This week, Here & Now will take a look at America’s retirement system. We’ll find out how well prepared people are financially, how secure Social Security is and how to reform it, how retirement in the United States compares to other countries, and how to help people save for retirement.
Today, Here & Now’s Jeremy Hobson looks at how people can be better prepared for retirement and if raising the retirement age is a good idea. He’s joined by Alicia Munnell, director of the Center for Retirement Research at Boston College and former assistant secretary of the Treasury under President Bill Clinton, and John Laitner, professor of economics and director of Michigan Retirement Research Center at the University of Michigan.
About half of American workers are not financially prepared for retirement. Traditional pension plans are disappearing, and one out of three working Americans don’t have access to a savings plan, like a 401(k), through their employer, so many end up not saving anything at all. And without reforms, many worry that Social Security benefits may not be there for them in 20 years.
How would you rate the current state of retirement in this country?
Alicia Munnell: “I’m a professor type, so I would give it a C minus. We put out an index that shows the percent of households that are not gonna be able to maintain their standard of living once they stop working, and that number’s around half. So that seems like a very bad situation of people who are going to expect a drop in their retirement.”
John Laitner: "I’d be a little more optimistic. Maybe I’d give it a B. Many people have pensions where they work, and have saved, and it’s also true, I think, that once you retire, your expenses go down a little bit. But at least it’s certainly correct that there is a segment of the population which is concerned that they may not have enough resources to have a very good retirement. It’s also true that people are living longer than ever before, and that’s certainly good. We’ll have to work around that and we can take advantage of it.”
What is the problem there? Is it because people are not saving? Is the government not doing enough?
Munnell: “The problem is two-fold. On the one hand, people are going to need more money, because they’re going to be living longer. They’re going to be facing high and rising healthcare costs. Interest rates are very low, which means you need a bigger pile. At the same time that people are going to need more, the traditional sources of retirement income are contracting. Social Security replacement rates, which are benefits related to earnings, are going to go down. People's balances in their 401(k)s are very modest. They don’t save outside of 401(k) plans and half the people don’t have any kind of pension coverage at all.”
Some argue that a way to work around the issue of living longer is to have people working longer.
Munnell: “I certainly think that’s one component of the solution. Working longer is the most powerful lever. If you claim your Social Security benefit when you’re 70 instead of 62, it’s 76 percent higher. Also it gives time for 401(k) assets to grow. If you can do it, people should do it.”
Is raising the age for Social Security a solution?
Munnell: “So, we ought to call raising the age for retirement under Social Security what it is. That is a benefit cut. I don’t think we need any further benefit cuts in Social Security. We do need to tell people that age 70 is the age at which you can get your maximum benefits and you should try to work as long as possible.”
Laitner: “This is a subject that I have done some scholarly research on. I think if people can work longer, since they’re living longer, it can be a very good thing. Then you have more years of earnings. This can help a lot on your budget, and your financial condition for retirement. I think since people are living longer, it would not be unnatural that they would take part of that time to work longer.”
Would people working longer make things difficult for younger people to enter the workforce?
Munnell: “That is the common fallacy that is very prevalent in Europe, but not so much in this country, that there is a lump in labor. So for every older person that stays in the labor force, one younger person is not going to have a job. We live in a dynamic economy; if people work, they earn, they spend and we have seen women flood into the labor market and not squeeze out younger people or any other people, so I don’t buy into that.”
On the idea of making Social Security means tested
Laitner: “It is true that some people rely on Social Security much more than others, and it is also true that the benefits schedule provides bigger replacement rates for lower income people than higher income people. But that’s already built into the system. I think, philosophically, it’s a desirable feature of the system, that we all have a stake in it. It’s something we all pay into and we all get a return on.”
Munnell: “I couldn’t agree more with John. We also should note that we tax benefits under the personal income tax, so we try to introduce some progressivity into it. But I think everyone has to pay in.”
What needs to be done so that Social Security still exists when people retire?
Munnell: “My view is, you’re right, there’s a gap between promised benefits and revenues and there’s no manna from heaven. My view is that that gap should be closed primarily by raising taxes and putting more money into the system.”
Laitner: “Bringing the system as it is now set up into balance, I think will require a lot of little changes and I would put everything on the table, including moving up the normal retirement age a little bit.”
What can be done to encourage people to start saving for retirement at a younger age?
Munnell: “I think one place to start is that people only save through organized savings mechanisms. They save through a plan at work and they save through paying off their mortgage. You can’t just go around telling people that they should save more, because that’s not going to happen. It depends how well the private sector retirement system is working. I’m not sure the old defined benefit system would have worked in this new age when you’ve got people moving around... We’ve ended up in a world of 401(k) plans and they’re here to stay, and I think our job is to make them work as well as possible and they could work much better than they do.”
How could 401(k)s work better?
Munnell: “They need to be fully automated, so if you’re going to have a 401(k) plan, you have to automatically enroll all your workers. You have to have a sensible default contribution rate. That means if you’re going to put people in, you should be putting them in at a 6 percent contribution rate. Then I think you need automatic escalation in that rate, maybe until it gets to a 10, 11, 12. Then we just have to keep remembering that if we take a snapshot of the private sector at any moment in time, half those workers have nothing at work. So the coverage issue is a big issue too.”
What would fix it on the private sector side?
Laitner: “Well many people do have substantial saving. Many people have equity in their house. Beyond that I would say it’s a matter of education; keeping people aware that they can have a much better retirement and they can retire earlier if they want to if they have followed through on a sensible savings plan. It’s a laisse faire economy, where we have to rely on individual people to act in their best interests, but we have to have education so that they know what those interests are. It is difficult to think way ahead when you’re young.”
Some employers won't ever provide 401(k)s - or should they?
Munnell: “People have started to realize that there is a big coverage issue and the president has proposed introducing auto-IRAs, where every employer in the country that doesn’t provide a plan will be required to auto-enroll his employees in an IRA. Nothing has happened at the federal level at all, not surprisingly, and so the states have taken up the mantle and California in the lead, but now Connecticut, Oregon and Illinois are all starting to set up state systems where those who do not have a retirement saving plan at work will have a mechanism by which they can save.”
Laitner: “I agree with Alicia that we have to try to get maximum coverage for people in pension plans and in some jobs, service jobs and so on, it’s harder than others. We need to keep trying. There needs to be portability; people move from one job to another, it has to be easy to carry your pension without invading its principle into the next job when you leave the first one and we have to think about the defaults so people don’t actively have to go through a lot of steps to enroll. It has to be automatic and make it as easy and streamlined as possible.”
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