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.

 

In "Leisure Inequality: What the Rich-Poor Longevity Gap Will Do to Retirement," SCEPA Director Teresa Ghilarducci looks at the inequality in end-of-life experiences between the rich and the poor. She begins with a startling fact from the 20th century: between 1930-1960, while the life expectancy of rich men increased by eight years, the life expectancy of poor men was unchanged. Though Social Security and Medicare have improved the end-of-life experiences of poor and middle-class Americans, a chasm remains between the golden year experiences of the rich and poor.

One difference is how the children of wealthier Americans are more prepared to guide their parents through later-life. She tells of a friend of hers who recently wrote her about the difficulties of navigating the medical, financial, and legal challenges arising from her father's end-of-life care. She says they have taken her "nearly to the limits of my intellectual capacity" - and she is a health-care policy expert with a PhD!

Her friend's point summarizes decades of research. Gaps in class, education, and income translate into gaps in end-of-life care. Wealthy, educated Americans tend to have educated children who can help them make the best end-of-life decisions and are likely to be with them at the end of their lives. This has important implications for retirement policy. Cutting benefits by raising the retirement age will force lower-income Americans, who haven't experienced a large increase in longevity, to work longer and miss out on their golden years.

The Atlantic

In "Raising the Retirement Age: A Sneaky Way to Reduce Social Security Benefits" SCEPA Director Teresa Ghilarducci writes about how raising the eligibility age for Social Security is bad politics and bad policy. Employers wanting to hire from a larger labor pool and Republican hard-liners who reflexively support decreases in government spending have long-supported cutting Social Security. Recently, it's been trumpeted as a prudent centrist policy. It's not.

First the policy. Make no mistake, raising the retirement age is a cut in benefits. As it stands, the full retirement age is 70. If you start collecting benefits before 70, you receive a lower monthly payment for life. Raising the age at which Americans can start collecting benefits will likely push the benefit-maximizing age up to an unattainable level. In general, we should not expect Americans to work into their seventies.

Second the politics. Americans overwhelmingly don't support benefit cuts. The Pew Research Center found that Americans are opposed to Social Security cuts by a margin of two-to-one. This preference persists among millennials, despite endless misinformation that Social Security will be gone by the time this cohort retires. Republicans have tried to re-brand a cut to Social Security as raising the retirement age. This is misleading at best. Raising the eligibility age for Social Security is a reduction in benefits.

We should be talking about strengthening and expanding Social Security, not weakening it.

Blackstone President Tony James today announced his support for a Retirement Savings Plan at the Center for American Progress (CAP) event, "Creating Long-Term Value." The Retirement Savings Plan embraces the need for Guaranteed Retirement Accounts (GRAs) proposed by ReLab Director Teresa Ghilarducci. James' statement (in full below) was covered by Pensions and Investments and CNBC.

"The theme of today's conference is short termism. While America can deal with short term crises pretty well sometimes, when it comes to intractable long-term problems, we are hopelessly short-sighted.

So I want to talk today about a huge, looming problem that almost no one is focused on. There may be no bigger challenge today than fixing our broken retirement system. The problem isn't with current retirees or people my age who are nearing retirement. It is with people in their 20s and 30s. Most of these young people no longer have access to pension plans and have to depend exclusively on personal savings and anemic 401ks. All at a time when they are struggling with years of stagnant incomes in real terms and have student loans to pay off. As a result, they are increasingly dependent solely on social security. But Social Security will not provide enough income for people to maintain their standard of living in retirement. And it is not just an issue for low and middle income workers. Inadequate savings and retirement worries are shared by many who are thought of as having high incomes but stop short of being rich. In other words, it cuts across society. If we don't do something about it, when an entire generation – maybe two generations - retires at 65 and doesn't have enough to live on, we are going to say "Oh my God, what happened?"

The good news is, we can solve this problem. And we can do so relatively painlessly, with manageable burdens on everyone. But we have to start now. If we let this problem linger, it will tear a hole in our social fabric. 30% of Americans will not have enough savings to maintain their standard of living and 15-20 million additional retirees will be poor or near poor - poverty rates not seen since the Great Depression. And our aging demographics mean the burden will fall crushingly on a shrinking group of young workers.

I believe we need to take our current Social Security system as a given and build on that. But Social Security alone is not enough. Most experts advise targeting a 70-80% replacement rate in retirement to have adequate income. Social Security provides 40 points of that, so retirees need to accumulate another 35% from other savings. The problem is most Americans cannot, have not and will not save that much. The average balance of retirement savings in America today of people between 40 and 55 is only $14,500. For people 55-65, the median balance is only about $80,000. For a person in their mid-60s, that would provide income of only about $2000 per year for the rest of their life. They really need 6 or 7 times this amount of income and underlying savings!

Roughly 15% of workers today, mostly government employees, are fortunate to have a defined benefit pension plan. Even with the chronic underfunding of state pension plans, beneficiaries are generally in good shape. Of the remaining people working in the private sector, about 60% have access to a corporate sponsored 401k plan. 

But up to one-half of employees don't take full advantage of these plans. In addition, they contribute too little, withdraw funds too early, and earn sub-par investment returns on their savings. The cumulative effect of these problems is that 401k plans can't work as a foundation for retirement. Still, 401k participants are better positioned than the other 40% of private sector workers that have no retirement plan at all. In short, our current system is a hodge podge of inconsistent programs that are simply not capable of providing basic retirement security for the American people.

I'd like to offer a fundamentally different approach, which I have had the pleasure of working on with labor economist Teresa Ghilarducci. I call it the Retirement Savings Plan. Under the Retirement Savings Plan, everyone who works without a pension plan, no matter how little or how much they make, from Uber drivers to CEOs, would have their own Guaranteed Retirement Account. We would simplify our current patchwork system by rolling everything else into it, 401k, IRAs, Keogh plans, etc. How can we make this happen? There is really no alternative. It has to be mandated. I know that can be a politically loaded word these days, but I assure you that nothing short of a mandate will provide future generations of Americans enough income for a secure retirement.

The Retirement Savings Plan will. Social Security represents a savings of about 12.5% of an average worker's income. To get retirement safety we need them to save another 3% each year - if it is invested correctly and earns a return for the retiree. (Unlike Social Security, which of course is not actually funded.) This is a much smaller gap to fill than most people assume. To make this 3% savings contribution affordable, I propose it be split evenly between workers and their employers. 1.5% each. Right now, the government spends $100 billion per year by allowing deductions of retirement contributions. This hasn't helped the retirement crisis at all. Because it is a deduction against income, it only benefits the most affluent Americans who already have enough retirement savings, and it is unavailable to the poorest who desperately need the help. Instead, I want to take that same money and give every individual worker, rich or poor, a government tax credit equal to their retirement contribution, up to a maximum of $600 per worker per year. The net effect on the government deficit is zero. $600 will fully defray the cost for people earning up to $40k per year. For a medium income family earning $45k, the annual cost of the plan would be only $75 per year. And their money isn't going anywhere. It is safely in their own retirement account and they will benefit tremendously in the long run.

For employers, the 1.5% of wages will be offset, to a greater or lesser degree, by their no longer having to contribute to and bear the administrative costs of 401k or other retirement plans. Their obligation to contribute (and the employee's) would be capped (as in Social Security) at 1.5% of only the first 250k of compensation for high earning employees.
With corporate profits at an all-time high in relation to GDP, this should be a manageable burden, and it will forestall the need for higher corporate taxes down the road.

Now that we have established and funded the Guaranteed Retirement Accounts, we come to the next critical component of the Retirement Savings Plan. The capital in people's Guaranteed Retirement Accounts must work harder. It has to be invested well in pooled plans run by professional investment managers and earn a solid return, just like pension plans do. The structure of today's 401k plans makes this impossible. They are required by law to be invested in ways that force excess liquidity, with short-term investment horizons and lots of volatility. Beneficiaries are supposed to choose from a narrow selection of managers and don't have the expertise to do so. And the administrative costs are high.
Where defined benefit plans expect to earn 7-8% annual returns, 401k accounts typically earn only 3-4%. For a 25 year old who puts aside $1000 per year, that's the difference between $75,000 and $200,000 when she retires at age 65! Managing the Guaranteed Retirement Accounts in a pooled fashion is good for a few reasons. First, when you pool your investments, you can leverage that scale to pay lower fees. You'll also have access to highest quality, private sector asset managers who would compete with each other to get you the best return. These investment strategists would be able to adopt long-term investment horizons that are actually appropriate for retirement funding. They could invest in less liquid, higher return asset classes, like Alternatives – real estate, managed futures, commodities, and the like. The beauty of investing more effectively is that the higher return funds a big part of the retirement gap and doesn't cost anyone anything! To the contrary, it encourages long-term capital formation and longer investment horizons which benefits the whole economy by fueling growth and getting away from short-termism in the markets.

In addition, I propose that the Federal government guarantee a minimum annual return of 2% for all retirees on their Guaranteed Retirement Accounts. This would eliminate the risk of market volatility for people unlucky enough to retire at the wrong time and give people confidence in contributing to their retirement accounts. Better yet, it can be essentially costless for the government because the accounts are extremely likely to earn comfortably more than the 2% guarantee over the long term.

The third leg to the stool is helping people make the right choices with the accumulated GRA balance when they retire and, perhaps more important, helping them avoid the tendency to do the wrong thing. People are living longer and retiring earlier. They have a lot more years in retirement. Since 1950 the average years in retirement has increased by five years, from 14 to 19 years. This means that retirement savings have to last for longer than ever. Most people aren't able to plan for that because they don't have the expertise to invest and annuitize it properly. And since no one knows how long they will live, we're essentially rolling the dice and hoping our retirement savings last long enough. But with GRAs, there's a clear way to fix that, too. When someone retires, their accumulated savings would be automatically annuitized as part of the overall pool and they would get a guaranteed amount every year for the rest of their life. A pooled system makes this possible, because you don't just pool your savings – you pool your risk of running out. In this case, we're essentially insuring against outliving our retirement savings. Few of us will live to 110. But those of us who do should be able to count on a continuous standard of living for their whole lives – instead of worrying, right up to the end, that we might not have enough. Making these annuity payments and tracking the GRA balances and inflows would be done through the existing Social Security infrastructure. No new government agencies or apparatus are required. It should be a relatively simple add-on to what is being done already. And with more assets under administration, costs per person should actually decrease.

Finally, I think we should help give older Americans the choice and the incentive to work longer, if they so desire. Accumulating more savings by working longer and shortening the retirement period has powerful effects on financial security for retirees. And for many, working longer has health and emotional benefits. We could facilitate this by making Medicare the primary health coverage for anyone over 65, even if they are still working. Medicare would pay this anyway if they retired, so incremental cost to the government should not be significant. That way, employers who pay health insurance will get a large break on their insurance cost for every employee past Medicare age. Instead of paying about $25,000 for an older worker's health insurance costs, the employer would pay something around $3000 or $4000 for a Medicare supplement. That's a significant incentive for them to keep older employees on the payroll longer. As for the employee, I would give them an incentive by doubling the credit for Social Security and GRA contributions they make in any year worked over the age of 65.

We know a system like this can work – because we've seen it work all over the world. Broadly similar plans have been adopted in countries like Australia and Chile – and every time they've been implemented, they've worked as promised. In fact, they haven't just provided retirement security, they've helped drive overall economic growth and significant capital formation. These steps will allow millions of individuals to have a stronger, more stable retirement. And that's not just good for retirees. It's good for their families, our communities, and our nation's economy as a whole. Achieving retirement security is going to require us to look beyond the next election cycle – beyond the next fiscal quarter – and toward the stronger nation that we can build together."

The Department of Labor today announced the September unemployment rate for workers between the ages of 55-64 was 3.6%. A slight decrease (0.4%) from last month's rate of 4.0%, this represents 945,000 older workers struggling in the labor market.

But economists know this number is too low and underestimates how soft the labor market is, for three reasons.

The first two apply to all workers. By counting only those who have searched for a job within the past four weeks, it leaves out people working part-time because they can't find a full-time job and "discouraged" workers who haven't been able to find a job for so long they have stopped looking. These are known as the hidden unemployed.

Real UnemploymentIn September, for workers 55-64, adding the 196,000 discouraged and 167,000 involuntarily part-time workers to those officially unemployed increases the total unemployed to 1,308,000, an increase of 28%. Going back to 2014, this real unemployment rate for workers 55-64 would be up to 30% higher.

For older workers, this adjusted number is still too low. If they can't find a job or can only find a low-wage or part-time job, older workers have the option to leave the ranks of the officially unemployed, or even the discouraged, and retire early. While this sounds like a good option, these folks pay a steep price for choosing to leave an unfriendly labor market. Known as being "pushed" into retirement, they are in danger of facing downward mobility throughout their old age by accessing Social Security and their retirement savings earlier than planned.

The labor market for older workers is far more vulnerable in real life than in statistics. This reality proves that proposals to raise the retirement age would only exacerbate this labor mismatch - further increasing the supply of older workers without a corresponding increase in the supply of employment opportunities. It also highlights the need to create savings vehicles for workers, such as Guaranteed Retirement Accounts, that would provide a lifetime stream of income to retirees to help them maintain their living standards should they chose to leave the labor market.

Bloomberg View logoBloomberg View's Christopher Flavelle reports in "A Great (and Impossible) Plan to Fix Retirement" that Americans are woefully unprepared for retirement and that SCEPA Director Teresa Ghilarducci's proposed policy fix is, despite political hurdles, the only potential solution.

The problem is simple: almost half of Americans aged 55-64 have no retirement savings whatsoever, and those who have some savings do not have enough to sustain them in retirement. Ghilarducci's solution: supplement Social Security with Guaranteed Retirement Accounts (GRAs), into which workers and their employers deposit 5% of their salary annually.

According to Flavelle, "The idea deserves attention, and not just because Ghilarducci's role with the campaign suggests Clinton could push something along the same lines if she becomes president. Just as important, what she's advocating illustrates the depressing difficulty of fixing retirement policy: For all the obstacles her plan presents, it's hard to think of anything better."

The U.S. Department of Labor today announced a slight increase for the unemployment rate for older workers (aged 55 and over) from 3.7% to 3.8% in August. While this number represents 1.3 million older Americans who cannot find a job, this national number hides the fact that some cities are less friendly to older workers than others.

In August, the national unemployment rate for all workers was 5.1%. In contrast, the local data (ASEC September 2014) shows four metropolitan areas have an unemployment rate of over 12% for older workers, including San Jose, California (13.7%), El Paso, Texas (13.6%), New Haven, Connecticut (13.1%), and Austin, Texas (12.2%).
Worst Cities for Older Workers to Find Jobs

These cities' high unemployment rates for older workers are not necessarily related to the unemployment rate for those under 54. While San Jose and El Paso have high unemployment rates for younger workers (8.4% and 7.3%), Austin has one of the country's lowest unemployment rates (3.6%) for younger workers.

Industry clusters could be to blame. San Jose and Austin are home to hot new tech corridors and New Haven's economy is closely tied to Yale University and its status as a college town. Both would favor employing the young over the old.

There are also regional pockets where older workers struggle to find a job, such as Ohio's Rust Belt cities. Cleveland has an unemployment rate of 9.6% for 55 and over versus 5.2% for workers 54 and under. Cincinnati's older unemployment rate is 7.7% versus 6.6% for younger workers.

Economists have long understood the domino effects of lower wages and decreased bargaining power resulting from high unemployment. Add to this a downward trend in access to retirement savings plans at work and older workers nearing retirement age are increasingly at the mercy of a labor market that cannot meet their needs. Ironically, the less work they can find and the less wages they can save, the longer older workers will need to work.

Only a national solution will ensure that all workers, regardless of where they live, will be able to retire rather than resign themselves to unemployment or low-wage work. Guaranteed Retirement Accounts (GRAs) would ensure a path to retirement by providing a safe, effective vehicle for all workers to save over their working lives. Tweet: GRAs ensure a path to retirement by providing a safe, effective vehicle for all workers to save @tghilarducci http://ctt.ec/m7wl3+

Presidential candidate Chris Christie used the GOP presidential debate to repeat his call to cut Social Security benefits by increasing the retirement age. A benefit cut would require individuals nearing retirement to save more - 28% of whom do not have a retirement savings account. Older workers without a bachelor's degree, about 72% of workers aged 62 and older, are especially disadvantaged in the labor market because their wages have been stuck for the last 30 years. If Social Security benefits are cut, older workers would have less bargaining power in the labor market.

Older Worker Hourly Wage

The Department of Labor announced today that the unemployment rate for older workers (aged 55 and up) was 3.7% in July, which remains the same as last month and represents 1.3 million older people who wanted to work but couldn't find a job.

Aside from struggling to find a job, the search for a quality job with good pay is harder for older workers. Workers 62 and over with high school degrees earned $24.16 per hour on average in 2012, just 3.8% more than they earned in real terms in 1982.1 The growing prevalence of low-paying jobs, particularly in the retail sector which employs about 15% of older workers, is a primary reason for wage stagnation and low retirement plan coverage rates in the last 30 years. Fewer than 40% of older workers without a college degree participate in a pension or 401(k)-type plan at work.

In contrast, wages for workers with at least a bachelors' degree (28% of workers aged 62 and older) increased by almost 33% between 1982 and 2012, to $37.55 per hour.2 And the older workers with pay increases have substantially more pension coverage – 47%.

Raising the retirement age is not a job creation policy, but a cut in Social Security benefits, a cut that increases retirement insecurity for everyone. Instead of raising the retirement age, presidential hopefuls should consider expanding access to pensions and savings through vehicles such as Guaranteed Retirement Accounts (GRAs). A secure pension, like the GRA, gives older job seekers a cushion and added bargaining power. 

Current Population Survey, March Supplement 2013. Years provided are end points of three-year intervals (1982 refers to data from 1981-1984, and 2012 refers to data from 2010-2013).
2 Ibid

Chris Christie and his proposal to raise the retirement age are officially part of the 2016 presidential campaign. While policies like this are debated on the campaign trail, the labor market for older workers needs to be considered.

Today's job report shows the unemployment rate for black older workers is nearly double that of Whites (3.3% for Whites and 5.8% for Blacks). This shows the perseverance of racial disparities in the labor market for older workers despite lower overall unemployment levels over the last year.

Not only is finding work more difficult for non-White older workers, so is saving for retirement if and when employed. For people of color nearing retirement who are in the bottom 50% of the income distribution – those families earning less than $60,000 a year – only 47% of Blacks have retirement coverage at work, 30% of Hispanics/Latinos and 37% for other racial and ethnic groups, including Asians.1 
Retirement Coverage by Race

SCEPA has documented how this one-two punch of joblessness coupled with age decreases older workers' bargaining power, further diminishing their ability to save for retirement even if they do find work.

For workers over 55, the labor market – and therefore raising the retirement age - is not a solution. Instead, older workers need access to a strengthened Social Security program and supplemental policy innovations like Guaranteed Retirement Accounts (GRAs).

1For the middle 40% ($60,000 - $187,000), non-coverage by race are: 9% for Whites, 10% for Blacks, 22% for Hispanics, and 18% for other. For the top 10%: 3% for Whites, 0% for Blacks, 45% for Hispanics, and 24% for other.

This week another GOP presidential hopeful, Jeb Bush, announced his support for raising the retirement age, a policy that would force older workers with inadequate retirement savings to depend on the labor market for needed income and savings. Yet, today's federal jobs report announced a May unemployment rate of 3.7% for older workers over 55 and nearing retirement. This is a decrease of 0.3 percentage points since last month, but it still means that 1.5 million older workers want to work but can't find a job.

This situation is particularly dire for older women. Given women's longer life expectancy, they will need to sock away retirement savings for five more years than men. According to the Census Bureau's Survey of Income Program and Participation (SIPP), over half of older women ages 50-64 have nothing saved for retirement. For women of the same ages who do have retirement savings, their median retirement account balance is $40,000. 
Retirement Account Balances by Gender

As we've seen, the labor market is no panacea for the retirement crisis. Older women have an unemployment rate of 3.6% in May, which means 715,000 women over 55 cannot find a job. Meanwhile, more older women are in the labor market. Since the 1980's, older women workers have increased by 171%, from 15 million to 40.5 million. The gender wage gap is also persistent, following women from college graduation through the pre-retirement years. In 2013, older women made between $0.73 and $0.80 for every dollar made by men of their own age.
Non-Zero Retirement Account Balances

For an older woman facing her last years to save, trying to work and save in this labor market means it will take her longer and she will get less. 

Raising the retirement age is not a solution, for women or for men. Rather, we need to reform the failing pension institutions that got us here by creating Guaranteed Retirement Accounts (GRAs) on top of Social Security to provide guaranteed income to seniors for life. By allowing people a viable path to saving, we can allow all workers the choice to continue working or to leave the labor market when it doesn't treat them well. 

The April employment report issued by the Department of Labor today reports an increase in the unemployment rate for workers over the age of 55. An estimated 21,000 more older workers joined the ranks of the unemployed, bringing the unemployment rate of older workers up to 4.0% from 3.9% in March.

This stands in contrast to the employment situation for workers 16 years and over. Both the unemployment rate (5.4%) and the number of unemployed persons (8.5 million) edged down in April.

While today's report shows a rise in the share of workers age 55+ with a job - the employment-to-population ratio increased from 38.3% to 38.5%, as an additional 266,000 older workers were counted as employed - this is explained by the fact that 286,000 more older workers entered the labor force in April hoping to find a job. This increased the labor force participation rate for this group from 39.9% to 40.1%. Unfortunately, many of these workers ended up among the 1.37 million older jobseekers who could not find a job.

Older workers continue to make up the second-largest group among the long-term unemployed, those actively seeing employment for 27 weeks or more. In fact, the share of older workers long-term unemployed rose in April - more than 39% of unemployed older workers have been searching for employment for 6 months. As of last month, job seekers between the ages of 55 to 64 spent an average of 46.4 weeks actively looking for work and those 65 years and older spent 47.1 weeks.

Presidential hopefuls calling for an increase in the retirement age should heed the signs of a job market struggling to accommodate older workers. Calling for an increase in the retirement age as a solution to a lack of retirement savings overlooks nearly half a century of economic literature on earnings. Economists have long known that age/earnings profiles have a parabolic shape, demonstrating a visible decline after the ages 55-59 as older workers are overlooked for promotions and on-the-job training.

As can be seen in Figure 1, workers experience a decline in earnings after ages 55-59 regardless of education levels.

unemployment image 5.8.15

Today's job numbers and what we know about the age/earnings profiles of full-time workers in the U.S. reminds us that work in old age is not the solution to the retirement crisis. To restore the position of older workers in today's job market, we must create new retirement savings vehicles, such as GRAs. Safe pensions and adequate retirement assets allow older workers to explore new jobs that help them transition into retirement, experiment with self-employment, and even quit jobs that don't pay enough to live with dignity and save for retirement.