Most retirees’ eagerly anticipated golden years will be tarnished by insufficient income and a consequential decline in standard of living unless consumers and policymakers get cracking now to avert this bleak scenario.
So says Alica H. Munnell, professor of management sciences at Boston College and director of its Center for Retirement Research, who, in an interview with ThinkAdvisor, discusses three critically important pieces of advice financial advisors can give clients who are nearing retirement.
Munnell served on President Bill Clinton’s Council of Economic Advisers and was the administration’s assistant secretary of the Treasury for economic policy. Before that, for two decades she worked at the Federal Reserve Bank of Boston, where she held the posts of senior vice president and research director from 1984 to 1993. Munnell, who has a doctorate from Harvard, joined Boston College, in Chestnut Hill, Massachusetts, in 1997.
Known as something of a firebrand in her Boston Fed days, the forthright Munnell argues now that the way to fix the Social Security funding dilemma is by raising taxes.
For better or worse, it was Munnell who influenced the Obama administration to scrap certain Social Security strategies in 2015. She contended they were unfair because they allowed the affluent to “milk the system,” while lower-income workers had no idea the provisions even existed.
Munnell has long given clarion wake-up calls on the looming gloomy retirement picture. Her most recent book, co-authored with Charles. D. Ellis and Andrew D. Eschtruth, is “Falling Short: The Coming Retirement Crisis and What to Do About It” (Oxford University Press 2014).
In 2016, she testified about expanding retirement savings to the Senate Finance Committee.
The Center for Retirement Research recently published a brief Munnell wrote revealing that when millennials reach retirement age, they’ll likely be in worse shape than savings-deficient late baby boomers and Gen Xers.
She writes: “At a time the retirement system is under pressure,” millennials “are much less prepared for retirement than earlier cohorts.” In the interview, she talks about why.
Indeed, one reason is that the percentage of millennials participating in employer retirement plans is “sharply lower for both men and women … This lack of a savings vehicle is a particular concern given that individuals who do not have a workplace retirement plan rarely save for retirement on their own,” she writes.
ThinkAdvisor recently interviewed Munnell, speaking from her office near Boston. She not only discussed problems facing retirees but offered a few solutions, including how to improve 401(k) plans, which, she opines, “are not doing as good a job as possible.” Here are excerpts from our conversation:
THINKADVISOR: What’s the solution to the Social Security funding dilemma?
ALICIA MUNNELL: Policymakers should fix Social Security by raising taxes. Money doesn’t come from heaven. It’s going to have to come from someplace, and it should be done on the revenue side. We need to maintain benefits. People don’t have anything else other than 401(k)s, and a significant portion of the population doesn’t even have those.
What’s your plan?
Tax increases can be done in a progressive way — [that is], a less harmful way to the average worker. If you include health insurance in the employer-provided health insurance tax space, it will make the rate lower. If you raise taxes on the employer side, you can raise [this] money.
So you think both employees and employers should be taxed.
There’s a philosophical reason, in addition to a humanitarian reason, not to put all the burden on today’s workers. We don’t have a trust fund because we gave it away to earlier generations. That was probably a good policy decision, but there doesn’t seem to be any reason why yesterday’s policy decisions for people who fought in World War I and were harmed by the Great Depression need to be borne by the average worker.
To what extent will President Trump’s tax cuts, which increase the federal deficit, put pressure on reducing Social Security benefits?
The rhetoric is already there: We have deficits; their source is the entitlement programs; we need to cut back on them. “Entitlements” isn’t a word I like. It makes it seem that people are putting claims on something to which they’re not really deserving. In the case of Social Security, people put in money over their entire lifetime, and they essentially get a pension for those contributions. It’s a forced savings program — not a giveaway.
On Jan. 16, House Minority Leader Nancy Pelosi said that Speaker Paul Ryan will “slash Social Security and Medicare within weeks” and that President Trump is “ready to ram it through.” She’s “terrified,” she said. Your thoughts?
Speaker Ryan has back-pedaled on that. His December 2017 statement was very much saying that it was on his agenda for 2018. But his most recent statement, on Jan. 12, acknowledges the political reality that they’re not going to be able to do anything on that front in 2018. He needs bipartisan cooperation to do it. He said he doesn’t see a pathway to entitlements this year.
So he’s postponing it.
He’s postponing it, but that doesn’t mean he’s not going to go after it.
Do you still advocate taxing contributions to pension plans, as you did when you were in the Clinton administration?
I’m not convinced that the favorable tax treatment of retirement savings does much to increase retirement savings. This deserves some attention. For one, most of the benefits go to higher-income people who would have saved already.
What do you suggest instead?
It would probably be fairer — and we’d likely get the same outcome — to have credits instead of deductions so that all the benefits aren’t given to higher income people. Recent academic work has shown that automatic provisions are more powerful than tax incentives. So it’s not clear that we’re buying much with favorable tax treatment.
Your brief, “Will Millennials Be Ready for Retirement?,” released Jan. 23, doesn’t paint a rosy picture.
The state of the millennials is shocking. They’re more educated than any other generation, but their labor-force participation is low, their earnings compared to the median is low, percentage participating in employer-sponsored retirement plans and percentage covered by employer-provided health insurance are both way below Gen Xers and baby boomers. And millennials tend not to relocate to find better jobs.
Your paper talks about millennials’ “lack of wealth in their 30s.” Why do they have less money than Gen Xers and baby boomers had at the same age?
They’ve had a very bad labor force experience and have huge student loan burdens. Those two things have caused many fewer to marry and then buy their own homes. So millennials have ended up with a very low net-worth to income ratio compared to 25- to 35-year-olds in the late baby boomer or the Gen X generations. It’s really a striking story.
What are your thoughts about 401(k) plans? Can they stand to be improved?
Yes. They need to work as well as they can because they’re here to stay, and they’re not doing as good a job as possible. That can be remedied by making them automatic in enrollment and in escalation of the default contribution rate, as well as fixing the decumulation side by providing an income mechanism within the plan.
What should be done to help people that don’t have a 401(k) plan?
Half the workforce isn’t covered by an old-fashioned pension plan or a 401(k) plan. We have a huge coverage gap. That should be remedied at the federal level with an automatic IRA-type provision. [But] some states have [already] undertaken their own initiatives: Oregon has a system up and running. We need to cover the uncovered.
The Bipartisan Budget Act of 2015 did away with some Social Security claiming strategies, such as file-and-suspend, which let people collect benefits based on the work record of a spouse who has deferred receiving their own growing benefits till a future date. I understand you were influential in the Obama administration’s decision to eliminate the strategy. How did that, and ending other strategies, help the government financially?
About 10 years ago, we put out a series of briefs that included three provisions that were unfair and a misuse of Social Security funds. They were, sort of, hilarious. The first was a provision that you could claim benefits at 62; and then at 70, if you decided that was the wrong idea, you could pay back all your benefits with no interest and then get a much higher benefit. It was just outlandish.
What were the second and third provisions? You could claim benefits first as a spouse and then as a worker. It allowed married couples to come out way ahead. The third was that you could claim [file] and suspend.
And what action did you take?
We wrote the three briefs, with indignation, saying that the provisions were outrageous. So instead, The Center became, sort of, the darling of all the financial planners in the country. We thought, “Oh God, we’ve really set the world back.”
How did the government respond to the briefs?
Fortunately, the first provision, the Social Security Administration eliminated with an administrative ruling, and then in 2015, the two others were finally eliminated. So they’re gone. They allowed the savvy to, sort of, milk the system, whereas the unsophisticated didn’t have any idea about [those provisions]. That’s not what Social Security is about — it shouldn’t be full of twists and turns that enable the clever to come out ahead.
What’s your best advice to financial advisors on how they can help clients nearing retirement?
There are three important things. I’ll say them in the order in which they come along in life: Control spending in your 50s; delay claiming Social Security as long as you can; think of your house as something you can use to help support yourself in retirement.
Once your kids leave home and your college education responsibilities are over, control your spending because you want to keep it at a level that’s sustainable once you stop working. Maybe you can take a trip to Paris, but just be careful not to let spending get out of control.
What’s the bonus for delaying to file for Social Security?
This is crucial. If you take benefits at age 70 rather than at 62 [the minimum age], the monthly benefit is 76% higher. You’ll have that base income that’s inflation-adjusted and goes on for as long as you live. If everybody would claim later, the whole retirement picture would look a lot better.
Is waiting till 70 of help to the government?
No. It really doesn’t matter for the government because, on average, the amount of money you’ll get is about the same. You’ll get a higher benefit, but you’ll get it later. The government gains a little if you keep working because you pay payroll taxes and income taxes. But basically the benefits are actuarially adjusted. So on a lifetime basis, you get the same amount at 62 as at 70. But if you wait, you’ll have a much larger monthly benefit if that’s what you need once you stop working.
Please discuss how one’s home is an asset that can be used for income in retirement.
For most middle-income people, their house is their largest single asset. They’ve really put [a great deal] of money into it by paying off a mortgage over their lifetime, and so they could draw on it one way or another.
Why don’t more retirees do that?
The problem is that people hate the idea of tapping their home equity. So somehow we need to find the magic potion that will make that socially acceptable because given the level of financial income people will have, they’re going to need this additional resource.
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