The US pension system is broken. This economist is trying to fix it.
Economist Alicia Munnell tells America it has had a retirement problem for decades, and by most measures it has gotten worse. The Center for Retirement Research at Boston College, which she directs, calculates that half of households will have a reduced retirement because they haven’t saved enough.
But unlike some economists and researchers who want to destroy our pension system, Munnell thinks the problem can be solved by fixing what’s already in place. She says the government should shore up Social Security finances by raising taxes, not cutting benefits. She says that retirement savings plans should be available to all workers and that all workers should be automatically enrolled in them when they start a job. Finally, Munnell says a growing number of Americans are going to have to work longer to save more money in retirement and maximize their Social Security benefits.
The 79-year-old professor may seem like an unlikely advocate for working-class Americans, having grown up on Park Avenue in Manhattan and earning his doctorate. in economics at Harvard University. But a job as a researcher at the Brookings Institution when she was 23 showed her that there were people tackling important issues and she wanted to be among them. She worked at the Federal Reserve Bank of Boston and served as an economics officer in the Clinton administration before joining Boston College in 1997 and starting the retreat center a year later.
We joined Munnell in his office in Boston. His comments have been edited.
Barrons: How serious is our retirement problem?
Alicia Munnell: It’s really very serious. For people in the top 40%, the system works well. For those below, it really isn’t. 401(k) plans have proven to be good accumulation mechanisms for those who have consistent coverage and earn substantial amounts.
How could it be fixed?
Any one of us could design an ideal system, a better system. But I’m fine with the school we have what we have. And the test is to make this system work as well as possible.
The problem is twofold. First, not everyone has that second tier of retirement income typified by 401(k) plans. And, second, people aren’t putting as much into their 401(k) plans as they could.
How would you make retirement savings plans more effective?
You need to automatically enroll people and you need to have default contribution rates that automatically increase. Most importantly, we need to expand coverage so everyone has a workplace savings plan.
My colleagues and I have worked extensively to encourage state plans, where state governments have introduced a requirement that employers who do not offer a plan must automatically enroll their employees in a Roth IRA. The employee can always abstain.
Which states use them?
So we have these auto IRA programs in place and running in Oregon, California, Illinois. I think Connecticut just boarded and Maryland is about to board.
But the idea of having 50 separate programs across the United States doesn’t make sense. What we really need is a federal program.
Must be a Roth?
It must be a Roth. First, being able to deduct contributions [as with plans like 401(k)s and traditional IRAs] is not very important for low-income people. And second, a Roth allows people to withdraw the money they’ve contributed when they need it. It gives them a piggy bank they can turn to. This means they have money if they get into a car accident, if their roof needs fixing, or if they have some other emergency.
How much tax increase would it take to make Social Security solvent?
If it were totally financed by a payroll tax on the current base, it would require an increase of 3.5%, half of that paid by workers, half by employers. The rate would be lower if we increased the maximum taxable income for Social Security, and even lower if we financed part of the costs through income tax revenues.
Why do you think working longer is a good thing?
Retirement is a relatively new phenomenon. People in the old days, before Social Security, really worked until they couldn’t physically work anymore.
Work provides structure. It offers social interaction. He provides money. It offers all sorts of goodies for people who have relatively attractive jobs.
I am very sensitive to the fact that the prescription to work longer does not apply to everyone. Not everyone is healthy enough to continue doing so. But for anyone who can work longer, it’s certainly the way to ensure a secure future.
Is it safe because you will save more money or have fewer years in retirement?
All the foregoing. And you get your biggest Social Security benefits if you work until you’re 70. If you work less, your benefits are reduced.
You are still working at 79. Do you plan to retire?
Yeah, I’m actually preparing to have fun and not do anything serious at all. I look forward to passing the reins of this successful institution to someone else. But of course, it won’t be for a few years.
How did you get to Boston College?
After five years in the Clinton administration, I returned to Boston. I was 55 then. I had irritated the banks because I had done a very big study on discrimination in mortgage lending which had generated a lot of attention. I had annoyed the insurance companies because I had written about the change in pension taxation.
So three people from British Columbia came and said, Would you like to have the Peter F. Drucker Chair in Management Science? So I said, ‘Yes, I have no other alternative. It just looks wonderful.
The more I said that I had no other alternative, the more they said, “She’s so modest. I was not modest. I had no options.
Your retirement home has done a lot of work on retirement assets. How much savings should a retiree have?
It depends on when you retire. For an average person, maybe 10 times their income.
How many Americans take this test?
What we find is that about half of the current workforce is prepared, meaning they have enough to maintain their current standard of living in retirement, and 50% are unprepared.
How much is the system to blame and how much are Americans to blame for the lack of savings?
It’s the whole system. People need automatic savings mechanisms. And they don’t have them. Without it, asking people to save is simply unrealistic.
Was switching to 401(k)s and abandoning private pensions a mistake?
Oh, I think it was a natural evolution to move away from the defined benefit plan. But no one would ever have designed an additional system that resembles 401(k) because it leaves so much discretion to the individual. But the old defined benefit plan, I don’t think it would have continued to work. Because it really assumes that you stay with your employer throughout your working life, and the workforce has just become much more mobile. And with a defined benefit plan, you really lose benefits when you switch careers.
House prices are skyrocketing. Could this be a retirement bailout for some?
For most middle-class people, their home is their greatest asset after their Social Security wealth. People could simplify their lives by tapping into their home equity in retirement. But people don’t think that way. They want to preserve the value of their home either to leave a legacy for their children or to have some protection in the event of costly long-term care at the end of life. So they are very, very reluctant to touch their house.
How can this be changed?
Massachusetts and other states have a property tax deferral, but it needs to be simplified and accessible to everyone. And then when you die or move, the money that is deferred is paid back with interest. If this were operational for a larger portion of the population, it would be a way for people to use some of their home equity to get heat, medicine and things like that in retirement.
I’ve long been a fan of reverse mortgages, but it seems too complicated for people. They don’t know how they work and they hate them at the same time.
Fifteen years ago, you worried that many baby boomers wouldn’t have enough money in retirement. Now many of them have retired. How did it work?
Just as we thought. They don’t have enough money in retirement.
So what are they doing?
You do what you have to do. You skimp.
You’ve been talking about the retirement problem for a long time, and in some ways it’s gotten worse. Do you keep hope?
Yes, I still have hope. Because it’s really not that hard to improve things a bit. We need to fix Social Security, and we can do it. It’s not rocket science. It’s just a political will.
We need to fix the 401(k)s. We know how to do this. We must continue to encourage people to retire later. They already do.
We need to expand coverage, and we can do that through auto IRAs. So all of this can be done. He just needs someone to pay attention and do it.
Thank you Alicia.
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