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.