Retirement Policy in the New Economy
Published July 13, 2016
Retirement Policy in the New Economy
Senior Vice President for Policy, Third Way
Representative Joe Crowley (D-NY)
Vice Chair, House Democratic Caucus
Executive Director, National Institute on Retirement Security
Resident Scholar, American Enterprise Institute
Vice President and Deputy, Federal Relations, American Council of Life Insurers
Personal Finance Writer, The Washington Post
Location: B369 Rayburn House Office Building, Washington, D.C.
Time: 8:30 a.m. EDT
Date: Wednesday, July 13, 2016
Superior Transcriptions LLC
JIM KESSLER: Good morning, everybody. Thank you for coming.
In a poll we conducted in June, 63 percent of voters said they were worried about not having enough money for a comfortable retirement. And of all the issues we polled, retirement savings was their top worry. We asked them if people who worked hard during their entire lifetimes, if they were likely to have a comfortable retirement? Fifty-eight percent said no. And 87 percent said they would need savings well beyond what they get from Social Security to have a decent retirement.
And finally, one more number – I know it’s early – between 2010 and 2030, the number of people over the age of 65 is going to increase by 80 percent, while those between the ages of 25 and 64, that number will increase by just 8 percent. People are living longer. Government retirement benefits are getting more expensive. So all this puts a lot of pressure on our retirement system, on government, on taxpayers, on the economy, and in the private sector.
But – and here’s the good news – there’s a whole bunch of very smart, very dedicated people trying to figure this thing out. Some want to do it relying on government programs, others on government intervention, some looking more at the private sector, others on vastly increasing private retirement savings. And that’s what we’re going to talk about today.
So let me go over the program. First, I’m going to introduce Congressman Joe Crowley. He’ll speak, and then has to run to a caucus meeting. Then I’m going to introduce a great panel, moderated by Jonnelle Marte of The Washington Post. So let’s get started.
Congressman Crowley is from Queens, which probably means you’re a Mets fan. OK. (Laughter.) Despite that – (laughter) – he is a great congressman, representing New York’s 18th District. He sits – and you always have to say this word before – the powerful Ways and Means Committee – it’s part of – it’s written in the bylaws – and is part of House Democratic leadership. He’s made a mark on economic issues, fighting crime, educating our kids, and expanding and protecting our social safety net. At the same time, he’s a pro-business, pro-growth progressive. He’s also a very, very good guitar player. And if they ever put members of Congress in the Rock and Roll Hall of Fame, Joe Crowley might get in on the first ballot.
But today he’s going to talk about retirement. He’s also introducing a bill that he worked on and that we were involved with somewhat, called the SAVE UP Act, that would dramatically improve the retirement fortunes of every person who works in America, and that’s not an understatement. So let’s get started with Joe Crowley. Thanks, Congressman. (Applause.)
REPRESENTATIVE JOE CROWLEY (D-NY): That’s all right. You just can’t take this piece, that’s all. We’re good, we’re good.
Thank you, Jim. It says here, “Thank you, Jim, for that introduction,” so if you had taken it I wouldn’t have been able to say that, so. (Laughter.)
It’s great to be at Third Way. And, yes, I am a Mets fan. I am not a Yankee hater. My brother Sean is a MetsSox fan. He actually owns the rights to MetsSoxNation.com. (Laughter.) So he actually thinks about this stuff. You know, I don’t –
MR. KESSLER: I’ll check out that hashtag.
REP. CROWLEY: (Laughs.) But it’s great to be with you all here at Third Way, and thank you for holding this important discussion about ways to address the retirement gap and the savings gap here in our country.
With too many Americans not saving enough for the future and fewer workers being offered pensions, the dream of a secure retirement is slipping away for millions of Americans. For example, half of all the people going to work today in America are not offered a retirement plan from their employer. Even for those who are saving, the picture isn’t much rosier. Too many families have no savings. And for those that do, the median family has just $5,000 saved.
But the problem starts even in the years before retirement. The crisis we’re seeing in retirement savings doesn’t just start on the day a worker retires. The problem begins decades before that. Our nation faces a savings and retirement security crisis, and it affects a person at every stage of their life. Can they buy a home? Can their parents afford college tuition? For far too many families, the answer is more and more unclear.
But there is hope. We know that many Americans know the value of savings. They want to save; they just need the right tools to help them save.
Our country needs a comprehensive approach to address these problems so that we can create a lifelong culture, a culture of savings here in the United States. That’s why I have proposed an action plan to help Americans build better savings to build brighter futures.
To put the ability to save back into the hands of every American family, the first part of my plan deals with addressing the lack of savings and financial insecurity at the very earliest stages of a person’s life. Families, particularly with children, they struggle to save. And that often morphs into a lifetime of financial challenges, with many just trying to stay afloat. That’s why I introduced legislation to create universal child savings accounts, which would ensure every child starts off on the right foot when it comes to saving.
We need to make sure saving is engrained as a basic habit. And that is why my bill would require that, upon a child’s birth, a savings account is opened in his or her name. The federal government would provide seed money as a down payment into each child’s account. It would also expand the child tax credit for families who save for their children. This gives struggling parents an incentive to put money aside into these accounts. Under my bill, when the child becomes an adult, when they emancipate, they can use that money to pay for college, or the funds can be rolled over into a Roth IRA to start their long-term savings off on the right foot.
The data proves that, if given the tools and resources, parents, even at the lowest levels of income, will save. We’re seeing this happen right now in the city of San Francisco, where the city offers child savings accounts to all children in public kindergarten. Lower-income families in San Francisco are contributing their own funds into these child savings accounts, and they are doing so – and this is – this is critical – they’re doing so at a rate four times higher than the Americans nationwide contribute to 529 college savings plans – four times higher than the average American in 529 college savings plans. So if you make this widespread, these young adults will grow up with not only a real asset, but also the experience and the routine to keep saving for the future.
The second prong of my action plan addresses the needs of working Americans who have no savings at all. Americans can’t start building for retirement when they don’t even have a cushion for emergency needs. We have millions of Americans who not only have no retirement savings, but are one broken water heater or one broken car – a car breaking down away from being literally in poverty. That’s a big problem, not just for these individuals but for all of us as a nation. The Federal Reserve Board estimates that almost half of all Americans would not be able to cover even a $400 emergency without borrowing money or selling off a possession.
To address this problem, I have introduced legislation to codify the president’s My Retirement Account, or myRA, plan, and codify that into law. MyRA helps build a culture of savings by breaking down the traditional barriers to saving. These barriers include high minimum contributions, concerns about market fluctuations, or a general distrust of financial markets and institutions. It will allow a worker to open an account with as little as $1, and gives them the ability to make automatic payments every pay period. There are also no maintenance charges or fees associated with these accounts. That means every dollar that is invested will be returned, plus interest, to the account holder.
MyRA also helps address one of the biggest savings deterrents out there. It allows access to these funds, which is critical, for emergencies, such as a car repair, without penalty.
And finally, the third prong of my plan deals with addressing the retirement security crisis that we’re facing as a nation. With a decline in employer-provided pensions, retirement has become an ever-growing question mark for far too many Americans. And this is where we see the lifetime lack of savings catching up in starting – in startling and in a very devastating way.
A recent Gallup poll shows that half of all current workers think they will not have enough money in their retirement accounts for retirement. We need to give workers the certainty of a pension – something that was once taken for granted, no longer is. While many employers do offer retirement plans to their employees, too many workers find themselves falling through the gaps. They’re either not eligible or don’t take the proper steps to enroll. In fact, the Department of Labor estimates that one in four Americans working full-time private-sector jobs are not taking advantage of their employer-provided retirement plans.
There are steps we can easily take to improve participation in these plans, such as increasing the auto-enrollment. Auto-enrollment has been proven to increase the participation at a rate of over 90 percent. That is why I led a letter signed by 65 of my House colleagues asking the president to take executive action to require federal contractors to auto-enroll all of their employees in retirement plans. But that, quite frankly, is just low-hanging fruit.
We need to help those workers who aren’t even offered a retirement plan through their employer. As I said earlier, one out of every two Americans going to work today is not offered a retirement plan through their job, and some – for some Americans the picture is even worse. For example, only 38 percent of working-age Latinos are employed at businesses with employer-sponsored retirement plans – only 38 percent, one of the fastest-growing populations in our country.
That is why yesterday I introduced legislation to shake up the status quo and address this problem head on. Based on a concept championed by the Third Way, my bill will create universal pension accounts for those non-covered workers employed at a business with 10 or more employees. Known as SAVE UP accounts, these pension accounts will be partially funded by the employer and partially funded by the employee. An employer will directly contribute 50 cents for every hour worked into individual SAVE UP pension accounts for each of their workers. This 50 cents allocation will increase annually to keep up with the cost of living. Aside from the employer contribution, once enrolled, employees will automatically begin contributing 3 percent of their pre-tax income into that account. And this 3 percent employee contribution will gradually increase over time. The worker can opt out, but the employer will continue to contribute to give their employees a solid retirement option.
To help with the cost of contributing to these plans, small employers will receive a tax credit worth the value of contributions to 10 employee accounts. For a small business with fewer than 10 employees, while they’re not required to contribute, this tax credit that we will offer will make it financially possible for them to do so on a voluntary basis. These pension accounts will work much like the Thrift Savings Plan that we federal employees enjoy. There will be government oversight, there will be private management, and a limited number of low-fee index fund options for the employee to choose.
SAVE UP accounts are portable, which is critical in this world that we’re living in today, as they are tied to the worker and not to the employer – tied to the worker and not to the employer, that is critical. So workers will be able to change jobs without fear of putting their retirement savings at risk, something that hampers and concerns many workers today.
These accounts will have a big impact for employees. After 45 years of working, someone who has only been employed in a low-wage job will have over $380,000 in their SAVE UP account – low-wage job, $380,000 in SAVE UP account. The funds will be paid out to retirees through a monthly annuity, providing retirees a form of guaranteed income that they can rely on.
When you add that to Social Security benefits, these workers will enjoy a much more secure retirement. So I will also continue to stand up for the – to the fear-mongers who claim that Social Security is going bankrupt. I will continue to oppose any efforts to cut Social Security cost of living allowance. I will also oppose any efforts to privatize Social Security. A stable retirement in Social Security – is Social Security plus pensions plus private savings. It’s a combination of all those, and I believe we can make all three stronger.
There’s no doubt my plan is just the start of what needs to be done on these important issues, but the point is we have to get started. I certainly don’t have a monopoly on all good ideas, and Jim knows that. I welcome discussions like you’re going to have today. I have also solicited input from my colleagues and continue to do so, as well as all the Democratic presidential nominees – now the Democratic presidential nominee. She’s been very open to our ideas.
The reality is we will only resolve this looming crisis if we start talking about it and working together, starting now. Third Way has been a great partner in this, constantly searching for fresh out-of-the-box ideas to help advance our nation. I look forward to working with you to champion the best possible ideas to ensure we can create a country where everyone is able to build better savings to build brighter futures for themselves, for their family, and for our country. And be mindful of the last piece: ourselves, our families, and for our nation. For if we fail to find a solution, it will fall upon the entire nation to address in a much more difficult way.
So, Jim, thank you, again, for having me. And I have to go, because I’m the vice chair of the Democratic Caucus. And, like the president – like the vice president, he says his role is every morning to call the president at 6 a.m.; if the president answers the phone, he goes back to sleep. (Laughter.) Unfortunately, I have to be here because sometimes the chairman is late. Don’t tell him I said that. And I have to be there to bang in – gavel in, and then he comes and takes over and gets all the credit. So that’s why I have to leave. (Laughter, applause.)
MR. KESSLER: Thank you so much, Congressman. That is such an important piece of legislation that he introduced. It’s going to take a long time to get it through Congress, but this is the future. It’s a future of making sure that people have private savings to supplement Social Security, able to save up for college, for life’s necessities, and for retirement.
Why don’t we have our panelists come and take a seat? I’m going to move the empty cups here.
I’ll introduce, and then –
JONNELLE MARTE: Where do you want us?
MR. KESSLER: Yeah, I’m going to sit over there.
So let’s move on to part two. And thank you so much for joining us this morning. I’m going to introduce our panelists, then I’m going to get out of the way so that we can have an interesting discussion.
Diane Oakley is executive director of the National Institute of Retirement Security, which is a very, very influential think tank that deals exclusively with retirement issues. They’re work and research on public-sector pensions, retirement savings for women, annuities, and pension financing are central reading. I know we read them at Third Way, and they’re of the highest quality. She spent nearly three decades at TIAA-CREF – thank you for managing my retirement fund. And she once worked for retired North Dakota Rep. Earl Pomeroy. And is there a more decent, kind and intelligent former member than Earl Pomeroy? I would say there is not.
Andrew Biggs is at American Enterprise Institute, and he’s been writing, researching, innovating, and provoking on retirement and Social Security policy for how long?
ANDREW BIGGS: Too long.
MR. KESSLER: Too long.
MR. BIGGS: Fifteen years.
MR. KESSLER: Fifteen years, OK. I can believe it. He served as deputy commissioner of the Social Security Administration under George W. Bush, and he was on President Bush’s National Economic Council. He’s a very fair and generous person with his intellectual knowledge and policy knowhow. I know we’ve reached out to Andrew on many occasions. He helps anyone who comes to him. And if I were to list my favorite thinkers at right-of-center think tanks, Andrew Biggs would be high on my list.
Alane Dent is with the American Council of Life Insurance, and previously worked for the National Association of Mutual Insurance Companies. And get this: What are the odds that there are two people here that used to work for the absolutely wonderful former rep from North Dakota, Earl Pomeroy? Alane works on retirement policy, and is focused on making sure people retire comfortably and with the right financial instruments for a secure and enjoyable retirement.
And our moderator is Jonnelle Marte, who we read regularly in The Washington Post. So her articles can make you concerned, like her June piece on the dwindling Social Security Trust Fund; informed, her piece on how Brexit will affect your wallet; and ticked off, how you’re nickel-and-dimed on overdraft fees. OK, so you’re kind of – you’re running the –
MS. MARTE: All the emotions there.
MR. KESSLER: The three stages of policy angst. (Laughter.) She had stints at MarketWatch, The Boston Globe and The Wall Street Journal. And thank you for joining us. And why don’t you take it away and lead the discussion.
MS. MARTE: OK. Can everyone hear me OK? I can move closer. Thank you all for having me.
Yes, lots of emotions that I go through when I’m writing my articles – (laughs) – and realize how much I need to do to be able to retire one day. And I write about this issue a lot, so let’s sort of go into talking to the experts, who are the ones who I kind of consult and who know more, who are going to be saying the interesting things.
I’m wondering if we could start off by just sort of getting a sense of what is the retirement savings gap. And maybe, Diane, you could start by kind of just – you know, your work has looked at this. Why don’t you tell us a little bit about, you know, who is able to save and who is the kind of worker that is having a harder time saving for retirement?
DIANE OAKLEY: All right. Thank you, Jonnelle.
(Comes on mic.) That does it, OK.
I apologize that I’m going to have a lot of numbers at this hour of the morning – (laughter) – but having worked for a member of Congress – and Alane knows this about Earl – Earl always like to have data points, because they’re important. They’re important to help the member understand the issue and important to help them frame policy.
So, you know, the first thing you want to think about is, well, where are the – where’s the American public? And, you know, obviously, the Third Way survey. For the last 15 years, for example, Gallup has been asking the American public about financial worry. Retirement and not having enough money to last comfortably through retirement has been their chief financial worry in every one of those 15 years.
And when NIRS has asked the American people – and we do a survey every other year of public opinion – 86 percent of Americans agree that Americans face a retirement crisis, and 57 percent said that strongly. Now, some people would say, well, is there just this lot of angst and worry because ultimately, when you ask some other numbers – like the Federal Reserve recently put a paper out on economic well-being, and on retirement they asked people, well, like, how much have you really thought about retirement? And only a small percentage of people thought about it a lot. Most of us don’t think about it that much. Obviously, when we think about it, we must worry because that’s what we – we feel there’s a crisis. But I do think most people know what’s in their 401(k)s or know that they don’t have one, especially today. So I think, when you look at what the American people are telling us as households, we know that there’s some issues.
NIRS has looked at a couple of things in terms of where are we. In the United States, most of our access to retirement savings – the best way to save for retirement is to do it through some type of employer-sponsored plan. That ability to save before you spend your money, pay yourself first as many of us often talk about, is one of the most powerful incentives to save, and has been proven that way.
And so when we look at employer access to retirement plans, in 2013, about 55 percent of workers between ages 25 to 64 had access to a plan, and about 51 percent of households across the country actually participated in a retirement plan – had one person in the household participate in a retirement plan. Now, those numbers don’t look bad, but they’re also – they’re down significantly from where we were at the start of the century. We had 52 percent of – 62 percent of people have access to retirement plans in 1997; 58 percent of employees – or households had someone in a retirement plan.
One real important piece that changed is the type of coverage, especially that younger workers will have. While people who are retired and individuals who are probably within that next realm of retirement between ages 55 and 64, they have coverage in those households usually of at least one person for 50 percent or so of those individuals, when we look at what happens to those people who are just coming into the workforce, only 25 to 30 percent of those younger households are being covered by Senator – Congressman Crowley talked about as that pension, that lifetime income related to your final salary.
When we look at the amount of savings – and we look not just at those people who have accounts, who have actually started to save, but we also take into account those households where they don’t have any savings; and we know that about 45 percent of households have no retirement savings – what we find is that the median account – this is the household right in the middle of America in terms of age and family for everybody in that whole group – is $2,500. The median amount of retirement savings for all households – all working households for people who are within 10 years of age 65 is $14,500. Now, that $14,500 is just about what Social Security pays the average retiree in one year.
When we look at how people’s savings stacks up against their current income – because, you know, if you’re only going to plan for a couple hours, financial companies and other – academics and professionals have tried to find ways to give people some rough rules of thumb on what you ought to be saving. Fidelity published a paper and talked about, you know, a gradual buildup of assets, so that by the time you hit 67 you had eight times your salary saved, so that you could be able to maintain your current status of income before you retired. When we measured Americans against that, we found that we really had about two-thirds of the American households were not on track. And in fact, when we look at the numbers – when we look at all households, four out of five have less than one times their saving – their salary saved for retirement in a retirement account. When we look at the people – again, those pre-retirees, three out of five households have less than one times their salary saved.
Now, if you have one times your salary saved, that’s pretty good if you’re 30. If you’re 55 or 60, that really is a challenge because, you know if you – if you just do real simple math and say, oh, I might live 20 years once I retire, that’s roughly going to get you a replacement of 5 percent of your income, assuming that you just take out a certain amount. You know, interest will take care of compounding and whatever, but just a real simple calculation because I know most of us in America suffer from math anxiety, so we don’t want to make it too complicated.
When you compare those things to net worth – this would include your house and other assets – the numbers are still pretty stark: about half of the Americans only have less than one times their salary in terms of net worth. And the pre-retirees are a little bit better. Many of them do have houses, so value accumulated in their house. They’re about one-fourth.
So when we look at those kind of numbers, and then we also realize that one of the things about retirement access, participation and ability is income-related. If you’re in – the access to a retirement plan in that lowest quartile of households is one in five of those households has a retirement account.
MS. MARTE: I have a follow-up question to that. So the income matters to determining what your chances are of having a retirement account. What about the type of job that you have? What are the trends with part-time versus full-time, or small-business owners as well?
MS. OAKLEY: Small business is less likely to have a plan, and part-time employees particularly less likely – very much less likely.
So places where there’s the lowest level or low income, only one in five, as I said. And then, if you look at net worth for that group, it’s – you know, 73 percent have less than one times their salary put away.
You know, and we asked Americans, what do you plan to do? And this is interesting because I really is income-related, again. The Federal Reserve recently, as part of that economic well-being survey, broke people up into groups under 40, 40 to 100, and 100 and over. For workers who earn under $40,000, what do they plan to do in retirement? They plan to work. They plan to work for as long as they can or never retire. For people in the $100,000 and over category, 27 percent of them have that same sense, that they’re going to work for as long as they can or until they – you know, I’m going to work forever. So there really is an income distinction there between what households feel they can afford to retire and what they can’t. And again, you know, there is also some longevity issues that would suggest those lower-income households have much lower longevity prospects than the higher-income.
So when we start to look at it, you know, you want to think about, what do we have to do to get people to save? Because that’s going to be more important. And save consistently.
MS. MARTE: So what are some of the challenges that women face when it comes to saving for retirement? Where do they fall in that spectrum? Andrew, I know you’ve looked a little bit at this, but also whoever wants to chime in.
MR. BIGGS: Women are more likely to have low incomes, to work in jobs where they’re not offered a retirement plan, to be working part-time – you’re less likely to be offered a retirement plan. They do benefit more from the progressive benefit formula from Social Security. But since they’re also more likely to be the surviving spouse once they retire, at that point your Social Security benefits are cut. So it’s a – it’s a more complicated issue there.
I mean, if they’re – if they’re married and they’re able to save together, that definitely helps. If you’re a single woman, low-income, part-time, that definitely does get more difficult.
MS. MARTE: So what share of retirement income comes from savings? We hear a lot of people relying on Social Security, which certainly makes up a large chunk of the income for a lot of households. So could you talk a little bit about what share is coming from savings? And then we can sort of go into how much should people be saving, which I know is an ongoing discussion.
MR. BIGGS: Do you want me –
MS. MARTE: Mmm hmm.
MR. BIGGS: well, it’s – one thing I’ll say at the outset is that people look at this issue and they think it’s – they think the data are cut and dry. They get a number and they say, well, that number tells me something. And retirement is an area in particular where the data is terrible. If you were to look at something like the Current Population Survey, which comes out of the Census Bureau, that will tell you here’s how much money we think Americans are getting from 401(k)s and IRAs, and the numbers are vastly underestimated. And the reason is Census, to them, they only count money as income if it’s paid regularly, if you get it every week or every month. That’s fine for Social Security or a private pension – a traditional pension. But for an IRA or 401(k), where people take the money out gradually as they need it, that money simply isn’t counted. So trying to get a handle on how much money people are getting from retirement plans is a lot harder than you’d think. I tend to use IRS data because all the – if you take money out of your 401(k), it has to be reported.
If you look at simulations done by the Social Security Administration, where they try to catch all the sources of income that people get, think about 40 percent comes from Social Security and the rest comes from other sources. Some of it will be – a lot of it, obviously, will be pensions or personal savings. You also get welfare benefits – you know, SSI, things like that. That’s a fairly small amount. But if I had to pull a number out of my head, I’d say about half from savings.
MS. MARTE: OK. That seems pretty high. (Laughs.) Do you want to –
MR. BIGGS: Well, it’s – and maybe I’ll just – if you want me just to –
MS. MARTE: No, I’m not questioning, I’m just saying that that just shows how much people need to save.
MR. BIGGS: It does. But I mean, I’m always the – when I come out – you can take this home with you. It has a lot of numbers in it. I’ll work off it a little bit. But when I tried out some of these numbers, a lot of people just shake their head and say I can’t believe that and all. And yet, I really think the retirement sort of environment today is a lot more positive than people think it is.
And the way I kind of walk through it is to start where we are today and look at today’s retirees and then say, OK, how are they faring; and then look at today’s workers – are they saving, are they participating in retirement plans? And that gives you some idea where they may end up. And I think, going back, you know, there is – and this came up in Congressman Crowley’s remarks – there is a bit of a(n) idealized view of the retirement situation in the past, where there’s an idea that everybody had a traditional pension, it paid you a benefit for life. And this is a sort of “Ozzie and Harriet” kind of warm and fuzzy kind of thing. The reality: there was never a time – never – when the typical American worker had a traditional pension. It just did not happen. DB pension coverage peaked in the mid-’70s at about 40 percent of the workforce. So you never had a time when your average worker had that. And moreover, if you go back to the ’70s, you know, pre-ERISA, when people – when traditional pensions were the predominant pension plan, the vesting requirements on average are about 15 years. You had to work 15 years for the same employer just to qualify for a benefit. Many employers said, in addition to that, you’d work 15 years and you had to retire from the job that you’re with in order to get a benefit. So if you worked 15 years for a company early in life and left, still you didn’t get a pension benefit.
So there is a – this survey done by the Social Security Administration in the early 1980s where you would expect, OK, pensions peaked in the ’70s, these new retirees in the ’80s, this is where you’d expect to see a lot of pension income. Only 27 percent of new retirees in the early ’80s got any form of private pension. Even if you look at the richest quarter of Americans retiring in the early ’80s, only 51 percent did. If you look at the bottom half, it was like 9 percent, something like that. So the idea that people were getting – participating in these plans and getting, you know, reasonable benefits from them basically was not true.
From the mid-’70s, you pass ERISA, which improved a lot of the funding requirements for traditional pensions and it improved, you know, the vesting requirements, things like that. But the problem is, at that point, employers said this is – you know, it became a better deal for the employee, but it also became a deal that employers were not really willing to offer, so they stopped offering traditional pensions. It wasn’t until, I think, ’84 when 401(k)s were really even invented. So you do have this kind of gap where traditional pensions are declining, 401(k)s really didn’t become widespread until the mid-1990s.
So if I look at that and I say, OK, where should we be today, the answer to me today is if we are going to have a retirement crisis, we should see it today. You know, it’s – and yet, if you look at retirees today from a whole variety of angles, they’re doing fine. Retirees have half the poverty rate of children, significantly lower poverty rate than among working-age adults. Growth of retirement incomes – from ’89 to 2013, the average retiree household’s income grew by 34 percent. Among people in the 45-to-64 range, it grew by 4 percent. Among younger workers, incomes grew by 10 percent. So you have much higher growth of incomes among retirees than any other segment of the population.
Look at the median U.S. retiree. This is not the super-rich. The typical U.S. retiree has a disposable income that’s the third-highest in the world. It in on part with Switzerland. And you don’t think of Switzerland as a poor place. We’re higher than Denmark or Germany or France. So you – if you look at where people are today, it’s very tough to look at that picture and pull out, you know, the idea that people are in a really hard way.
You ask American retirees, it’s – you know, we – I mean, Diane is right. You ask working-age people what do you worry about, they’ll say I’m worried about retirement. If you ask actual retirees – you know, Gallup asked retirees, do you have enough money to live comfortably? It’s somewhere – I have a number in here – it is 79 percent of retirees say they have enough money to live comfortably versus only 63 percent of working age Americans. If you look in Health and Retirement Study, eight out of 10 retirees say life is a good or better than before retirement. Ninety-one percent of HRS households say their retirements are very or moderately satisfying. So if you ask them, they’re happy.
Another indicator, are retirees running out of money? If we hadn’t saved enough we should be running out of money. Looking at a survey of consumer finances or Health and Retirement Study, for the median household net worth rises over the course of retirement. They’re not spending everything they have. Even for relatively low-income households in the HRS, financial assets tend to rise through retirement. It means they could spend more than they are spending. So things are pretty good today.
Now, say, well, where are things going? Are today’s workers saving as much towards retires as yesterday’s workers did – as today’s retirees had? And I think the answer is yes. Again, at the peak of DB pension coverage, in the mid-’70s, about 40 percent had traditional pensions and another 5 percent had, like, profit sharing plans. So you had about 45 percent coverage.
MS. MARTE: So that brings up a good question, though, which is – and we’re about to transition – I think this is a good place to transition to talking about, well, what can we do to make it easier for people to save? So but first I wanted to pose the question of how much should people save? And I know there are studies that show we are living longer, but we’re also working longer. Also, your expenses change once you get to retirement. So if we could just talk quickly about each person here, and then we can sort of switch to Alane to talk about, well, what can do to get people to save more? But sort of just quickly, how much should people save or what do you think people should know about how much you really need to have saved?
MR. BIGGS: Let me just touch quickly on benchmarks. I mean, Diane mentioned the benchmark from Fidelity saying you need – you should have retirement savings, you know, that when you retire equal eight times your final salary. And there’s other benchmarks like that. I have a chart here where I looked at different stylized earnings levels that the Social Security Administration puts together. And I said, OK, let’s assume those people retired with eight times their final salary and retirement savings, plus social security. I produced an annuity from the retirement savings, you know, a steady payment that will come out over the rest of their life.
And I said, OK, what would their total retirement income, Social Security plus their personal savings, be relative to their final salary? For a medium-wage worker, it would be a replacement rate of about 120 percent of final salary. For a low wage worker, or very low wage worker, which represents almost 20 percent of the population, it would be 172 percent. These benchmarks are way too high. And the way I put this is, you know, if a drug company came to you and said: You’re sick and you need my drug, I mean, you’d listen to them, but you’d also remember, look, they’re in the business of selling you drugs.
If you look at the academic research on how much you need to save for retirement, versus what, to be honest, you get from financial services companies, the academics always come out with a much lower number.
MS. MARTE: So it’s fair to say that Fidelity has a reason – and incentive for saying people need to save more.
MR. BIGGS: I’m not saying they’re liars. They believe in what they’re doing. It’s just too high. It’s just too high.
MS. MARTE: No, of course. So you also mentioned annuity or lifetime income. And, you know, Alane, can you talk a little bit about how many people buy annuities, what – and also, just generally speaking, what are some of the solutions that we should be looking at to expand how many people – you know, how much people have saved for retirement?
ALANE DENT: Thank you. I think Andrew and Diane, you know, do a very good job laying out the retirement challenge that we face, and the benefit and the foundation being Social Security. And so I would definitely say that is something that needs to be solvent. And we continue to build upon the system that we do have in place. As Andrew said, we see the problem as mainly twofold – small business coverage and part-time or seasonal workers. So what do we do to address coverage in those areas? And there are a number of proposals out there that are bicameral and bipartisan to help small businesses kind of pull together in order to get economies of scale, in order to facilitate pension expansion. So that’s just one idea.
And obviously, we’ve talked a lot – and Congressman Crowley talked a lot about the importance of a startup credit for small businesses to get into it. Participation is key. Auto enrollment has done a tremendous job of getting more workers, especially lower-income and younger workers, to participate. But obviously, you know, ACLI, the American Council of Life Insurers, we not only provide retirement savings solutions, but we provide retirement income security solutions as well. Annuities go a very long way to guarantee lifetime savings. And we like to talk about it, because there is a lot of conversation in Congress about savings, and importance of savings. And obviously you need to have savings in order to talk about retirement income.
But once you have Social Security in place and you have a certain amount of savings, we do want people to think about what additional levels above Social Security you want to receive in lifetime income, so you don’t have to worry about those expected expenses in retirement – be it you haven’t paid for your mortgage, Medigap policies, your car insurance, your car payments. Take a look at what additional levels of Social Security you need – I’m sorry, guaranteed lifetime income you need above social security – and plan for it. And that way you have a much more secure retirement, continue to grow those other savings in retirement, because we’re going to live longer.
Jonnelle, to your question on women, they have – (laughs) – the most longevity. And so, you know, that’s probably one of the biggest risks of being a woman in retirement, is outliving your savings. And so annuities play an important part. And I believe somebody had referred to a Gallup survey. There is actually another Gallup survey out there that says that retirees who have guaranteed lifetime income are the most secure in their retirement. So not to lose sight of that.
So, you know, we want to talk about solutions. I mean, obviously Congressman Crowley introduced his bill, and that is his solution. And we’re just trying to rise and increase and enhance the awareness of the debate, because more needs to be done. We have a good system. It’s a good voluntary federal system. And we need to do more to expand it, so that more workers are in it.
MS. MARTE: You did talk about participation, which I think is also an issue that some companies are trying to address. Other than auto enrollment, auto escalation, is there anything else that can be done to improve participation? Whoever wants to chime in.
MS. OAKLEY: I’ll be happy to take that. First, let me – I want to put two comments on some discussion about women, if you don’t mind. NIRS did a paper recently called “Shortchanged: The Situation of Women in Retirement.” And when we looked at it, you know, there’s a couple things. I think when you look at retirees in one broad sweep, and you come up with averages for all of them it’s different, because each one of those retiree groups retired at different ages. And so the older retirees had less pre-retirement income than today’s retirees, because current retirees have had salary growth over time.
So when you look at the numbers, the highest amount of income replacement is going to the younger employees. And to be honest, a large chunk of what those households get as retirement income comes from wages for people who are over 65. If you look at, you know, Social Security it’s there, it’s a key part of it. If you break things down by income, what you clearly see is Social Security is the main source of income for clearly the bottom half. And you don’t really start to see – once you get people who actually retire and no longer have any income, what you finally find out is only the top quarter of households really have what we often refer to as a three-legged stool, where those retirees have Social Security, a pension, and a personal savings in a retirement account.
So I think those are just to give some flexibility. And then to talk a little bit and share with the audience, there is a really interesting study that is done by people – it was done at UMass Boston. It’s called the Elder Index. And it will give you a state-by-state analysis of what do you – what does a retiree need to meet their basic living expenses? And if you look at it on a national level, they’ll say an individual needs about $24,000 to meet their basic living expenses, across the nation. But you can find it actually for each of your states. And you can even, in some cases, go down to more metropolitan numbers.
But then when you start to look at the numbers and you realize that, well, that’s for somebody who rents and they only pay $500 a month to rent. You know, you guys all rent.
MS. MARTE: Where do we find that kind of rent? (Laughter.)
MS. OAKLEY: So where are you going to be able to find that place? So again, you have to look at what those numbers mean. And I think the one thing about that study is it really does break it out where are you going to spend it? So that, I think, is helpful.
You know, this issue – Congressman Crowley’s leadership on this is great to see. And there’s been a lot of savings proposals on various different components of retirement savings. Auto-IRAs at the federal level have been a legislative proposal. What’s really interesting is that on the local level, at the state level, a lot of legislators are looking at this issue I think because they’re local, they’re more responsive, they hear this anxiety that individuals feel. Plus, the states often become that last resort of how are we going to take of our elderly and make sure that we have – we at least don’t have poverty for the elderly become worse than what it is today. And so some of the things that they’ll do for housing subsidies and what have you.
MS. MARTE: Could you sum up what it is that they’re doing at the state level? Is it they’re basically creating – or trying to create accounts for people who don’t have access to plans through their jobs, correct?
MS. OAKLEY: Exactly. There’s 30 states that have actually considered or have acted on legislation. A number of states that have passed legislation and are in various stages of enactment are California, Illinois, Massachusetts, New Jersey, Connecticut, and on the West Coast you’ve got a solid run up from California into Oregon and Washington state. So you have those states. And they’re looking at different approaches. Some states are looking at taking the auto-IRA proposal and saying: We feel that employees in our state, if they have some minimum number of employees, ought to at least offer that access point – not that the employer has to make a contribution, but give the payroll deduction flexibility to the worker to say.
A number of other states, such as Washington, is in the process of implementing shortly a marketplace where they’ve also created the other accesses – you know, how do I figure out which investment to use? So they’ll sort of vet the investments and put them out in an easy-to-understand way for people to help to clarify between the IRA. The IRA marketplace is probably one of the most diverse and less well – you know, the fees in that marketplace are much, much higher. And that’s a big issue for these individuals.
MS. MARTE: So these are solutions that work to increase access to retirement plans. But for a lot of low-income people, Alane mentioned, you need to have income to be able to save. Are some of the plans that are available – are they encouraging low-income workers to save? And if not, what are some of the solutions that are being discussed that would encourage lower income households to save?
MS. DENT: There’s a few things that Diane and I could agree on. I believe the saver’s credit is one of those, that we could probably expand, and that would probably enhance and increase participation. But as Congressman Crowley had said, myRA is a very viable option that is out there now, that employers could tap into. And you know, although we would all prefer a federal solution to addressing the retirement security crisis, we do want to recognize probably the frustration amongst the states to do something. And looking at what Washington did in terms of facilitating a private marketplace to educate employers about the benefits and the simplicity of putting an IRA option in place is a very good idea.
You know, there’s a very vibrant private marketplace. And my companies, and probably a lot of other financial services companies, say that we are there, we are waiting, we are doing the education. You know, small – (coughs) – sorry about the frog in my throat – small employers, you know, they’re working every day just to be stable and profitable. And at some point, you know, they’re going to do what their employees want in terms of benefits. It’s usually health care first. And so our guys are there, waiting to talk to that small employer about the benefits of putting a plan in place, not only for himself but for his workers.
So we want to continue that. And with ERISA preemption, you get uniformity, you get certainty, you get participant protections. So we want to continue to – you know, and thank you, Third Way, for putting this together in terms of elevating the issue so that we can encourage and get Congress to act to do more.
MS. MARTE: Could you explain the benefits of the savers credit, and why that might encourage people who are low income to save? I think you hear about the fact that the tax benefit that people receive from their 401(k), you need to be in a higher tax bracket to benefit from that. So if you could just explain, you know, why the saver’s credit has potential, and if there are other possible programs that would encourage and incentivize also those in the lower tax brackets to save a little more?
MS. OAKLEY: Basically, actually, there’s a congressional research – no, not congressional, I’m sorry. It’s a CBO research paper, where they’ve actually looked and done an analysis of the income distribution of the retirement savings components of the tax code. And what they found was about 17 percent of the benefits of that go to the lower 60 percent of taxpayers. The savers credit is a separate credit, designed for very low-income households. It has a cap of about $30,000 for households, a couple, in terms of getting the full credit. It can be up to $50,000. For individuals, it’s half of that amount.
But individuals – so you have this situation – it’s not refundable. So really, the people who tend to benefit most from the credit are people who are in that phase out period, which get a credit of about 10 to 20 percent. And the median – the average credit paid in 2013, which is the most recent year we have data for, was about $175. And about 7.4 million taxpayers claimed the credit. The interesting thing about this credit is, unlike when you go and sign up for the federal thrift plan and you get your tax benefit from making your contributions right away, the low-income person has to go after the fact. They have to file a long tax form. They can’t file a 1040-EZ form to claim the credit. And sadly –
MS. MARTE: So that could essentially make it more expensive to file your taxes.
MS. OAKLEY: So it’s more expensive to file your taxes. You’ve got to have the resource to know that you can do that. And then in addition to that, the credit doesn’t go into your account. So the individual who is working and putting the money and gets that tax benefit, the tax benefit works for them, it compounds, this money get paid out as a benefit. So if we could put that money into people’s accounts, if we could get so that every low-income person would have an account, which is what the auto-IRA proposals at the state do. They use auto-IRA, so low-income people would be in those plans. They could opt out, obviously.
And then the other piece of it would be if we could make that benefit refundable GAO did a report that suggested you could improve retirement income in the lowest quartile by about 20 percent.
MS. MARTE: So refundable, meaning added to their tax refund?
MS. OAKLEY: It would mean they don’t have to –
MS. MARTE: They don’t have to owe taxes.
MS. OAKLEY: Right now, you have to have a tax liability in order to get the refund. So if you don’t – this would mean if you didn’t have a tax liability you would get a cash payment, similar to, like, the Earned Income Tax Credit.
MS. MARTE: So –
MR. BIGGS: Maybe I could just touch quickly on –
MS. MARTE: Yeah, I was going to ask you.
MR. BIGGS: Yeah. My gut is that what matters really is access plus auto enrollment. And with small businesses the problem is access. There’s fixed costs involved for small business to set up a 401(k). There’s regulatory hassles. They’re afraid of liability issues. One potential way around that is what’s called multiple employer defined contribution plans, which essentially lets them work with a single supplier, reduced the cost to them of doing it.
I mean, think about the tax preference. I mean, it obviously is true that the direct tax preference will be sort of regressive because it’s based on your income and the tax rate you pay. At the same time, though, on net, it’s a lot less regressive than you think, because people are paying taxes – it’s a tax deferment. It’s not a tax credit or tax deduction. It’s paying taxes when you retire. That takes a lot of the regressivity out of it. It doesn’t take all of it, but it takes a lot of it.
I think with both the tax preference, to be honest, and the savers credit, and going even to employer matches on 401(k)s, I’m a little skeptical of how much they really influence behavior. So I think you want access and auto enrollment. If somebody’s automatically enrolled and they say I don’t want to save, I take them at their word and just let them not save. So I’m not again, you know, things like the saver’s credit. I just really wonder how far that’s going to get you, though.
MS. MARTE: Is there anything else that can be done to make these solutions more targeted? You and I were talking earlier about how if you just make it too broad or assume that everyone’s struggling that you may not get to the people who are really struggling.
MR. BIGGS: Well, I think that’s a good point. And again, I’ve got a couple slides in here. But if you say, OK, we’re all doomed. The sky is falling. Then you get something – the idea, we just need to expand Social Security for everyone which is, to me, an insane idea. But it’s – specifically the problem with something like that is it misses the groups that really are having trouble. If you look at the – if you look at the research – the academic research tends to find most households are saving OK. It’s really in contrast to what you find with the more popular stuff.
But even the academic research – like the stuff coming out from RAND – finds that single, less-educated women, in particular, are having a real hard time preparing for retirement. These are people with very low earnings, spotty work histories in particular, disproportionally unlikely to meet the 10-year vesting requirement to even qualify for social security benefits. So this is a group – and if you look, like, at the Bernie Sanders Social Security plan does almost nothing for that group, because it doesn’t address the very low-income people, it doesn’t address qualification requirements.
So you’re paying high – you know, higher benefits to middle- and high-income households. The people who really need it aren’t getting anything. And it’s because of thinking the wrong way about the problem. My gut on that is that is a Social Security problem. That is not a – somebody in that income bracket, you know, they’re not going to be participating in a retirement plan. It’s just – those are folks for whom – and I’ve argued for a real, true poverty guarantee with Social Security which we currently don’t provide. That’s something that can be done fairly cheaply. A lot of other countries do it.
That’s a public policy Social Security problem. The people who need to be saving for retirement, that’s when you start thinking about coverage and auto enrollment. But if you’re a truly low-income person, they don’t need an earnings-based plan. They essentially need kind of a welfare benefit to protect them. So it’s trying to see which program does the job for which group.
MR. MARTE: You mentioned Sanders. I mean, it is an election year. I guess could you all just talk a little bit about – or just quickly – because I think we want to leave some room for questions from the audience, in terms of what are the solutions that you think should really be gaining more attention right now – because it’s an election year, but just in general.
MS. DENT: I guess I just want, you know, to speak specifically about Sanders. (Laugh.) But to continue on what Andrew was saying, you know, there probably is a segment of the population where it’s kind of unrealistic to expect that they can save because, you know, their income is – falls far below their everyday needs. But for those who are covered, I think it’s very important to change the conversation of how people view their retirement savings. For those Hill staffers in your TSP, especially if you’ve been working for a few years, you get a lifetime income disclosure in terms of changing the conversation of what your lump sum balance look(s) like. You also get another illustration that says what that would translate into monthly income.
So it’s really reframing the debate. It’s not you get to retirement, yay, I saved $100,000. It’s – (laughs) – I’m hitting – I saved 100,000 (dollars) and that may translate into 1,000 of monthly income. And the great thing about the TSP, it actually did some survey work on the disclosure after it was added. And they actually got a good response from federal government workers. You know, they had over 70 percent who said they found that disclosure helpful. And of that, an additional 30 actually increased their contributions and became more diversified in their contributions. So it was a wakeup call that, you know, if I am saving, Social Security’s a base, but what more do I want to save? And really challenge people to be engaged in a very simplified way about their retirement savings.
MS. MARTE: Because so many people never do the math until maybe right before they retire. So having that shock happen earlier can encourage more people to save.
MS. DENT: And it’s basic education, because Social Security provides that now. And now you get that additional level. And so that’s something – there’s actually a bill, the Lifetime Income Disclosure Act, that will give all workers that very simple information, as very important to reframe the conversation.
And also, you know, I wouldn’t do my due diligence if I didn’t talk about some of the other product innovations that life insurers have in terms of helping people secure additional levels of lifetime income. You know, for those who are auto enrolled now into plans, there is usually a lifecycle fund or a target date fund to kind of help people just set it and forget it. And these vehicles automatically adjust your equites exposure as you get older. And there is usually a bond component to that, that kind of safe mechanism, safe savings as it grows.
And so there is actually some innovative products that provides an annuity as that bond part of that portfolio. So as people save for their retirement, they are automatically getting guaranteed pieces. So when they do go to retire, it’s done or them.
MS. MARTE: They have some of that lifetime income include.
MS. DENT: Automatically.
MS. MARTE: Thank you. So let’s take – let’s just leave some time for questions from the audience. If anyone has questions? Yes, right here, Jim. (Laughs.)
MR. KESSLER: Why don’t you come on over. I’ll start off with one quickly. A lot of talk about people with low income, but a lot of times income is a factor of age. So how important is it that people are saving when they’re under the age of 30? Or is that something that – you know, because a lot of times people who are earning $15(,000) or $18,000 or $25,000 a year are 23 or 28 years old.
MR. BIGGS: You’ll hear statistics like, well, a third of, you know, Americans are not saving for retirement. And that’s – we’re all supposed to kind of quake in our boots. If you are under the age of 30, textbook economics says you shouldn’t be saving for retirement. And it says as you – as you get older and your income rises, and then you tend to save. And that’s in fact what people do. Similar with low-income person. If you’re a truly low-income person you shouldn’t be saving for retirement. Lo and behold, they don’t.
So it’s trying to say – and this is the tricky thing – getting at who should be saving for retirement, which means people, you know, who are a little bit older, who are – who have, you know, say, slightly higher incomes, and what percentage of them there are. There is a nice paper that came out of the Treasury. It’s a little bit dated. It’s from 2001. And it used HAX (ph) data, which is how you want to – you want to use administrative data, not survey responses, because people always answer the questions wrong. But they looked at households, working age households above the poverty line, and something like 80 percent who were actively participating in a retirement plan. That tells me they’re acting pretty rationally.
MS. OAKLEY: You know, one of the things I would say is when you look at the data, for example, today, about 46 percent of people between 25 and 35 have a retirement account. And as you get closer to retirement that moves up and tops out at about 60 percent. So you know, it is related to age.
But the other important piece, especially when you have – as you move to this defined contribution system of retirement savings, instead of the pension, defined benefit, what really does matter is that you save early, and you save consistently. And in reality, because of that miracle that we call compound interest – now, compound interest, that 0.1 percent that you get in your bank today, is not as powerful as when it might be 3 or 4 percent, or even let’s say 8. But you know, and at 0.1 percent it only takes 720 years for that money you put in today to double.
So if you think about it, if you start early – and the whole financial industry has these projections that, you know, if you put money away for the time between 21 and 30, and you put $2,000 away, you would end up having more money – and stopped – you would end up having more money than the person who started to save at age 30 and put $2,000 away for every year until they hit 65. And that’s just because those early dollars compound over time.
So when you are in a DC plan, it is really important to save early. And you know, and that’s sort of where you get this – when you look at the lifecycle model and it says, well, you don’t really need to safe for retirement, but if you don’t save for retirement in those first 10 or 15 years, what happens is you are really, you know, behind where you need to be. And catching up is really difficult to do.
MR. BIGGS: It’s not like the lifecycle model’s unaware of compound interest. What you’re asking people to do is lower their income at a time of life when their income is the lowest. And it’s just – you know, it’s just – this is what the textbook model says people shouldn’t do. And in fact, they don’t do it. So you know, if you run the numbers – if people want a smooth standard of living over the course of their life, which again is what theory says and what the research tells people try to do, it says you should start saving most when your income starts to rise, because then you have a little bit extra.
If you’re straight out of college – I mean, I was working on the Hill when I was 25-years old. I had zero money. And did participate in the TSP to get the match, and I pulled the money out and bought a house with it. But it’s just – again, if you have theory saying this is what people should do, and they are in fact doing it, it – a lot of what goes on with retirement savings is this morality play. Well, oh, even if you’re young, if it’s not optimal for you to save, you should save because it’s good for you. Even if you’re poor and you’re going to get a solid replacement rate from Social Security, you should save.
And it’s not a morality play. It’s not about people showing they can put off consumption for tomorrow and all that. It’s about trying to manage your finances. And by and large, people do what theory says they should be doing.
MS. DENT: I just want to add that in addition to age, we should really look at full-time work as well. I think it’s unrealistic to think part-time workers will save. So if you look at the full-time numbers, especially by BLS, you’ll see that 80 percent of full-time workers are covered, and 80 percent of those participate. So that’s a pretty good story.
MS. MARTE: So lots to look at. Thank you all. Let’s take the next person.
Q: Yeah. Karl Polzer, from the Center of Capital & Social Equity, which I started.
And I’d just like to applaud the congressman for starting this dialogue and putting in legislative language a national system, a national system, a near-universal system where – two elements have been mentioned – everybody has a plan, and is auto enrolled. But there’s a third element. And that’s having some money, especially for lots of low-income people. Half of them have nothing now for retirement. Giving them the tax credit could be just put in the plan, the current tax exclusion goes mainly to the upper-income people. So if you’re putting in 25,000 (dollars) as an upper-income person, at your tax rate you’re getting a $10,000 tax break. So take a little of that and move it over to the lower-income people and put it in. So what about combining those ideas? I know it might take a while to get there politically, but I think that should be considered.
MS. OAKLEY: Can I just – the reality of it is the Pension Protection Act said that Treasury should be able to deposit that money from the credit, the saver credit, into people’s retirement accounts. You know, the reality of it is, in the marketplace, number one, just the numbers of getting people to file for it. And if you would call a financial services firm and say, hey, I need some numbers so I can tell Treasury what it is, I’m sure you’re going to get a lot of blank responses back, because it’s not being done in the marketplace. And those are things we need to think about. And I think those are things that, you know, maybe the states can experiment as they put a plan together, and say we’re going to make sure and we’re going to help everybody who’s eligible for the saver’s credit file for it, make them aware of it.
And we want to make sure the provider – because all this money is going to be using firms, like Alane’s members, financial firms in the private sector, to invest that money. But say we want to make sure that you can do this, because so many people at the lower levels who don’t have a plan, who have the small employers, who can’t afford to do a plan, they still could safe if they – and many of them do want to do that. And I think that’s the whole point. Can we get the access? Can we give everybody some type of match, even if the match comes from Uncle Sam instead of their own employer?
Q: And ideally, when you get your Social Security card you get an account, and it could even have $100 in it, you know? Anyhow, thank you.
MS. MARTE: Thank you. This is the last question.
Q: I’m Allison Shelton (sp) from Pew Charitable Trusts.
But I’m really interested in this question of who should be saving by income level, by age. I do think the lifecycle model is a personal optimization decision. It’s me maximizing my utility over my lifetime. And it has the potential to create a mass of people who are reliant on the government in retirement. And when I look at that, I see a dearth of possible fixes for that. For example, Social Security, if you change the vesting – the 10-year vesting period to lower it, so that you get more of the people who have part-time or part-career work histories, you may change work incentives. And I think there would be a lot of opposition to doing it for that reason.
And I’ve looked at this issue some, and I think it’s very hard to reach these people with Social Security. I’m wondering – for that reason, I would suggest that you need to go further down the income level to encourage people to save – even if they’re part time, even if they’re part career. And I wondered what you think about that.
MS. OAKLEY: Well, I think when you start to look at the workforce patterns that we’re seeing with Millennials, some Millennials are only able to get part-time jobs. Some of them are working two part-time jobs. So in other words, their attachment to the workforce is that they’re attached to several employers, not just one. So you’ve got those type of issues. Or you’ve got individuals who are, you know, working, but then driving Uber at night for additional income. How can they get some of those resources into the mix? So that’s one piece of it.
I do feel sometimes that we don’t think about that discipline of saving. You know, if we encourage people to do that. And I think that’s one of the really wonderful things about the congressman’s bill. It does it from the early days. You know, I know for me personally the reason I saved when I started working – I started in my pension plan when I was 22-years old. And I put money away. I put it away because I thought it was going to go back to grad school and take it out to pay for grad school. And then I decided to let my company pay for my MBA. (Laughter.) But then I had to do what they asked. So it – you know, it had other aspects of it.
But that got me into saving. And but what really did it was my dad used to take me to the bank, you know, and open up an account and a savings account. You know, and today some of these low interest rates make that a challenge, to get our children to see that discipline of saving and knowing that it works. And so how do we do that? And I think having the idea of children’s accounts makes some sense, and then being able to translate that, roll it over to retirement if you don’t need it, that 529 education expense is great.
But if you also look at Millennials, they’re not buying houses either at this point. So if you’re not – if you’re not also the other piece of America that they’re doing, is they’re using their home equity as probably one of their biggest assets. But if you’re not buying that house until you’re 45 or 40, or even 35, you’re not – the time you’re going to have that equity build up over time. So to a certain extent – you know, as Andrew said, he got into a plan. He used it to pay for his down payment. You may get some people who will put money away, use that 401(k) vehicle to buy something else that eventually will give them more net worth to deal with things in retirement.
MS. MARTE: Anyone else, final thoughts?
MR. BIGGS: I mean, if you look at the chart I put together on folks at different income levels and what they get from Social Security and what, you know, say, Fidelity said they should have from savings, here are very low earners, somebody who’s, you know, in the bottom 20 percent. They’re going to get a Social Security benefit that’s very close to what they had during their working years. So the question is, OK, we want to make them less –
Q: If they worked their entire career, yeah.
MR. BIGGS: Yes. At extremely low earnings, or if they work part-career at higher earnings it would come out pretty much the same.
Q: Yeah. They’ll get 90 percent, yeah.
MR. BIGGS: But the point is, do we – if we want them to be less dependent on the government, without them over saving for retirement – I mean, the person doesn’t need a retirement income 120 percent of their working-age salary. So if you want to make them less dependent on government, you got to cut their Social Security benefits, get them to save. Now, if you had passed the Bush personal accounts – you’re shaking your head, but this is the logic –
Q: Well, I don’t know if people see that far ahead. You know, you cut my personal – oh, you cut my Social Security benefit for when I retire 30 years from now.
MR. BIGGS: Well, and here’s the – here’s an important thing, I think, when we think about the policy front. I could site you a dozen papers on how people react to Social Security benefits in terms of their own saving, both from the U.S. and other countries. And low-earning people don’t. If you cut their Social Security benefits they’re probably not going to save more on their own, unless you really facilitate it. High income people, if you cut their benefits, they will save more on their own. If you raise their benefits, they’ll save less on their own. They’re optimizing. Low-income people are not, for whatever reason.
But the point is, if you want to make them less dependent on government, you either have to reduce your Social Security benefit, substitute some other saving, or you need to make them essentially have a retirement income that is too high relative to their working age income. And those are kind of your choices. And I’m not sure either of them is a particularly great choice. So it’s – I just don’t worry about it that much. (Laughs.)
Q: Sure. I mean, the very low, we’re talking, what, 10,000 (dollars) a year, poverty level?
MR. BIGGS: About that, yeah.
Q: So that if they had more than poverty level in retirement that might be a good thing.
MR. BIGGS: Yeah, but if you’re having them – I’m fine with raising their Social Security benefits. If you’re saying we want them to save, it means they’d be less than poverty level during their working years. Why do we want to do this? You know, you’re asking – these people are more or less acting rationally. And we, from up here, are saying, no, we want you to act irrationally. I don’t see why we want to do that. It seems they’re smarter than we are. (Laughs.) I mean, they’re doing what the incentives tell them to do.
MR. KESSLER: Thank you. Thank you so much to our panel. We said we wanted divergent views. We got divergent views. (Laughter.) So the message here is you should save, or maybe you shouldn’t save. (Laughter.) But thank you so much. And I’m sure this conversation will continue. (Applause.) Thank you.
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