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.


A recent article in Institutional Investor by Fran Hawthorne, "Claims that 401(k)s Beat Defined Benefit Plans Stirs Controversy," analyzes the findings of an Employee Benefit Research Institute (EBRI) Issue Brief that claims that defined contribution (DC) plans do better than defined denefit (DB) plans for all income levels.

Hawthorne's critique points out the weaknesses of the EBRI study. These include the fact that the study includes only data on voluntary 401(k) plans, which have higher contribution rates than the more prevalent automatic enrollment plans, that it uses unrealistically high rates of return on stocks, and that it ignores the fact that employers contribute 'free money' toward DB plans, but do not need to contribute to DC plans.

Hawthorne is thorough. However, she overlooks two significant problems. First, EBRI overstates the retirement plan coverage and participation rates for workers, especially following an unemployment spell; this is especially important in the aftermath of the Great Recession. Second, the study uses an implausibly high growth rate of average hourly earnings. EBRI's findings are partly a result of these skewed assumptions.

These concerns are spelled out in a Huffington Post Business blog, by SCEPA Director Teresa Ghilarducci and SCEPA Research Economist Joelle Saad-Lessler.

On July 9, 2013, The New York Times reported that U.S. Senator Orrin Hatch (R-UT) announced a new proposal to allow the life insurance industry to manage public pensions.

Senator Hatch's high hopes that insurance companies are better insurers of public pensions than municipalities and states is based on three false beliefs.

  1. States regulate insurance companies better than their pension funds.
  2. Insurance companies will insure pension funds cheaper and more efficiently than state and local pension funds.
  3. Insurance companies are more secure than state and local governments.

Each of these assumptions is wrong. 

Governments have promised their employees these benefits, so they can't simply "get the obligation off their books" by privatizing the management of the funds. Further, insurance companies are for-profit institutions – shareholders come first – so they charge more than state and local pension funds. Also, as we have seen, insurance companies can fail, requiring huge government bailouts. Examples abound, with AIG foremost in memory. At the state level, Executive Life took over California's pension funds in the 1970s and then went belly up. Pension beneficiaries lost everything.

Senator Hatch argues he is earnest. He wants to help state and local governments, not insurance companies. His theory is that pensions would come off municipal books and benefit from more reliable contributions.

But state and local governments could pay their pension obligations with a simple administrative and actuarial fix - by looking at their assets and liabilities and figuring how much they have to pay each month. This is called 'easy math,' a concept familiar to anyone with a mortgage. 

The problems faced by some state and local governments are not structural. Rather, a minority of governors and mayors took pension holidays. They liked paying nothing, diverting funds from their pension obligations to other budget lines. Rather than creating a new structure for public pensions, Senator Hatch, the ranking Republican on the Senate Finance Committee, could hold hearings highlighting this political failure and calling for these localities to pay what they owe.

Contrary to Senator Hatch's intention, this proposal would expose public pensions to more insecurity, not less - while boosting industry profits.

On June 9, 2013, NPR's story, "Golden Years Tainted as Retirement Savings Dwindle" reports on a new study on the next generation's ability to retire. "Gen. X looks to be the first generation that will not exceed the wealth of the group that came before them, and to potentially face downward mobility in retirement," says Erin Currier, director of economic mobility for the Pew Charitable Trusts.

SCEPA's Retirement Income Security project has documented the current retirement system's failure to support future retirees. NPR quotes SCEPA Director Teresa Ghilarducci: "There has to be new institutions that guarantee a modest but safe continual rate of return," she says. "And we can do that by adding to the Social Security system, a place where people can save their money and get a rate of return that's safe."

On May 16, 2013, SCEPA Director Teresa Ghilarducci joined a panel discussion hosted by the Economic Policy Institute (EPI) on Robert Kuttner's new book, Debtor’s Prison: The Politics of Austerity Versus Possibility. Below are her comments on the structural shift of risk: 

"The last 20 years has seen significant growth and change in the character of interactions between working and middle-class households and financial institutions and markets.1

With this financial development and households' increased exposure to financial risk, academic economists and others have embarked on a new inquiry, a body of study some call the "culture of finance." This is the name of an NYU seminar taught this summer featuring business faculty, anthropologists, and investment bank economists. Other scholars call this line of inquiry the "financialization of households," and even others embed it in literature as the "culture or varieties of capitalism" (see among others David Soskice and Peter Hall).2

Generally, the project seeks to understand how and why individuals and households are taking on more and more economic risk. These risks were once managed by government and employers, and sometimes social insurance arrangements or employee benefits, such as pension plans, unemployment insurance, and default risk by banks. These institutions have been replaced by financial institutions and products, and are key to the story of how corporations and banks have shifted the risk of financial loss to households.

On April 10, 2013, President Obama introduced his budget proposal for Fiscal Year 2014, which includes a controversial change in how the Social Security program determines benefits for seniors. In short, the President wants the program to determine cost of living adjustments based on a "chained" Consumer Price Index (CPI), rather than a traditional CPI.

The chained CPI assumes that people can easily substitute cheaper goods for households necessities. However, SCEPA Director and retirement expert Teresa Ghilarducci joins the PBS Newshour blog, "Does Obama Have it Right or Wrong on Social Security?," to argue that seniors face the opposite as they age, as more and more of their income is taken up by expensive healthcare services and other products that do not have cheaper substitutes. It is also increasingly difficult for the elderly, especially those with health problems or disabilities, to buy in bulk or go from store to store bargain shopping. This fact is well-documented and led the U.S. Department of Labor's Bureau of Labor Statistics (BLS) to develop a measure of inflation that reflects the true costs of aging: the Current Price Index for the Elderly (CPI-E).

On April 13, 2013, Ghilarducci was also interviewed on the Real News by Paul Jay, where she called the chained CPI proposal "heartless," stating that it ignores research on seniors' rising living expenses. She notes that the chained CPI would disproportionately affect elderly women who live longer than men and earn less over their lifetime.

The differences between the chained CPI and the traditional CPI are only .03% lower per year. However, these small cuts year after year would mean that the average retiree would lose $1,147 a year by age 85. The cumulative cuts to people on Social Security reach $28,000 by the time a retiree is 95 according to Social Security advocates. In contrast, linking Social Security benefits to CPI-E would raise benefits by 6% for a 95-year-old rather than cut them by tens of thousands of dollars.

On Tuesday, April 23, 2013, the PBS program Frontline aired "The Retirement Gamble," a news investigation into how the financialization of retirement savings via 401(k)-type accounts has eroded individuals' ability to retire. SCEPA Director Teresa Ghilarducci and Robert Hiltonsmith, a policy analyst at Demos, were interviewed on their work documenting the structural failure and high fees of the 401(k). 

Frontline's investigation reveals:

  • On any given street, one household may be paying 10 times as much to invest in a 401(k) as the household next door;
  • Over the course of a lifetime, a seemingly low annual fee of 2 percent can reduce what your balance would have been by more than 60 percent—potentially adding years to your working life;
  • Popular 401(k) providers often charge a plethora of hidden fees, burying them under opaque names like "Expense Ratio";
  • Many financial advisers are not required to provide advice that is in their clients' best interest; they are only obligated to give advice that is "suitable"; and
  • The best way to maximize your return might be to cut Wall Street out of the equation and invest in low-cost, unmanaged index funds.

On April 18, 2012, SCEPA released the study, "Are Connecticut Workers Ready for Retirement" which documents a downward trend in both employer sponsorship of retirement plans and employee participation rates in Connecticut from 1998 to 2012, making it increasingly difficult for workers to prepare for retirement.

In 2010, 50% of Connecticut's workers – 740,000 residents – were not participating in an employer-provided retirement plan. The lack of access to retirement plans is falling for workers in almost all demographic and economic categories, including those nearing retirement and young workers, as well as those with middle and high income levels.

CT Retirement Graph

SCEPA's research attributes the downward trend in workers' financial security in retirement to two factors:

  1. A Drop in Employer Sponsorship - From 2000 to 2010, the availability of employer-sponsored retirement plans in Connecticut declined by eight percentage points, from 66% to 59%. Four out of ten workers in the state do not have access to a retirement plan at work.

  2. A Lack of Participation - Of the 59% of workers who had access to a retirement plan at work,14% did not participate, either due to personal choice or structural rules that exclude part-time workers, those with under a year of service, or those under 25.

The report broke down the trend by income, age, race, and industry:

  • Sponsorship is decreasing fastest for lower-income workers, but those at all income levels are experiencing a drop in access. Lower-income workers saw a decrease in sponsorship rates from 46% to 31% over the ten year period. Workers in the middle 50% and top 50% income groups saw decreases of 8% and 7%, respectively.
  • Workers between 55 and 64 had the largest drop in sponsorship - 15% - among all age groups surveyed. However, young workers (25-44) were close behind, with a drop in sponsorship of 13%.
  • Asian workers lost the most ground with a 31% decline in sponsorship rates, almost triple the decline of 11% experienced by white workers and almost eight times the decline of 4% of black workers.
  • Small firms have the lowest sponsorship rates, and this trend is accelerating in Connecticut. Of all firms, small firms with 1 to 24 employees showed the biggest proportional drop in sponsorship from 2000 to 2010. Sponsorship rates dropped from 34% to 27% in 2000, a change of 20%.

Connecticut's State Senate Majority Leader Martin Looney (D-New Haven) introduced legislation, SB 54, to create a retirement savings plan for low-income workers in the private sector. Passed by the Joint Committee on Labor and Public Employees in March, it would create a retirement plan for all Connecticut workers without access to a retirement savings plan at work. The legislation is modeled after SCEPA's proposal for state Guaranteed Retirement Accounts (GRAs), a plan that was recently enacted in California.

The Urban Institute recently published a Retirement Security Data Brief that shows Americans are contributing more to defined contribution (DC) plans of the 401(k) variety than to defined benefit (DC) pension plans as less employers offer DB plans to their employees. This supports SCEPA research, which has documented the effect of this structural shift in the labor market (INCLUDE LINK) - a downward trend in individual’s ability to retire at their current standard of living due to high fees and market losses.

In their documentation of this trend, The Urban Institute’s analysis can be misleading. It shows that when adjusted for inflation, DC assets have increased by 5 percent from 2007 to 2012, suggesting that DC accounts have recovered from the recession and that these accounts can recover from market vulnerability. However, this calculation includes yearly workers’ contributions, which is the same problem faced by the Beardstown Ladies, the savvy group of older women who pooled their knowledge to invest their money. Their fantastical returns reported in their best selling book were audited when it was discovered they included their contributions as earnings.

When yearly contributions are subtracted, the increase is only 1 percent - hardly enough to be considered a recovery and certainly not enough to adequately prepare for retirement.


American workers retirement plans are not working as hard for them as they should. If these funds had been contributed to a Guaranteed Retirement Account,it would have created a more stable and significant source of retirement funding. The GRA shields workers' hard-earned savings from stock market crashes by pooling investments and guaranteeing a rate of return. GRA plans would provide 3 percent returns above inflation, plus the 5 percent of combined employee-employer annual contributions. This 8 percent increase over 4 years would mean an increase of 32 percent, including their own contributions. 

A new SCEPA report, "Are Maryland Workers Ready for Retirement?" is raising awareness about the retirement crisis in Maryland. On March 31, 2013, The Baltimore Sun ran the article, "40% of Older Households in Maryland Ill-Prepared for Retirement, Study Finds"  citing the report. SCEPA director Teresa Ghilarducci is quoted saying that the fact that Maryland is a relatively high-income state, "puts an exclamation mark on the end of the sentence that all of America has a coming retirement crisis." On April 5, 2013, Plan Sponsor ran "Nearly Half of Marylanders Not Plan Participants", citing the study.

The report finds that four out of ten households headed by someone aged 55-64 in Maryland will receive the majority of their retirement income from Social Security or won't be able to afford retirement. The study also finds that more than 1 million workers in Maryland aged 25 to 64 do not participate in an employer-sponsored retirement plan. Many of these workers lack access to employer-sponsored retirement savings accounts due to a decrease in the number of jobs that offer traditional pensions or employer-sponsored plans. SCEPA has conducted similar research on New York City residents' preparedness for retirement and is currently conducting studies for Connecticut, Washington, and Illinois.

retirement graphOn April 2, 2013, SCEPA released a study, "Are Maryland Workers Ready for Retirement," that documents a downward trend in both employer sponsorship of retirement plans and employee participation rates in Maryland from 1995 to 2012, making it increasingly difficult for workers to prepare for retirement.

In 2010, 49% of Maryland's workers – 1.25 million residents – were not participating in an employer-provided retirement plan. The lack of access has immediate implications for those nearing retirement: 41% of households headed by someone near retirement age (55-64 years old) will have to subsist almost entirely on Social Security income or will not be able to retire at all due to negligible savings.

SCEPA's research attributes the downward trend in workers' financial security in retirement to three factors:

  1. A drop in employers' sponsorship of retirement plans for their workers. From 2000 to 2010, the availability of employer-sponsored retirement plans in Maryland declined by eight percentage points, from 67% to 59%.
  2. A shift away from traditional pensions, which are mandatory, defined benefit pension (DB) plans, to 401(k)-type defined contribution (DC) plans. Only 36% of workers aged 25-44 have a DB plan as their primary employer-sponsored retirement plan, compared to 43% of workers aged 45-54 and 53% of those aged 55-64.  Based on financial data from the U.S. Census Bureau, the report concludes that those with DB plans are more likely to maintain a middle class lifestyle throughout retirement, whereas those with only DC plans will need to consider selling their homes to obtain adequate retirement income.
  3. A lack of participation in voluntary defined contribution plans. Of the 59% of workers who had access to a retirement plan at work, 14% did not participate, either due to personal choice or structural rules that exclude part-time workers, those with under a year of service, or those under 25.

The report broke down the trend by age, race, and industry:

  • Workers between 25 and 44 had the largest drop in sponsorship - 13% - among all age groups surveyed, suggesting this downward trend will continue as the population ages.
  • By race, Hispanic workers lost the most ground with a 20% decline in sponsorship rates, more than double the decline of 9% experienced by White and Black Non-Hispanic workers.
  • Traditionally, large employers offer more benefits. However, firms with 500 to 999 employees showed the biggest proportional drop in sponsorship of 16%. They also had the largest absolute decline, dropping from 75% to 63%.

SCEPA recently testified at a hearing in the Maryland House of Delegates regarding legislation sponsored by Delegate Tom Hucker that would increase access to a retirement savings plans by giving workers the option of opening an individual Guaranteed Retirement Account (GRA) through the existing Maryland State Retirement and Pension System. A similar bill, sponsored by Senator Jim Rosapepe, would establish a Maryland Private Sector Employees Pension Plan

The Guaranteed Retirement Account (GRA) is based on Ghilarducci's STATE GRA plan, which was recently enacted in California. The proposal takes advantage of existing financial infrastructure in the state to give private sector workers access to the best financial managers and the lowest fees. The accounts would be separate from public sector retirement funds and come at no cost to taxpayers—workers would pay administrative fees. Since these are individual retirement savings accounts, there is no liability to the state. Workers take out what they and their employer put in, plus the returns they earn. Private capital markets offer expensive retirement accounts with high fees to lower income workers because the sums invested are low. By pooling the money from many private sector workers, the Maryland State Retirement and Pension System can invest in longer-term opportunities with higher rates of return and charge lower fees.