How to Fix America’s Retirement Problem

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Teresa Ghilarducci. Has studied retirement issues for his entire career.

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Courtesy of The New School

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When labor economist Teresa Gilarducci was in graduate school, she helped her mother’s union in Sacramento, Calif., negotiate a new pension plan.

Today, she is campaigning for a mandatory pension for all Americans. The 64-year-old professor at the New School in New York City envisions a plan that would invest in professionally managed funds and bolt on top of workers’ Social Security accounts. She and Kevin Hassett, who most recently chaired President Trump’s Council of Economic Advisors published a paper advocating a program Prepared according to the Federal Workers’ Thrift Savings Plan.

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In Ghillarducci’s mind, America took a wrong turn when it adopted 401(k)s and other tax-deferred retirement plans in the early 1980s and companies began to close or freeze their defined-benefit pension plans. Gave. She says the “do-it-yourself retirement system” works well for the top 5%, but it has left millions with separate retirement income from Social Security.

Under the plan he and Hassett are proposing, workers would invest a large amount of shares in a government fund early in their careers. As they approach retirement, the money will gradually be transferred to income annuities to provide a steady, pension-like income in addition to their Social Security.

Gilarducci has studied retirement issues for his entire career. His ideas took shape in childhood. When she was 10, her father was fired, her parents eventually divorced, and the family’s middle-class life came to an end. Her family was living in subsidized public housing and receiving Medicaid and welfare benefits. She went to the University of California at Berkeley on a scholarship, and later received her Ph.D. There. “I subscribe to Catholic social teachings,” she says: “We don’t care for the poor because they are poor and we are rich. We care for the poor because we are all the same.”

Economists have advised Hillary Clinton and Bernie Sanders, but unlike some progressive politicians, Ghillarducci believes the key to a better retirement for most Americans is market investing.

We arrived at Ghillarducci on a sabbatical in his native state of California. What follows is an edited version of our conversation.

baron’sIs America’s retirement system broken?

Ghilarducci: It’s really simple. You have to save money, invest it well, and spend it so that it lasts for the rest of your life. These are three things that a pension system has to do, and in all three areas, we have become worse.

Why is it broken?

It is broken due to government policies and lack of worker power. We moved away from the system where the government provided a social safety net to give people tax breaks so that they could provide pensions themselves.

And the fact that government policies favored employers over unions meant that workers had no voice to bargain for a defined-benefit plan. The government also dismantled the Social Security system by gradually raising the full retirement age to 67, with the effect of significantly reducing benefits at each age.

Can it be fixed?

Yes. And it’s not difficult. The way to fix this is to make sure everyone saves for retirement early in their career, they save consistently, make good investments, and spend the most in annuities. There are many problems, such as health care costs and climate change, that are far more difficult to address.

Your plan is based on a highly successful and well-studied thrift savings plan, How will the money be invested?

In a low-cost life-cycle fund, a set of assets appropriate to the age of the participant. This would be a diversified fund; You won’t just have stocks and bonds. These can include private equity and real estate—all assets that wealthy people find under professional management. [pension] Plan.

And the incentive to save?

The government will match contributions of up to 3% for middle- and low-income workers, typically those earning less than $50,000 a year.

When it comes to retirement withdrawals, you suggest annuities.

Annuities are an effective way for people to ensure that they will not run out of money for the rest of their lives. It should be a low-cost lifetime annuity, with survivor benefits, purchased from the individual’s account and provided by the government.

What about Social Security?

It would be in addition to, not a substitute for, Social Security. You’ll either get two checks or a hefty Social Security check.

Would you stay away from 401(k) plans?

I’ll let them compete against a more efficient system: a universal government program that has lower fees, is subsidized by the federal government with a 3% match, and doesn’t have conflicting retail advisors who don’t have a fiduciary duty. .

Larger employers that need to attract employees will have their own 401(k) plan, perhaps more generous than a government plan. This scheme is really for those people who do not have any plan at all.

Wouldn’t that increase the federal deficit?

No. We spend $250 billion right now in deductions for the top-heavy, wealth-inequality-creation system. So if we just take $250 billion and redistribute it to the 63 million people who have no pension plans, and reduce the subsidies given to high-income workers, there will hardly be any new spending.

It’s hard to believe that creating a pension for 63 million people wouldn’t be too expensive.

Because the people we will cover are low income people, giving them 3% of their salary is not that expensive. What’s costly is giving people huge deductions for their retirement contributions.

You have been called a socialist.

I am not a socialist. I am really practical. I am now working with Kevin Hassett to get the mandatory pension. So if I’m a socialist, Trump’s top economic adviser, Kevin Hassett, is a socialist.

In fact, many socialists say I am betraying progressive values ​​by demanding advance-funded pensions that invest in the private market rather than massive expansion of Social Security.

How many Americans don’t have enough for retirement?

majority of. I just did the numbers—72% of Americans who are nearing retirement won’t have enough to maintain their standard of living if they retire at age 65. And if everyone works until age 70, about half still won’t have enough to keep up. their standard of living.

How does personal debt factor into retirement decisions?

You have more elderly people reaching retirement age who have a mortgage. This rate has doubled in the last 20 years. Coming into retirement with debt makes you more vulnerable. You are more likely to lose your home if something goes wrong. And you have a lot of older people with credit-card debt. You can tell a 90-year-old not to bother paying off his credit card. Just let it be the default. But older people aren’t shy or badass, they pay off their debt – at great cost.

How do people know they have enough money to retire?

I hate to talk about this topic because when I do a seminar for the common people, I know most of the people will not have enough money and I have raised the blood pressure level in the room.

The rule of thumb is that by the time you’re 30, your retirement account should equal eight times your gross annual income by the time you turn 50, and By the time you turn 65, you should have 10 to 12 bars.

What should people do if their employer fires them before they are ready to retire?

This question concerns more people than you can imagine—52% of retirees say they retired earlier than expected. They were excluded either by retrenchment or, indeed, out of prejudice of age, or were excluded because of their own health and physical or mental limitations, or that of a spouse.

So what should they do?

They should be prepared for a long unemployment period. It takes twice as long for an older worker to find a job, and there is a much higher chance that they will find a job that pays much less than before. They should probably plan on downsizing on a more permanent basis.

But for most people, claiming Social Security is a good option, except for people with terminal illnesses or dependents, as long as you can wait until age 70. You’ll get a much higher monthly benefit if you wait, and that benefit is adjusted for inflation for the rest of your life. Most people underestimate how long they will live.

You have researched how long people live after retirement. What have you got?

People who have less wealth are more likely to die very quickly. So I like not only the disparity in retirement wealth, and not just the disparity in length of life, but the growing disparity in the timing of retirement—because the people who have the most can retire early.

When are you planning to retire?

I am a full professor and a thriving chair and therefore control the pace and content of my work. So I expect to retire in my 70s. People who have control over the pace and content of their lives tend to work longer hours.

Thank you, Teresa.

E-mail: [email protected]

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