Elizabeth Bauer / Contributor
Retirement – I write about retirement policy from an actuary’s perspective.
Commissioner Kara M. Stein spoke to the Brookings Institution on Tuesday, giving a talk titled “The New American Dream: Retirement Security.” Here’s what she had to say:
Since World War II, Americans have planned their retirements around the expectation of combining a pension, Social Security benefits, and personal savings to provide sufficient income for their golden years.
Due to a number of factors, the financial health of the Social Security trust fund has been declining. According to the 2018 Trustees Report on Social Security, the fund will be depleted by 2034. That is only 16 years away. At the same time, the availability of employer-provided pension plans has also been declining. Few private sector workers today have access to a pension, and many public sector pension plans are facing severe financial problem.
We’ve moved from a collective retirement system to one in which each person is expected to go it alone.
The retirement crisis is a tsunami that is rapidly approaching.We can already see it and, indeed, we are starting to feel its effects. Americans are having to work past traditional retirement age. And the number of bankruptcies for those over the age of 65 has increased dramatically. The size and speed of the tsunami is likely to increase as it gets closer and closer to us. Our population is aging and the cost of medical care—an important factor for retirees—is increasing. We must address this problem before we are collectively underwater.
As an SEC Commissioner, I’m here to talk about solutions specifically related to the third leg of the stool—investments. Stashing away money in a savings account only gets retirees so far. To have a safe and secure retirement, Americans must invest their savings to allow them to grow. Given the importance of investment to Americans’ ability to retire, what can the SEC do to help?
Stein’s talk continues by addressing the need for improved financial education, and suggests the SEC might create a model curriculum for schools, create spelling bee-like contests, and create an app, for instance. They might also work to improve the readability of disclosures in an investment prospectus, with key information up-front, or require that 401(k) disclosures include information on projected retirement income. She revisits the question of the now-discarded plan of holding investment advisors to a fiduciary standard (that is, prohibiting them from steering clients to investments which pay higher commissions) and suggests that a (less-desirable) alternative might be educating investors to ask whether their advisors have conflicts of interest. In addition, because of the impact that severe market downturns can have on retirement-savers, the Commission should, while recognizing that downturns are a fact of life, look at actions to mitigate the likelihood of the most severe market crashes.
And she makes a final proposal:
To harness the creative thinking of a wide range of people, I believe the President should issue an executive order to create a Presidential Working Group on Retirement Security. The working group would assemble regulators from the Departments of Labor, Treasury, Commerce,the SEC, and others. It would also bring together major market participants, such as asset managers, exchanges, broker-dealers, and others to determine private sector solutions wherever possible. The purposes and functions of the group would be to enhance the state of retirement security in the United States by making recommendations regarding legislative, regulatory, or other changes.
She’s not alone. In 2017, the Government Accountability Office made a similar call in its report, “The Nation’s Retirement System: A Comprehensive Re-evaluation Is Needed to Better Promote Future Retirement Security,” which evaluated recent developments and the overall retirement landscape, concluding:
Congress should consider establishing an independent commission to comprehensively examine the U.S. retirement system and make recommendations to clarify key policy goals for the system and improve how the nation can promote more stable retirement security. We suggest that such a commission include representatives from government agencies, employers, the financial services industry, unions, participant advocates, and researchers, among others, to help inform policymakers on changes needed to improve the current U.S. retirement system.
At the same time, the Washington Post reported, again on Tuesday,
Senate Majority Leader Mitch McConnell on Tuesday called the ballooning budget deficit “very disturbing” but said large federal spending programs were to blame, dismissing criticism that last year’s GOP tax cuts are saddling the country with more debt.
and, like clockwork, Democrats pounced:
“Like clockwork, Republicans in Congress are setting in motion their plan to destroy the Medicare, Medicaid and Social Security that seniors and families rely on, just months after they exploded the deficit by $2 trillion with their tax scam for the rich,” House Minority Leader Nancy Pelosi (D-Calif.) said in a statement.
and Forbes contributor Teresa Ghilarducci used the report as a springboard for an article urging Americans to vote to defend these programs and offering up some defenses that she calls “key realities,” first, that Social Security is an essential form of insurance” (actually it’s not; it’s social insurance, which is something different); second, that “Social Security and Medicare benefit all workers, whether white-, pink-, or blue-collar” which is true but misleading (the system has significant cross-subsidies, not only providing proportionately greater benefits to lower-income folk, but also to couples with one spouse earning low or no wages, to parents, and to ex-wives of serial divorcers); and, third, that “Social Security is on sound financial footing” because we “only” need to raise taxes by 2.83% or eliminate the earnings cap (but total spending on programs for the elderly is projected to grow to nearly 30% of total GDP, and any increase in taxes — whether in terms of the overall payroll tax or the increase in taxes for higher-income folk that an elimination of the earnings cap would amount to — can’t just be done in isolation, because money directed to middle-class retirees is money that’s not spent on needs of families, for example).
So I’m all for a Blue-Ribbon Commission, or a Working Group, and I’d gladly tout my preferred retirement reform proposal, which, as regular readers will recall, combines a flat anti-poverty benefit for all with a funded truly-earned contributory account-based system for middle-class pay replacement. But at the same time, we shouldn’t build a myth of a pension “golden age”; even at their height, employer sponsored pensions only covered around half the working population , and, even then, the lion’s share of their benefits went to workers who were at the same employer for their full career. And we’re not in some Retirement Dark Age now. Here’s Forbes contributor Andrew Biggs:
The Census Bureau study found that the median retiree’s income rose by 32% above inflation from 1990 through 2012, a period during which SSA data show that real median wages for workers rose by only about 11%. When retirement incomes grow faster than worker earnings, retirees will generally have a greater ability to maintain their pre-retirement standard of living.
And incomes did not grow only at the median: over that same 1990-2012 period, incomes for lower-income retirees rose by 31% and the poverty rate among Americans 65 and older dropped from 9.7% to 6.7%, reflecting rising incomes even for poorest retirees.
And with respect to future retirees:
The Urban Institute’s Dynasim model estimates that the median retiree in 2015 had income sources and assets sufficient to support a total annual income of $37,887. By 2025 real median incomes are projected to rise to $40,880, and to $42,165 by 2035. The Urban Institute model also projects that poverty rates in old age will fall, a reflection of high real incomes among the poor.
And on the third hand, there remain reasons to worry: woefully-underfunded public pensions and (certain) multiemployer pension plans, retirees at risk of falling through the cracks regardless of the statistics, the new challenges retirees face of managing their money in the face of unknown life expectancy, and the need for an economy able to accommodate individuals working later in life. (Stein’s claim of increasing bankruptcies for older Americans, however, is based on an August report that has been disproven.)
The bottom line is that, no, the sky is not falling, but there are actions that the government, private organizations, and employers can take to improve the system. And if there’s to be a Working Group or Blue Ribbon Commission, count me in – just so long as it’s based on data, not ideology or scare tactics, please!
The bigger question is, can retirees or those soon to be retired, count on swift action by these entities or do they have to rely on themselves to protect their nest egg? Based on past performance, it seems obvious to me that protecting one’s wealth will ultimately be the responsibility of the retirees. Having faith that the government is going to fix it without significantly impacting one’s retirement plans just doesn’t seem to be prudent, especially given the past performance of these entities.