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."