Americans contemplating retirement can almost despair seeing how Social Security’s fuse may be two years shorter than official estimates and is in need of shoring up at precisely the time when political paralysis in our nation’s capital has grown ever more entrenched.
And yet, stepping back and seeing beyond the maelstrom of partisan clashes in Washington, one can look at the experience of retirement income systems overseas for possible solutions, or at least benchmarks, that may help us solve our own seemingly intractable problems.
To that end, AdvisorOne spoke with Wharton professor and Pension Research Council executive director Olivia Mitchell, one of the foremost authorities on U.S. and international private and social insurance.
AdvisorOne: Are there other retirement systems that policymakers should be more familiar with?
Olivia Mitchell: The Australian one is of particular interest to me because it is mandatory. When it was put into place, they said it would be a good idea to establish a 12% contribution rate, but they put it at 9%. But the 12% rate will be phased in fully by 2020.
In the U.S., 3% or 4% is a more typical workplace rate. We should revisit the question of how much we should be contributing. The Chileans have had a mandatory contribution rate of 10%. I tell my students and adult daughters they should be contributing 20% of their income for three reasons: Longevity is increasing, returns are not as strong anymore, and we’re going to need a lot of money in retirement.
This notion that you can get by on 3% or 4% is very misleading. So the lesson from these countries is, yes, we should be contributing more.
AdvisorOne: With the Social Security insolvency looming, is there a reason not to pursue high, mandatory contributions?
Olivia Mitchell: In the U.S., there are social safety net programs like SSI for those who are destitute in old age, or Medicaid for those who run out of money and need to go to a nursing home.
The question does come up: How much should we be encouraging or mandating low-wage workers to save when there are so many benefits they [stand to lose] in old age?
Many of these folks don’t have the ability to save. And if they were forced to do so, they wouldn’t be able to pay their bills.
In the U.S., if you do save, then you may be less likely to get the Medicaid benefits; you’ll be asked to pay a higher Medicare premium.
AdvisorOne: Does Australia’s experience with means testing hold lessons for the U.S.?
Olivia Mitchell: Australia’s Age Pension scheme [its Social Security equivalent—eds.] is a means-tested benefit program such that if you have too much income or too much assets, you don’t get this benefit.
It becomes an issue when you get to be retirement age and you decide whether you want to take Superannuation [Australia’s workplace-based retirement account] benefits as a lump sum or payout scheme.
You can take the money as young as 55 and take it in a lump sum. So a couple may take their trip around world at 55, and then at 65 they’re entitled and take their age pension, their means-tested bit. The problem is that taking a lump sum may increase the possibility that people spend down their assets.
The Australian system is good with the accumulation phase. Like the U.S., I think they still need to contemplate how to better structure the payout phase.
In the U.S., people quite high up the income scale dispose of [their] assets and rely on the generosity of the taxpayer [to qualify for Medicaid nursing home care].
The tension is inevitable between wanting to provide for the old and poor and wanting to provide incentives to save.
AdvisorOne: Is there an example of a country that is more successful at encouraging saving?
Olivia Mitchell: New Zealand has the “demogrant.” Once you reach retirement age, you’re entitled to a flat amount of money no matter what. It’s not means-tested, so it doesn’t discourage saving. On the other hand, it’s not hugely generous so there’s some incentive to keep working and maintain one’s productivity as long as possible.
AdvisorOne: To what extent has means testing taken root in the U.S.?
Olivia Mitchell: We’ve already moved down the path of means testing, in effect, with more and more of Social Security benefits being subject to tax and means testing for the prescription drug portion of Medicare. The nose of the camel is already under the tent. I suspect that benefits may become more means-tested down the road.
Olivia Mitchell: It seems to me fairly clear there has to be entitlement system reform. It wasn’t a huge topic of debate in the presidential election. And subsequent to the election, I still haven’t heard too much about it.
When the 1983 Greenspan Commission met to fix Social Security, they were about two months away from running out of money for Social Security. They put a number of reforms in place, which were to take effect gradually in the future.
We should similarly announce today changes for the future and give people some advance notice. Our only choices are to work more, save more or consume less.
AdvisorOne: You have recently proposed a policy that would strengthen Social Security without raising costs or cutting benefits by incentivizing longer work careers. Tell us about your plan.
Olivia Mitchell: Some folks have proposed increasing the early and normal retirement ages. I’ve been working on a way to provide an incentive for more people to work longer without people being punished for it.
Currently, if you delay taking Social Security till age 66 instead of 62, you get a [modest-seeming] benefit increase. What would happen if instead of giving a few extra dollars per month, you’d give them a lump sum? It could be $50,000 or $60,000. I believe there would be substantial interest in delaying retirement if you gave people a reward for doing so. And it would have a [positive] effect on system solvency.