase of 0.2 percentage points from last month. Although unemployment is low, older workers’ earnings have not increased since the end of the Great Recession in June 2009. As we discussed last month, this indicates a weak labor market.
For most workers, this reflects a continuation of the labor market conditions they experienced over their working lives. Between 1979 and 2015, increasing wage inequality contributed to wage stagnation for workers aged 25-54. Over this period, average real earnings increased by 1.4% a year for men in the top 10% of the income distribution, but only increased by 0.1% a year for the remaining 90% of men.
Wage stagnation makes it harder for workers of all ages to start or increase saving for retirement. Without a raise, workers can only increase saving by reducing their current level of consumption.
Reflecting the many challenges workers face when saving for retirement, our analysis of Survey of Consumer Finances data shows that only 52.4% of working households ages 55-64 have any type of retirement savings plan. For those households participating in a 401(k) plan, the median retirement account balance is a mere $111,000.
Guaranteed Retirement Accounts (GRAs) will ensure that workers’ sacrifices are rewarded. Fees are kept to a minimum, ensuring that workers benefit from investment returns. And at retirement, workers will receive a guaranteed lifetime income rather than having to gamble on not outliving their savings.
The unemployment rate for older workers was 3.5% in June, increasing by 0.1 percentage points from May. The wage growth in June for older workers is not released today. According to conventional economic theory, a low headline unemployment rate is associated with rising wages. But unlike prior economic recoveries, older workers’ earnings stagnated in the five years after the Great Recession.
Between 2010 and 2015, workers over 55 with full-time jobs experienced a decline in median real weekly earnings (-0.8%). In prior recoveries, older workers experienced high earnings growth. In the five years after the 2001 recession, earnings grew 2.3%, 1.0% in the five years after 1991, and 5.9% after the 1982 recession.
Wage stagnation can indicate a weak labor market and low bargaining power, even when headline unemployment is low. And while it affects all workers in today’s labor market, stagnation especially harms older workers.
The average household approaching retirement has retirement savings of only $150,000. In retirement, this sum will only provide $500 a month in income - far short of what’s needed to maintain retirees’ standard of living. However, near retirees' need to prioritize savings is hamstrung by stagnant wages, forcing them to choose between cutting pre-retirement consumption or arriving at retirement with insufficient savings.
America faces a retirement crisis brought on by poorly designed retirement plans and compounded by wage stagnation. Cutting Social Security benefits by raising the retirement age would further erode retirement security. Americans need a reliable way to save for retirement in addition to Social Security. Guaranteed Retirement Accounts (GRAs) open a path to retirement security by providing all workers retirement savings plans with guaranteed growth.
Without changes to our failed system, a growing number of Americans will ride a wave of insufficient savings to deprivation in their old age. More than half of American households who are near retirement have less than $12,000 saved. The number of 65-year-olds per year who are poor or near poor between 2013 and 2022 will increase by 146%.
A recent report by the Bipartisan Policy Center's (BPC) Commission on Retirement Security and Personal Savings takes the first steps toward reform by recognizing the principles necessary to create effective retirement savings vehicles. The Commission's call for Retirement Security Plans to pool resources and decrease administrative burdens supports the need for economies of scale and universal access. The call to expand myRA and create a nationwide minimum-coverage standard supports the need for mandated participation and a shared responsibility between employers and employees. The call for a lifelong income plan supports the need for annuities to ensure seniors don't outlive their savings.
"Growing inequality has made retirement increasingly available to only a few," said Commission member and SCEPA Director Teresa Ghilarducci. "We need a federal plan that serves everyone. With 27 states actively pursuing retirement reform, these leaders have made it clear that the political will for change exists. Historically, we have relied on state innovation to spur federal action. As with Social Security and healthcare (see image), this report recognizes that federal legislation is necessary to provide employers and employees consistency and portability across states.
The Commission recognizes the failure of our current system and sets us on the right path to reform. However, it does not claim these recommendations, even if fully implemented, will solve the retirement crisis."
Ghilarducci stressed that she looks forward to taking the next steps toward comprehensive reform through supporting Guaranteed Retirement Accounts (GRAs). A joint policy proposal issued with Hamilton "Tony" James of Blackstone (from the diverse backgrounds of academia and investment banking), GRAs would provide savings accounts that advance the same principles in the Commission's report. By creating individual accounts on top of Social Security with mandated contributions from both employers and employees, these accounts would pool investments, guarantee a return, and provide lifelong annuity payments.
The report also put forward reform measures for Social Security. Ghilarducci joined with fellow commissioner Alan Reuther to discuss their disagreement with some of the recommended policies on Huffington Post in a blog titled, "A Better Way to Fix to Social Security."
On June 15, 2016, Tony Webb, director of research at SCEPA's Retirement Equity Lab (ReLab), presented a SCEPA report on Philadelphia's retirement crisis before the Philadelphia City Council Committee on Labor and Civil Service. The report, "Are Philadelphians Ready for Retirement?," was done on behalf of Philadelphia City Councilwoman Cherelle L. Parker and the City Council of Philadelphia. Following the hearing, Councilwoman Parker announced plans to introduce a resolution calling for the creation of a task force to address retirement security for private-sector workers in the city.
Workers across the country face a retirement crisis. However, workers in Philadelphia are faring worse than average.
- Philadelphia’s senior citizens are more likely than senior citizens nationally to rely on Social Security for more than 90% of their retirement income.
- Only 48 percent (less than half) of all Philadelphia workers ages 25-64 had access to an employersponsored retirement savings plan, compared with 53 percent of workers nationwide.
- Only 37 percent of Philadelphia’s workers ages 25-64 participated in an employer-sponsored retirement plan, compared with 45 percent nationwide.
- The median near-retirement household in the state’s metropolitan areas had enough financial assets to generate at most $550 a month in retirement income.
The Department of Labor’s monthly unemployment report released today shows an unemployment rate of 3.4% for workers over the age of 55. The unemployment rate has decreased from 3.6% last month to 3.4%, a decrease of 0.2 percentage points.
In addition to imposing a financial cost on older workers, unemployment can also impose a psychological cost. The unemployed are not unemployed by choice. And being deprived of choice creates a feeling of helplessness.
According to the Health and Retirement Study (HRS), a nationally representative study of older Americans, unemployed respondents were more likely than both workers and retirees their same age to report a general feeling of helplessness. Among 55 to 64-year-olds, 40% of the unemployed agreed with the statement, “I often feel helpless in dealing with the problems of life,” compared to 8% of retirees and 16% of older workers.
Proposals to cut Social Security benefits by raising the retirement age will condemn some older Americans to unemployment, and will force others to continue to work out of economic necessity. Policymakers should prioritize preserving and strengthening the institutions that give people the choice to retire, rather than chipping away at their foundations. This means expanding Social Security and implementing Guaranteed Retirement Accounts (GRAs) to provide workers with effective savings vehicles over their working lives and lifelong income in retirement.
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
- "America May Finally Be Ready for Mandatory Retirement Savings" in Time's Money Magazine