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 Guaranteed Retirement Accounts (GRA) to provide stable pensions to the 63 million workers who currently have none.
On September 30, 2014, PBS Frontline won an Emmy Award for their documentary 'The Retirement Gamble,' that aired on April 23, 2014. The piece investigates the financialization of retirement savings via 401(k)-type accounts and the resulting erosion of an individual's ability to retire.
SCEPA Director Teresa Ghilarducci and Demos Senior Policy Analyst Robert Hiltonsmith, a New School alumni, were interviewed on their work documenting the structural failure of the 401(k) and its corresponding high fees. Ghilarducci states, "The 401(k) is one of the only products that Americans buy that they don't know the price of it. It's also one of the products that Americans buy that they don't even know it's quality."
SCEPA's report 'How 401(k) Plans Make Recessions Worse' describes how the structural flaws of 401(k)-type retirement plans exacerbate recessions in comparison to annuity-backed retirement accounts. The latter, including definied benefit plans and Social Security, serve as automatic stabilizers because they stabilize the economy during both recessions and expansions.
This article appeared on Huffington Post's Money blog on September 30, 2014, and as a letter to the editor under the Wall Street Journal's headline, "There Really is a Huge Retirement Crisis Developing."
The Retirement Crisis is Real
The retirement crisis is anything but imaginary. In a recent working paper, we find that only 44% of workers in the United States have access to a retirement plan at work. Except for workers with defined benefit plans, most middle class U.S. workers will not have adequate retirement income - 55% of near-retirees will only have Social Security income at age 65.
Yet, in a Wall Street Journal opinion piece titled, "The Imaginary Retirement Income Crisis," Andrew Biggs and Sylvester Schieber make a number of startling and misleading claims.
Not Enough Retirement Income
First, they claim that the average U.S. retiree has an income equal to 92% of the average American income. Yet, the latest data from the American Community Survey show that the median income of U.S. retirees1 is less than $16,000 compared to the median American worker's income of $31,000 – hardly 92%.2 Retired workers received an average of $1,294 per month in Social Security benefits as of December 2013. That adds up to a paltry $15,528 per year – far from a princely sum to live on when one's medical bills and the expenses of old age are racking up.
Social Security Supports a Stabile Economy
Second, Biggs and Schieber assert that if Social Security benefits are increased, the country will likely experience lower employment and saving rates. Our new study shows the exact opposite. Social Security benefits actually boost the economy during recessions as beneficiaries maintain spending power in a downturn.
Downward Mobility in Retirement
Third, Biggs and Schieber rightly use a reasonable measure of adequacy - retirees' ability to maintain living standards, which compares retirement income to work earnings. They refer to a Social Security Administration's Office of Retirement and Disability Policy (ORDP) report to note that in 2012 the income of the median 67-year-old exceeded his career average earnings. But it would be a mistake to make much of this statement. The median 67-year-old in the ORDP report is taken from a pool of individuals who continue to work and thus have higher earnings and higher years of education than the typical 67-year-old. Recent work by Gary Burtless shows that 67-year-old men with professional degrees are three times more likely to be working than men with a high school education or less. This ORDP pool from which the median is drawn also includes individuals who are claiming Social Security benefits. This helps explain why their incomes appear higher than their career averages.
Less Retirement Income for Gen-Xers
Fourth, Biggs and Schieber claim that the typical Gen-X (born between 1966 and 1975) household will have higher replacement rates than Depression-era birth cohorts. This claim is misleading because it uses an unorthodox measure of replacement rates. The ORDP report actually shows that the more common measure, wage-adjusted replacement rates, has deteriorated over time. Depression and WWII-era birth cohorts have replacement rates of 95% and 98%, while future retirees (born between 1966 and 1975) will have projected replacement rates of 84%.
It is very interesting that Biggs and Schieber decide to use the cited ORDP report to claim that the retirement crisis is imaginary. One of the major findings of this report is that gains in retirement income are largely going to higher socioeconomic groups (whites, the college educated, high earners, and workers with strong labor force attachments). In the age of inequality, the retirement crisis is real.
People need more savings for retirement. Mandatory, protected, and regulated individual accounts in addition to a robust Social Security system will ensure that all Americans have an adequate retirement income and can choose to work or not in their old age.
1U.S. retirees are defined as Americans who are older than 60, are out of the labor force, and had no income from earnings.
2The median worker is defined from a sample of Americans 60 years of age or younger, who were in the labor force.
Do government programs help the economy?
Looking at data from 1971 through 2012, a SCEPA Working Paper, 'How 401(k) Plans Make Recessions Worse' (soon to be published in a research volume by the Labor and Employment Relations Association), found that Social Security, unemployment insurance, disability insurance, Medicare and federal taxes are indeed good for the economy. Specifically, these programs have a stabilizing effect on the economy. By increasing consumer spending in recessions and reducing it in times of expansion, they dampen the wild swings of the business cycle.
On the other hand, 401(k) plans are destabilizing to the economy. They reduce consumer spending in recessions as savers lose 401(k) wealth in the stock market, and they increase spending in expansions when inflated 401(k) accounts make people feel wealthier.
Consumer spending is important because it translates into jobs. During a recession when overall spending is down, the unemployment rate rises. But Social Security, disability insurance, Medicare, income taxes, and unemployment insurance keep the unemployment rate from rising even higher.
Christina Romer and David Romer also found that Social Security and other government transfer payments have a positive impact on consumption in their paper, Transfer Payments and the Macroeconomy: The Effects of Social Security Benefit Changes, 1952-1991. SCEPA's research takes this one step further by documenting how 401(k) plans reduce the efficacy of these automatic stabilizers and result in higher unemployment rates during recessions.
The Great Recession hit working Americans and those hoping to retire harder if their retirement savings were based in 401(k)s rather than defined benefit pensions or Social Security. A recent SCEPA working paper, 'How 401(k) Plans Make Recessions Worse' (soon to be published in a research volume of the Labor and Employment Relations Association), concludes that 401(k)-type retirement plans exacerbate recessions, whereas annuity-backed retirement accounts such as defined benefit plans and Social Security stabilize the economy during both recessions and expansions - a function known as automatic stabilizers.
Social Security is a pension institution in which workers accumulate credits over their working lifetime, and those credits guarantee a level of benefits in their retirement years, because these benefits do not dependent on market gains or losses, consumption does not fluctuate. By design Social Security automatically stabilizes the economy because consumption is able to remain constant through recessionary and expansionary times.
Alternatively, 401(k)-type plans are private market-based retirement accounts, therefore their success or failure is tied directly to the booms and busts of the market. The value of these accounts increases during economic expansions and decreases during recessions, which directly and immediately impacts consumption causing consumers to reduce spending in recessions, therefore worsening the recession.
In 2008, over half of U.S. households owned 401(k)-type retirement accounts and these families and individual saw the value of those accounts drop by an average of 14%. In addition to perpetuating recessions, this study found that 401(k)-type plans reduced the automatic stabilization impact of government programs by 11 to 15%.
On Tuesday, June 17th, the New York City Central Labor Council, AFL-CIO, joined SCEPA to host 'Confronting New York City's Retirement Crisis,' a conference with New York City Comptroller Scott Stringer and New York State Comptroller Thomas DiNapoli. At the event, Scott Stringer committed to address the retirement crisis head-on with the creation of an advisory panel. The goal of the panel is to examine reform measures that will provide retirement security for all New Yorkers.
SCEPA's newly published 'Retirement Readiness in New York City: Trends in Plan Sponsorship, Participation and Income Security,' conducted at the request of New York City Comptroller Scott Stringer, reveals a 17% drop (from 49% to 41%) between 2001 and 2011 in the percentage of New York City workers participating in a retirement plan at work. Only 12% of New Yorkers had a defined benefit (DB) plan. A DB plan guarantees workers a pension, whereas defined contribution (DC) plans such as 401(k)s and IRAs, do not. As a result, those with DB plans maintained an average income replacement rate of 90% versus those with a DC plan who had an average of replacement rate of 48%.
The consequences of declining employer-sponsored plans and low replacement rates threaten workers' standard of living in retirement and raise the spector of increased poverty levels among the city's older residents. This research makes clear that the current system of retirement savings only protects the dwindline number of workers with traditional DB plans from a significant reduction in their living standards at retirement.
Currently, 59% of New Yorkers do have access to a retirement plan. Of those who do have a plan—either a defined contribution or a defined benefit plan—the majority have less than $30,000 for their retirement.
With an average annual benefit of only $15,528, Social Security is quickly becoming an inadequate income replacement at retirement. Without a supplemental income, many individuals will spend the later years of their lives in poverty, adding expenses to constrained working families, and requiring support from government at all levels.
The New York City Central Labor Council, AFL-CIO joined SCEPA on Tuesday, June 17th, for a conference on retirement security with New York City Comptroller, Scott Stringer and New York State Comptroller, Thomas DiNapoli. The conference addressed both problems and solutions to New York City’s retirement security crisis. At the conference, Scott Stringer announced the creation of an advisory panel to examine ways to provide retirement security for all New Yorkers.
Retirement Readiness in New York City: Trends in Plan Sponsorship, Participation and Income Security
Account Balances by Income: Even the Highest Earners Don't Have Enough
The Future of Elderly Poverty in America
What Would it Cost to Eliminate Extreme Elderly Poverty in New York City?
Pension Replacement and Downward Mobility
Confronting NYC's Retirement Crisis
John Adler's Presentation
James Parrott Presentation
Below is a recent interview Teresa Ghilarducci, Director of SCEPA, did with Governing Magazine Editor Penelope Lemov on local and national efforts to mitigate the retirement crisis in "States Search for Retirement Security Beyond Obama's myRA."
PL: How would you define the stakes states and localities have in public retirement security?
TG: Seventy-five percent of Americans nearing retirement age in 2010 had less than $30,000 in their retirement accounts. The specter of downward mobility in retirement is a looming reality for both middle- and higher-income workers. Almost half of middle-class workers will be poor or near poor in retirement, living on a food budget of about $5 a day. It isn't just a matter of people being able to keep up their standard of living. We're talking about people who will be old and in a chronic state of deprivation -- with all the attendant dislocation that causes. Cities will suffer a decline in the stability of neighborhoods. Neighborhoods are rich when they have grandmothers who are stable and able to function.
PL: At least five states have passed -- and another handful are debating -- bills to set up task forces to develop a plan. Is this just kicking the can down the road?
TG: What these task forces are going to do is present their legislatures with a full blown, detailed plan. A task force can get all the details right so legislators have their questions answered. It's a better way to write a bill like this.
The New York Times' Kate Taylor raises the issue of New York City's retirement insecurity in her article, As the City's Elderly Population Swells, Concerns Rise Over Lack of Access to Retirement Plans. She documents the decrease in workers' access to retirement plans at work found in SCEPA's research, Are New Yorkers Ready for Retirement?
"According to Ms. Ghilarducci's research, 59 percent of workers in the city do not have either a pension or a 401(k), up from 51 percent a decade ago. Many small businesses do not have the human resources capacity to manage a 401(k). Moreover, Ms. Ghilarducci says, 401(k)'s are less than ideal for workers themselves, since they charge higher fees and have lower rates of return than pension funds, in part because people can withdraw their money at any time."
The solution: "creating a pooled pension fund for private sector workers that the city itself could manage."
On May 21, 2014, SCEPA Director Teresa Ghilarducci testified before the U.S. Senate on Finance Subcommittee on Social Security, Pensions, and Family Policy at a hearing titled, "Strengthening Social Security to Meet the Needs of Tomorrow's Retirees." As a retirement expert, Ghilarducci provided an oral and written statement on how the retirement crisis exacerbates inequality.
The hearing was broadcast online. Below is an excerpt from Ghilarducci's comments.
"The current voluntary, self-directed, liquid, commercial retirement account system relies on generous tax subsidies and is stacked against workers for five reasons.
- Nearly half of workers have no plan at work because the system is voluntary. Only 53% of the workforce have any kind of retirement plan at work, which is down from 60% 10 years ago
- Middle class workers are more likely to take out loans or withdraw money before retirement from their 401(k) or IRA's than the highest income workers. Many workers use their retirement accounts as savings accounts. A 30-year-old who cashes out a $16,000 account will be losing an estimated $470 a month at age 67.
- Tax deductions create inequality in unintended and perverse ways. Two people can save exactly the same amount in their 401(k) plans and IRAs, but the higher earner will get a larger tax deduction and therefore a higher rate of return on their savings. Over just a few years this differential multiplies exponentially so the system unintentionally penalizes middle and lower income savers.
- Lower income workers have more conservative portfolios, which is rational, but those portfolios earn less overtime.
- Middle and lower income savers pay higher fees; they don't enjoy scale economies in fund management."