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February 08, 2018 at 08:14 AM
If the federal government mandates all workers and employers to contribute 3% of wages to individual employee pension-style Guaranteed Retirement Accounts, will America’s “jumbled, broken” retirement system be fixed?
Retirement security expert Teresa Ghilarducci, an economics professor at the New School for Social Research, says yes indeed, in an interview with ThinkAdvisor. Her bold plan would also change the financial advisory profession, she argues.
The present retirement system isn’t merely a broken hodgepodge, it’s “a disaster,” according to Ghilarducci. Consequently, the U.S. is headed for a retirement catastrophe, where millions will suffer in poverty-stricken old age.
A Guaranteed Retirement Account (GRA), providing a supplemental stream of income to Social Security, will avert that, Ghilarducci writes in her new book, “Rescuing Retirement: A Plan to Guarantee Retirement Security for All Americans” (2nd edition — Columbia University Press — January 2018). The professor’s co-author is Tony James, president and COO of the Blackstone Group investment advisory firm, manager of large pension funds.
The Social Security Administration would handle GRA payments, but the program would not be a government entitlement.
While Ghilarducci focuses on those earning less than $100,000 a year, a GRA would benefit high-net-worth people, too, by providing them with a safe place to invest versus making costly mistakes in their 401(k)s, as is often the case, she says. The income stream would also help ease anxiety about outliving one’s money, a persistent fear that even the affluent, especially older women, harbor.
Where do financial advisors fit in? They would still help folks manage their entire portfolio; but should a GRA become law, the advisory profession would change dramatically, as Ghilarducci describes in the interview.
Focused on the retirement-funding dilemma for 35 years now, the economist is director of the New School’s Retirement Equity Lab, which researches the future of Americans’ retirement. She is a trustee of the Goodyear Tire and Rubber Co. Health Care Trust and the United Automobile Workers Retiree Medical Benefits Trust.
Further, Ghilarducci serves on the board of the Economic Policy Institute and is a past commissioner of Gov. Arnold Schwarzenegger’s Public Employee Post-Employment Benefits.
Under the GRA plan, employees and employers would each automatically contribute 1.5% from worker salaries. Independent contractors would contribute 3% on their own. All funds would be pooled and invested by a board of professional investment managers appointed by the president and Congress.
Individuals would choose a pension manager, who would be held accountable to investors. These managers, in turn, would select the money managers to make actual investments.
At least a 6% or 7% annual return for each saver would be realized, Ghilarducci estimates.
The “guarantee” refers to the worker’s “protected” principal; that is, each saver will get back at least as much as they put in. Unlike 401(k) plans, people would be prohibited from withdrawing funds prior to retirement.
No congressional bill has yet been introduced for the plan, but Ghilarducci believes it would likely receive serious consideration when the next recession hits — an event she anticipates occurring in two years.
ThinkAdvisor recently interviewed the professor, on the phone from her New York City office. She and co-author James, Costco board chairman and who reportedly declined the post of Commerce secretary in President Barack Obama’s administration, are certain that the GRA plan will ensure “a failsafe” retirement. Here are excerpts from our conversation:
THINKADVISOR:
Why did you write “Rescuing Retirement”?
TERESA GHILARDUCCI:
I want to prevent a coming crisis. For 35 years, I’ve been working on the issue of how to fund retirement. I declare the present system a failure and a disaster.
You write that inadequate funding of workplace retirement is “a political time bomb with potentially devastating effects on [government] budgets and the macro economy.” What could happen?
If we don’t change what we’re doing, we’re going to have millions of middle-class people who are downwardly mobile into poverty.
How will that affect America’s cities and states?
They’ll have to provide more services or let these older people starve. Low-growth communities depend on elders for their spending. Therefore, if we have a big chunk of our population with very little income, it’s going to affect local commerce.
To what extent does your GRA plan help affluent people?
I’m shocked that almost 20% of people in their 50s making $250,000 a year have nothing but Social Security [for retirement]. A GRA will help affluent people have a safe place to invest. Right now, they’re in self-directed commercial accounts, in which they make a lot of mistakes. They have no idea how to decumulate their assets. And they’re worried stiff that they’ll live too long. A GRA would also help the wealthy get their children to save early so they can be more financially independent.
Women outlive men, as we know. You write that “women ages 75-79 are three times more likely than men to be living in poverty.” So a GRA will clearly help them.
I wish I could have put this in red letters in my book: When people have even as much as $1 million and don’t have a guaranteed [retirement] payment stream, they get very worried. When an old woman dies with $25,000 in a shoe box, research shows she probably lived her last years in anxiety, possibly malnourished, because she didn’t know how much money she needed and how long she needed it to last. That, and having to manage the money yourself, is causing trauma, depression and anxiety in a huge part of the population.
Who’d be responsible for investing people’s money?
Pension managers that individual savers would choose [from a long list].
You write that it is they who would select the money managers who’d handle the actual investing. A wide range of institutions would manage the accounts, including money management firms and mutual fund companies, you say.
Yes. It would be the same kind of apparatus — Commonfund, for example — that manages large pension funds.
But savers would have little say, then, as to how or where their savings would be invested.
They could choose among the large managers, but they wouldn’t pick the investments. It would be very similar to a 529 plan in that way.
What role would financial advisors play?
They would help people decide how much to save, help them choose the fund manager and help manage their entire portfolio, including their house and debt. I would imagine financial advisors’ entire profession would change.
