The Do-It-Yourself Retirement System Isn’t Working. Retirement Pro Teresa Ghilarducci Has Solutions

Updated : Aug 26, 2019 in Articles

The Do-It-Yourself Retirement System Isn’t Working. Retirement Pro Teresa Ghilarducci Has Solutions


Teresa 40 percent of older workers and their
spouses will experience downward mobility in retirement. What’s going on. Well 40 percent of middle class workers who
are about ready to approach retirement don’t have enough money in their retirement accounts
or don’t have any retirement account. So when they reach retirement age they will only depend
upon Social Security and Social Security isn’t enough to maintain a middle class worker’s
retirement standard of living the standard of living they reach when they were when they
were working. And what’s happening is not so much the fault
of the workers who are coming into retirement. The problem is that this cohort the generation
of workers have lived under an experiment in the United States that kind of a do it
yourself experiment where governments have shrunk their pensions especially Social Security
but also Medicare. Premiums went up and companies have moved away from offering or expanding
their retirement options. And so for the past 40 years the boomer generation
has really had to know the ropes and started saving from the moment they started working
and kept that money in an account almost every year for two forty two years for the system
to have worked for them cause that’s unrealistic. We’re now seeing the result of that that do
it yourself pension experiment we’ve been conducting for the past 40 years. What’s interesting is this experiment is really
for those people who are lucky enough to have an employer sponsored plan a 401(K). And of
course IRA’a are new relatively new as well. But what about the rest of them too. You know
that that that aren’t covered. is their predicament worse or better than it was let’s say 40 years
ago? We were never in a golden age of retirement
let’s say in the 70s and 80s because. Not everybody was covered by a supplemental plan
on top of Social Security. But the numbers were a lot larger than people thought. At
any one point in time there were about 50 percent of workers were covered by a defined
benefit plan but by the time a worker’s reach retirement the chances that they had passed
through an employer that had had a defined benefit plan or somewhere along the way that
they collected vesting benefits was far higher than half was about 70 percent. And often
those defined benefit plans were valuable if you were vesting towards
the end of your working life. And that’s when people would stop shopping for job and stay
with an employer for a period of time. So the data is quite remarkable because I see
retirees now who are living on the do these plans Now they’re not rich on DB (Defined Benefit)
plan but they had spousal benefits. So surviving spouse would have a steady income for the
rest of their lives sitting on top of Social Security and the chances. That someone with
a modest DB plan would be poor in retirement is almost zero. The kind of a lower middle class workers with
a DB plan remained a lower middle class retiree. Where we’re seeing a lot of risk of poverty
in our older people who have some defined contribution plan or nothing at all because
when you get older that money runs out or when you’re living alone and the money is
has already run out and you actually have a little bit more expenses when you’re living
alone because two people can live a lot cheaper cheaper per person than one person. So they’re
The defined benefit system was not perfect but it was much much better than the system
we have now. your thesis is that it’s not our fault that
basically it’s the do it yourself system if this experiment as you described it that really
it is the main problem. But when I look at the savings rates for instance and this has
been something that you know for the last 40 years as a matter of fact that the savings
rate of the US have overall declined and you’re an economist, you tell me if that’s accurate
but isn’t it also the case that we’ve become much more consumer oriented and that in fact
that we’re not saving enough don’t we share some of the responsibility for our retirement
Security? The idea that we can blame the victim, you
know this generation of workers without enough savings in their voluntary accounts is the
first place I went to as well. You know we’re ruining the environment with our consumerism
and the third world, and was there something about credit cards and advertising and even
social media that made us more present minded or wanting more immediate gratification. And
the research just doesn’t show that’s true that humans really haven’t changed that much
over the past 70 years. We were when we had a defined benefit system and longer term relationships
for their employer which actually provide a platform to save for retirement, humans
were just as impulsive as they are now. So what has caused the big break is that we don’t
have the institutions that help people save and that explains the decline in the savings
rate in accumulation for retirement not a change in personality or culture. Also you would think that people in France
or Italy, places where roads you know the the joy of living is even better have better
institutions for retirement savings. So if we think that we’re that Americans are
pretty much facing the same kind of cultural changes that other Europeans are it’s really
the Americans that have really fallen off. And so it’s institutional. But the idea of
blaming the victim and wanting to be able to control our own Destiny, that’s a that’s
important human reaction is to say Hey I just saved more. If I do save more I can save myself.
The flip side of that is to blame yourself and to not be accurate in blaming really the
victim. It’s our failed system that’s flawed not not flawed human beings. And even if we
are flawed human beings we should have systems that that help us do the right thing. And
I can tell you what kind of system we need. But we have been moving away from a well-designed
system for the past 40 years. Let’s quickly address the system failures.
And you’ve written extensively about two of the major ones which is one is lack of coverage
the access to the employer sponsored retirement plan. There is a real lack of coverage. And
the other one is as you just referred to the switch to the 401(k)s, the defined contribution
versus the defined benefits is flawed because it’s voluntary it’s easier to withdraw. You
get a lump sum at the end. There are all sorts of hazards there so you want to just quickly
address the failure of these. This do it yourself retirement system? Yes. That was so well said first Only half
of workers are covered by a 401(K) system. But even if everyone was covered by a 401(k)
system and we implemented these laws that opted everybody into a 401(K) or even individual
retirement account the system would still fall short because of the structure of the
system. And the system fails three ways a system has to be able to help people accumulate
enough money for over their entire working life. And most people want to do it. Nobody
is clamoring to make Social Security for instance voluntary. People want to be personally responsible
in part for their own retirement and they’re willing to say if we see that over and over
and survey what we have to have a system that helps people accumulate. The second thing
a good system has to do is help people invest every dollar they save for retirement for
the long term well and efficiently in a 401(k) or IRA is just terrible at helping people
invest securely and efficiently. And third people don’t want to get rich on their retirement
savings. They want to be secure. And so there’s no way as you pointed out that a lump sum
can. Through an individual’s effort be transferred into an efficient. Annuity or lifelong monthly
benefit on their own. Because of all the problems with somebody having to go out into the insurance
market and buying a single insurance and health insurance that’s not group health insurance
is much more expensive. So as a an individual annuity for the 401(k)
or IRA is an individual account that a person has to decide to contribute to with or without
the help of their employer. The person has to direct their investment That even professional
ones have a difficult time doing. They have to live their lives as American workers do.
And. When they are faced with losing their house or having to fund the transition from job to job then having
money available taken it out of retirement isn’t a matter of immediate grab a vacation
or some kind of flood. It’s rational it’s just sitting there. And the third thing is
is that we have a system that’s built for at 55 having one hundred two hundred thousand
maybe even a million dollars in their account right at the time that they are quite vulnerable
not only are they are they aging and at risk of cognitive decline they are also at a period
of time where they may be alone. So we’re basically setting up our seniors to be prey
to predators. In the United States we have five times the amount of financial abuse of
seniors than you see in other countries. And that’s basically because our system like pins
thousand dollar bills to the shirt jacket you know lapels of our elders send them on
a bus and say hey you better get financially literate out there and manage your money.
It just isn’t a system that is reality based you know based on the realities of the workplace
or the realities of what older people need. You mentioned the fact that it’s not because
somebody has an impulse to go out and spend madly that they raid their 401(K) accounts
and you and your team at the New School publish a paper analyzing retirement savings. And
your conclusion basically was that if you looked at all income levels that no one is
safe that basically stuff happens. So w the kinds of events that again enable us to kind
of necessitate us going into our savings accounts before we are even in retirement?. Yeah well we’re not. None of us are immune
to stuff. There are three things that happen that really into to drain accounts. One is
job loss or a loss and ours or even the not being able to get inflation increased you
know wages have stagnated for the past 40 years it’s really hard to save when you don’t
get a raise. The third thing that happens that people get a divorce and a divorce specially
in middle age can halve your your assets. Recessions happen. Recessions can wipe out
your financial account at the same time. It wipes out your ability to get a raise or or
to find a job if you lose it. And the other thing that happens even though
it’s less prevalent but I suspect it will increase more is that people do have health
and disability incidences. Even if it’s not permanent that makes them have to withdraw
from the labor force. For their own disabilities. Temporary or permanent also their spouses.
So that we are a community of human beings that need to take care of other human beings.
And we also are on the mercy of the economy and our employers and frankly on whether or
not our skills continue to be in demand in the marketplace or whether or not they depreciate
very very fast. And these are all things that are really out of the control of an individual
and those are the things that that are that make our retirement savings very vulnerable
to leakage. that vulnerability to leakage of your retirement
account affects people whether they’re poor middle class or even the very very rich. It’s
just that people in the bottom 80 percent of the distribution in 90 percent of distribution
just are more likely to have more of those things. More job loss more depreciation of
their skills. And just more vulnerable. There are several fixes that are commonly
mentioned out there and one is and I’ve talked to guests on WealthTrack about them. One is
that, t make participation in 401(K)s mandatory, to make a contribution larger than one and
a half percent of your income, another one is to insist that everyone work longer. What
about those those partial solutions. Why don’t you say they will be effective. Let’s really talk about what we need to do
as a nation, just public policy. And let me talk about also what individuals can do while
we wait around for the politicians to act. The first thing we need to do is to get everybody
saving at the very beginning of their work life. We we went halfway by having everybody
i Social Security for every single hour they work whether it’s gig work or independent
contracting work self employment or you know regular employment. So everybody’s in you
know from the first moment that they start working. We need to do that with a pension
plan. Let’s talk about solutions I’ve mentioned
in my introduction to you that you and Tony James the executive vice chairman of Blackstone
have written a terrific book called Rescuing Retirement and in it you do have a solution
and you call the solution to the do it yourself retirement system that is broken according
to you and Tony James. It’s called guaranteed retirement accounts. GRA What are they. Our National solution to this retirement crisis
is a pensions for all plan for everybody would have an individual account called a guaranteed
retirement account from the very first moment they start to work you start paying into Social
Security and you start paying into your guaranteed retirement account. Your also pays into the
retirement account like your employer does for your Social Security. We propose that
we start at a minimum of one point five percent for each employee and the employer. F a young
person who starts at that level they could just ratchet that up gradually over time and
they would be able to maintain their living standards. F most of us w would want to contribute
a lot more than just the total 3 percent, 5 percent, even 6- percent would make us really
comfortable in retirement. So we would get everybody in and everybody
saving employer and employee. We would also have these a professionally managed, so a
worker wouldn’t have to decide whether or not they should have equities, bonds, t kind
of equity, that kind of bond. They’d be tempted time the market. We just have a track record
to show that individuals don’t do as well as professionals. We would also have a board
that would make sure that the choices people had to invest in the kinds of managers would
be highly regulated. We don’t have that kind of guarantee now. And then at the end of their
working life they would be able to take that lump sum and convert it into a guaranteed
annuity for life. Just like social security is guaranteed. So they wouldn’t have to worry
about being old and suffering through a recession. So that’s what a guaranteed retirement account
is. And it’s a bold plan. I think several politicians
are interested in that plan and also Republicans and Democrats are interested in that plan,
t politicians are and so are voters because it pulls and adds in personal responsibility
along with with a with a well-designed structure or a platform And I might add that among the benefits which
you’ve one is that it’s self funding because the worker and the employer are contributing
to it kind of from the get go or whenever they start. And also it’s paid through the
Social Security system so you’re not creating a new bureaucracy right. That’s exactly right. your pension plan can never be underfunded.
It’s self-funded. There’s no exposure for the government and the Social Security system
is so efficient it knows your number and knows where you were it already tracked your your
employment. And so just adding that administrative addition
which is not that expensive means that we bypass a lot of the administrative cost. So
it’s a it’s a system that other countries have and it’s a system that a lot of workers
have when they work from big big firms. We’re just extending that efficient system kind
of a pyramid system, Social S on the on the bottom and a well funded well managed pension
plan you know in the middle for all workers. And I’ll add being the it’s well funded but
the well managed is my understanding is that the default manager would be your state pension
plan which actually have pretty good track records certainly much better than the track
records of the 401(K) investments. Right you know there are about 170 state and
local pension plans, a by far most of them are very well managed and and only a few aren’t
funded. But the underfunding that you hear about in New Jersey and Illinois isn’t the
fault of the management it’s the fault of the governors and the legislature is not funding
them. So most of the state and local pension plans are very well managed because they’re
big. We also looking into adding a default manager being the thrift savings plan you
know that has a long term investment Sidecar add to it. T Thrift Savings Plan is what federal
workers save through so a worker would be able to choose who their manager is but the
default that they don’t choose would be their state pension plan. In the meantime Teresa and we are living with
a flawed system that is not working well for many Americans. So what can we do as individuals
If we’re near retirement what can we do to help them all up our retirement savings plan. if you’re young it’s easy for me to give advice
and I won’t even bother here. But it’s about letting compound interest know work for you,
save a little bit 5 percent. Don’t look at it, don’t don’t time it, you know go to Vanguard,
go to index funds. It’s just a lot easier to talk to a young person. It’s harder, have
to admit it’s just very difficult to talk to an older person who might have just gotten
divorced or has a skill that they just know is not that marketable in the marketplace.
So if they’re 55 and I know I’m pretty sure there’s going to be a recession coming up
in a year. My advice is to really downsize your living standards really do whatever you
need to do. You know Buddhism you know a mindfulness you know really reassess what your spending
pattern is. Get a budget do all of those hygienic things for your budget so that you don’t sacrifice
yourself or feel deprived or put upon mindfully with your own power and choice bring down
your your spending. And that’s where personal responsibility but also psychology even brain
chemistry is really necessary here. I don’t want to make people feel just crushed by personal
austerity but it is important to get your spending down. It’s important to try to work
as much as you can into your 60s. And I know that’s very hard for some people and impossible
for, for others. I important to know that delaying your Social Security your own worker
benefit in social security can have a huge payoff. So even if let’s say you’re 62 and
you have forty thousand dollars in your IRA or your 401(K). I would suggest living on
that with a little bit of work, maybe bringing in a border, doing a little gig work. Anything you can to delay even six months
or a year. If you have one hundred thousand dollars delay at your collection for three
years. If you have two hundred thousand dollars try to delay all the way up to 70. For everybody
with a worker benefit waiting to collect means that you earn a guarantee of six point seventy
five to eight percent depending upon when that delayed retirement year is. So what you
want to do is try to bridge the gap between your full time work and your collection of
Social Security. You mean you can retire but you don’t have to collect Social Security
your full benefit will come when you’re 70 and that for someone who doesn’t have a college
degree. It is very unusual to be able to find work and work that isn’t just awful all the
way up to 70. I also recommend that people don’t rely on
a reverse mortgage you know sometime in their future. They’re a lot more risky than people
realize. First of all a lot of housing that older people are in isn’t appropriate for
an older person. It might be when you’re 55 it’s totally inappropriate when you’re 75
and reverse mortgages rely on people thinking that their, their house is going to go up
in value. And a lot of houses don’t go up in value. When we saw a lot of the American
housing stock fall in value in the recession and stay down for a while. So it’s better
when you’re healthy and you can and you can manage it. It’s a downsize sort of earlier
in your retirement life and not wait till 70 or 80 So those are my that’s my suggestion. Let’s discuss the outlook for a recession
and you told me that you went to a conference of economists recently and the majority of
them are now predicting a recession in 2020? In 2020. what do people in retirement or actually what
do people planning for retirement do in the event of a recession. Well first of all when you’re when you are
in a recession the values of your stocks and your bonds are going to fall. So you’re going
to see a decline in the value of your portfolio. You really don’t want to have to just sell
those assets when they’re falling in value to pay for bills that you anticipated. So
I Would hope that people try to pay off their mortgage or get rid of their fixed expenses
right before a recession. For a lot of people it’s their mortgage. For
other people it could be car loans or other kinds of debt. So get out of debt no matter
what kind of debt it is as fast as you can while you still you still have your job and
you still have some flexibility. So you don’t want to get into a recession in debt. And
you also want to be psychologically prepared that you don’t panic. If you don’t have to
take out your money when your accounts fall then you are losing
what we think you’re losing on paper you know they’re not realized losses yet. So if you
can hang on it’s likely in a couple of years your assets will come back. Now you won’t
have as much as you have planned but you won’t have that kind of drop that you had. So I
would right now try to. Everybody. Try to reduce your debt and. And actually go to your
basic spending As if we were in a recession now. You know
cut the cable now. in love with your stuff, get All your stuff out of your closet, and
your house and just like you know pour a glass of wine and you know bring your stuff some
flowers. But really get rid of the impulse to buy new stuff that consumer discretion
money can can really hurt your budget. Learn how to cook. And then if you kind of prepare for the austerity
that a recession might have then you’ll feel more in control. Lately I’ve really been concerned
about the data we’re seeing about depression,low level depression among the elderly and a lot
of that is because of shame and a feeling that people don’t have that much control over
their lives or the locus of control. And if people are savvy to know that that they’re
at risk for that they might be able to prevent that Great advice. Thank you so much for joining us. this has
been Theresa Ghilarducci. She’s the director of the Schwartz Center for Economic Policy
Analysis at The New School and head of its retirement equity lab. She is the author of
many books The most recent being Rescuing Retirement retirement with Tony James. And
it is a terrific book with solutions for our retirement crisis and I hope it gets traction
in Washington. Thank you so much Theresa for joining us on WEALTHTRACK. You’re welcome. It was really great to talk
to you.

15 Comments

  • No thank you. We already pay 12.4% into Social Security (the government has clearly demonstrated they can't manage that properly). We don't need Social Security Part 2 with bureaucrats playing politics with our retirement savings.

  • No way do I want the government handling the money I'm supposed to be using for retirement. Noooo…Thanks!

  • Social Security could be a globally significant asset manager, if it managed its portfolio like a professional asset-management company. But all of the Social Security trust’s assets are invested in U.S. Treasury securities. Based on the 2018 annual statistical report, the yield on the trust’s portfolio was about 3% and falling because interest rates have dropped. Norway’s system allows investment in stocks on a global basis and it often held up as a model system.

  • It is the fault of the "workers" under this experiment. If you are spending 15k a year on cable, coffee, cell phones, eating out, tobacco and alcohol instead of prioritizing your retirement then you have chosen your path. If you dollar cost average over a long period of time and stay disciplined and invested there is nothing stopping you from retiring in a comfortable fashion.

    The S&P 500 has an average rate of return of over 12% for the last 100 years. Adjust for inflation but include dividends reinvested and you get almost 10%. If you invest 2500$ a year; which is less than half of what you can invest in an IRA, for 40 years you will end up over 2 million dollars pre inflation if the average holds (granted there could be a downturn or a recession or a long term bear market) so bad timing can effect your results.

  • Standard of living falling significantly after retirement – welcome to the rest of the world, Americans.

  • She says you may have to sell your stocks to pay for debt when the economy is bad. I don't agree. Most solid companies bounce back and if I do sell my stocks I'm getting rid of my dividends that DOES pay me on a consistent basis.

  • So change Social Security to a national pension system. Of the 12% tax from you and your employer 8% would go to your pension plan and 4% would go to a general fund to support the less fortunate in society. Maybe this plan could let you add more if you so chose. I thought the median spending for retirees was just under $4000 a month and spending tends to go down in retirement? A married couple both receiving Social Security should be able to get somewhat close to this. Savings or part time work should get you close to this number! This is especially true if you once children are out of the house, the mortgage is paid off, and your cars are paid off. How much more do you really need when you hit retirement age? Discretionary spending tends to go down as you not trying to accumulate more stuff. Perhaps spending on travel goes up, but that also slows later on. The only other thing will be medical cost.

  • Greg Harris, what is your answer to the problem besides trolling replys in the comments below? It's easy to say that someone's comments don't supply a solution to the problem, but when you don't provide your own suggestion, then what's the point of being critical of others?

  • I started investing in real estate 10 yrs ago and now I get how fucking stupid it is to have all your money in stocks and bonds. Retirement is about creating a positive monthly cash flow that is equal to or higher than what you spend. Good Luck doing that in the market. I do pick stocks and am very good at it but I do it with the money I make off my tenants. When that account builds up I buy more real estate and start the process all over again.

  • boo hoo…. save money…. my parents are about to retire and have way more than enough because they make good decisions…. they don't get a pension by the way

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