Gary Burtless Discussing “What growing life expectancy gaps mean for the promise of Social Security”

LUNCH FORUM
Wednesday, February 22nd
with Gary Burtless, Senior Fellow at Brookings Institute discussing “The Growing Longevity Gap between Rich and Poor and Its Impact on Redistribution through Social Security”
Wednesday, February 22nd
Noon – 1:00 p.m.
Location:  
NFIB
1201 F St. NW
#200
Washington, D.C. 20004

Gary Burtless is a senior fellow and holds the John C. and Nancy D. Whitehead Chair in Economic Studies at the Brookings Institution in Washington, DC. He does research on issues connected with the income distribution and poverty, public finance, aging, labor markets, social insurance, and the behavioral effects of government tax and transfer policy.

Debate over Social Security’s Impact on the Federal Deficit

Over the past week, Andrew Biggs of the American Enterprise Institute—and friend of the Foundation—and Michael Hiltzik of the Los Angeles Times have engaged in a debate over whether Social Security contributes to the federal deficit. The debate started over comments made by former Treasury Secretary Timothy Geithner in his new book Stress Test. Specifically over his disagreement with the White House over the statement that shortfalls in Social Security doesn’t add a dime to the deficit. The former said it does; the latter said it doesn’t. Andrew Biggs, in a number of posts—here, here, and here—provides evidence as to why shortfalls do impact the federal deficit.

Senator Rubio’s Proposal to Save Social Security

Senator Marco Rubio (R-FL) this past week released a proposal to fix some of the problems with Social Security. He laid out three goals:

  • Make it easier for Americans to save for retirement;
  • Insure the long-term financial stability of the Social Security;
  • Save Medicare.

Too the surprise and consternation of many on the Left and Right, Senator Rubio’s proposal doesn’t call for the privatization of Social Security. Rather, his objective is to put Social Security on a more stable financial footing in order to preserve it for future generations. Reihan Salan at National Review writes: “Rubio made it extremely clear that he doesn’t just begrudgingly accept Social Security as a concession to political reality that he would eliminate if he could. He makes an affirmative case for Social Security, which he characterizes as a central element of the American dream.”

The senator’s reforms include: (1) allow workers who don’t have an employee pension plan to enroll in the federal government’s Thrift Savings Program; (2) eliminate the payroll tax on those workers who reach retirement age; and (3) end the Retirement Earnings Test, which in affect is a 50 percent marginal tax rate on wages.

One of the best ways to reduce the mounting future liabilities of Social Security is to increase the retirement age—a proposal that faces stiff opposition in Congress. Yet as anyone who has taken an economic course knows is that incentives matter. Senator Rubio’s latter two proposals gives workers the financial incentive to work longer if they choose.

 

Blahous: Don’t Worsen Social Security’s Soaring Cost Problem

Charles Blahous comments on the recent push to expand Social Security benefits.  He provides ten factors to keep in mind when thinking about changing the program.  He writes in conclusion:

But there are good reasons why such proposals have not been supported by mainstream Social Security analysts to date. Not only would such a benefit expansion render it still more difficult to maintain Social Security solvency without large, economically damaging tax increases, it would worsen many existing program inequities, depress worker living standards, and further undermine low-income individuals’ ability and incentive to put aside savings of their own. Though such proposals may bear a superficial political attraction for some, the policy consequences of their actual enactment would be hugely damaging.

 

GAO Recommends Congress Shift Responsibility for Pension Benefit Data to Dept. of Labor

According to a new report by the Government Accountability Office (GAO), management of pension benefit data would be better served if overseen by the Department of Labor (DOL), not the Social Security Administration. The report recommends that Congress consider shifting responsibility and necessary resources to the Department of Labor for administering the programs that provide benefit data to retirees.

The DOL, the Internal Revenue Service and the Pension Benefit Guaranty Corporation, the agencies responsible for administering the Employee Retirement Income Security Act (ERISA), should improve their online tools on reporting requirements and simplify disclosures, the GAO said in the report, “Private Pensions: Clarity of Required Reports and Disclosures Could Be Improved” (GAO-14-92, November 2013).

Because of the separation of reporting requirements and disclosures between three agencies, the reports issued to retirees are confusing and often times misleading, according to GAO’s findings. To make matters worse, not one of the three agencies is tasked with insuring the accuracy of the data.

All three agencies admitted that execution of some of the disclosure requirements had not been a priority, and generally agreed with the GAO’s recommendations. In response to the findings, some action items have already been identified and implemented by the agencies to improve the quality of the information provided to retirees.

New America Foundation- Arizona State Panels on Longevity and Public Policy

Last Friday, Slate.com, New America Foundation, and Arizona State University hosted a series of panels discussing the implications of increasing life expectancy on public policy, retirement, and family planning.

Savings defaults, auto-enrollment, and financial literacy were hot topics. Nudges, “guardrails,” and redefining “retirement” are discussed at length.

Life Expectancy Rate and Impact on Retirement (~40 minutes)

Report Stresses Retirement Income over Savings

A new study by the Stanford Center for Longevity and the Society of Actuaries finds that most employers view their 401(k) plans purely as savings vehicles rather than as a means of generating income for their employees post-retirement. The authors see this mindset as one of the major problems with retirement planning today.

While employees may have money set aside in a 401(k) account, most don’t know what to do with it to generate enough income to see them through their retirement. A volatile stock market and uncertainty over longevity complicates this problem and all too often leaves retirees with inadequately budgeted savings.

As a response to this situation, the study proposes a number of options for employers to help help increase retirement income for their employees, such as annuities and systematic withdrawals. Most importantly, they argue, there needs to be a cultural shift away from the idea of “retirement savings” and towards “retirement income.”

Senate Special Committee on Aging Worries about Baby Boomers’ “Golden Years”

Yesterday, while the Senate as a whole was waiting out Senator Cruz during his negotiated “filibuster” to move forward the continuing resolution to fund the government past September 30th, the Senate Special Committee on Aging took a little more than an hour and half during the afternoon to reexamine the increasing concern among Baby Boomers that they won’t be able to retire at age 65, or if they do, not at the standard of living that they’ve grown accustomed to during their productive years.

Baby Boomers find themselves nearing the Social Security full-benefit retirement age much less financially prepared than they hoped they’d be. The percentage of Boomers carrying debt ages 51 to 62 has risen six percentage points to 70 percent since the early 1990s, and the average debt has risen four-fold to $28,300 — all while the changing landscape in company provided retirement benefits has left many unexpectedly working into years they’d previously set aside for leisure.

There was surprisingly little mention of the dire situation that the Social Security Trust Fund currently finds itself in, or that since the 1950s the average American worker is actually retiring earlier- now 62 years old compared to 68 y/old. Not to mention life-expectancy has risen from 72 y/old to early 80s for workers retiring now–meaning Baby Boomers are expecting to spend approximately a third of their adult life in retirement. Although the remedies offered up for securing Baby Boomers’ golden years were nothing new– greater financial literacy, mandatory life insurance plans, auto-enrollment in company sponsored savings plans, and modifications to Social Security– the discomfort in addressing our own notions of what retirement should be was obvious.

“We’re coming to some tough conclusions here… Work longer is one conclusion. That certainly wasn’t the way it was in the previous generation,” said Chairman Bill Nelson, Senator from Florida.

Small Business Workers Suffer Higher 401(k) Fees

A new study by Bankrate.com finds that employers at small businesses are paying significantly more in fees on their 401(k) plans than their counterparts at large companies. This happens because fees are divvied out among the members of a plan, and so naturally plans with fewer members will have higher fees per member. Additionally, large businesses have the resources and clout to negotiate lower fees with plan providers, an ability not shared by their smaller competitors.

This is a troubling statistic, as relatively small discrepancies among fee rates can lead to huge differences in a worker’s total savings when they are paid out over a period of thirty-five years. Furthermore, small businesses employ nearly half of the American workforce, so it is worrisome to find that they are so disadvantaged when it comes to retirement plans.

Reasons against Defined Benefit Pension Funds

The defeat of Elliot Spitzer as comptroller of New York City last week may be a real blessing for city workers and retirees. The reason has nothing to do with his personal life; rather it has to do with one of his campaign pledges. The comptroller manages the large public pension funds of current and retired city workers. The funds contain a large amount of stocks and Mr. Spitzer said he would use his power as a stockholder to hold Wall Street more accountable. In other words, Mr. Spitzer is more concerned about the political correctness of companies than in maximizing rates of returns on the funds he manages. Continue reading

Employers Cite Worker Attitudes for 401(k) Features

There have been a number of recent studies detailing the ways in which automatic enrollment in 401(k) plans could boost retirement savings and help address the shortfalls we are now witnessing throughout the economy. Yet private employers remain reluctant to include these features in their retirement plans. Only 27% of employers According to new research by J.P. Morgan, only 27% of employers feature automatic enrollment in their 401(k) plans.

Asked why this was the case, employers said that they fear automatic savings will be unpopular with employees. Plan sponsors are also being advised against implementing automatic savings by their financial advisers, with only 14% receiving a recommendation to use automatic savings as an effective retirement tool.

Perhaps there is some legitimacy to the worry that employees will disapprove of auto enrollment. There remains little reliable polling on worker attitudes towards these plans in the U.S. In Britain, more than two thirds of workers are not even aware that auto enrollment exists, and it seems likely that a similar level of unfamiliarity is hindering such plans domestically.

Defined Contibution Plans Gaining Ground

As employers find it more and more difficult to keep up with costs of defined-benefit retirement plans, an increasing number are adopting the alternative strategy of defined contribution programs, in which a set amount is contributed each month without the promise of a fixed level of benefits in the future.

According to Aon Hewitt, the participation rate for defined contribution plans is now at its highest level ever, with 78% of employers participating in 2012. Over the ten years Aon Hewitt has been tracking the data, participation rates have steadily increased from 68% in 2002.

Balances in defined contribution plans have also reached their highest level in six years, with an average plan balance of $81,240 in 2012. These numbers are likely to continue to increase as defined benefit programs become less popular and automatic enrollment becomes more widely implemented.

California’s “Secure Choice” Proposal

With a rash of studies indicating major shortfalls in the nation’s retirement savings, there has been no shortage of proposals to reform pensions, both public and private, and to induce a greater savings rate for younger workers. As Baby Boomers move into retirement, the lopsided nature of the workforce to retiree ration means that now, more than ever, people need to be mindful of where the money for their twilight years is going to come from.

One such proposal is California’s Secure Choice Retirement Savings Program, a mandatory savings initiative that would require private sector employers to put aside three percent of their workers’ pay into a retirement account guaranteed by the government. The proposal is modeled, in part after mandatory savings programs that exist in other countries, and which have widely been touted as successful, with Australia being a particularly noteworthy case. Although secure choice has not yet passed the California legislature, it has the support of Governor Jerry Brown and other states are already beginning to show an interest in adopting similar ideas.

Naturally, the idea of a mandatory savings program is not without controversy. Critics of the idea point out that Social Security was also supposed to be a guaranteed retirement account, but that that promise was broken long ago, leaving the program struggling for solvency. They argue that another entitlement program isn’t the answer, and there are also concerned about an already paternalistic state telling private sector workers and employees what to do with their own money.

Supporters of Secure Choice, on the other hand, are quick to answer that there is an ability to opt out of the savings requirement, and that the program only affects private sector employers who do not already offer some type of retirement account. Three percent of one’s wages is not going to be a sufficient sum on which to retire, but is intended merely to supplement Social Security and any other private savings workers have accrued throughout their careers.

Secure Choice is not the only option on the table to increase American retirement savings; Michigan has been experimenting with a prize-based approach that shows some promise. But California’s bold initiative is one of the more dramatic and attention-getting ideas. If it proves successful, it could end up spreading rapidly, changing the savings landscape significantly in a relatively short period of time.