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.


social security cardDo 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%.

As a result, California, Connecticut, Oregon, Maryland and Minnesota have passed bills to implement or study state backed retirement accounts.
Retirement Legislation Success

Scott StringerOn 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 to examine reform measures to 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.  

Conference Materials:
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 

Governing logBelow 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.

New York TimesThe 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." 

Teresa GhilarducciOn 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.

  1. 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
  2. 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. 
  3. 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. 
  4. Lower income workers have more conservative portfolios, which is rational, but those portfolios earn less overtime. 
  5. Middle and lower income savers pay higher fees; they don't enjoy scale economies in fund management."

retirement readiness in CT​On May 7, 2014, the Connecticut General Assembly announced it's approval of a plan leading to the creation of a state-level public IRA plan open to all private sector

They estimate the feasibility study and subsequent plan for a new retirement policy will be ready to implement in 2016. This success is due to the hard work of the Campaign for Retirement Security Connecticut. SCEPA is a proud partner in this effort, having testified on numerous occasions in the state capitol on our research report documenting the state's retirement readiness. The SCEPA report, "Are Connecticut Workers Ready for Retirement?' revealed that in 2010, 50% of Connecticut workers were not currently participating in an employer-sponsored retirement savings plan.

The Bipartisan Policy Center (BPC) today launched its Personal Savings Initiative (PSI). The initiative will examine whether savings rates and available savings vehicles are meeting the retirement goals of Americans and the nation's investment needs.

Co-chaired by former Senate Budget Committee Chairman Kent Conrad, a Democrat, and Jim Lockhart, former Deputy Commissioner of the Social Security Administration under President George W. Bush, the initiative will issue recommendations from a bipartisan commission, which includes SCEPA Director Teresa Ghilarducci

According to Forbes' coverage of the launch announcement, "Lockhart cited a recent Gallup poll that found that not having enough money for retirement is the top financial worry among middle-aged Americans. Then he recapped some sobering retirement statistics to show why the issue is so important and why Congress should take it up."

The initiative will address important financial security issues, including, but not limited to:

  • The impact of federal policies on private savings. 
  • The finances and operation of Social Security Disability Insurance and its interaction with private disability insurance. 
  • Interaction of Social Security with personal savings, especially those in tax-advantaged retirement savings vehicles.
  • The impact of long-term care needs on retirement security. 
  • The role of homeownership and student debt. 

During 2014, the PSI will hold roundtables and issue a series of white papers highlighting challenges related to retirement savings, defined contribution accounts, annuities, Social Security Disability Insurance, and the intersection among housing, higher-education debt, and savings. The commission will develop a set of policy recommendations and model their impact on personal savings, retirement readiness, the macro economy and the federal budget to be presented in a final report in early 2015.