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Fixing Retirement Without Tax Hikes or Benefit Cuts

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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:


Why did you write “Rescuing Retirement”?


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.

Why is that?

They wouldn’t be tied to selling individual products. I think many financial advisors don’t like doing that, anyway. Everyone needs financial advice about how to manage their lifetime consumption, but people don’t need the advice that financial advisors give, which is [often] to choose among mutual funds that charge high fees and for which advisors get a commission for selling. That system has failed.

Many advisors would disagree with you.

Most of the financial advisors I meet are very honest people and are filling an important role in people’s lives. But the piece I’m taking away from advisors is the most controversial one and the one that doesn’t work very well: telling people what funds to invest in. That’s conflicted and inefficient.

You write that people will likely ask if GRAs will be “a windfall for Wall Street.” What’s your answer?

Clearly, we’re going to have private-sector companies invest the money, just as we have private-sector companies build roads and rocket ships. Those companies don’t get a windfall. So this won’t be a windfall for Wall Street either. The companies [who manage the money] are going to be regulated and will be scrutinized for their prices and practices. It will be more regulated than it is now.

That doesn’t dovetail with President Trump’s deregulation promise and to have less government in Americans’ lives. The GRA plan requires an act of Congress and would be managed by a federal agency. What are the chances for its enactment?

The retirement crisis is on the minds of most voters; and older people [nearing retirement] are much more likely to vote. The plan [adds] onto a program that people already like: Social Security. We look mainly to Congress — there’s not much leadership in social policy coming from the White House. The plan has a lot of elements that Republicans would like. So we believe both parties would support employees securing their own financial future.  

Why did you pair up with Tony James to write the new book?

He’s as close to the system as one can get. He understands its weaknesses. He brings the employer vision and the investment vision. He has strong opinions about how public policy should go and contributes a lot to political campaigns. He invests for pension funds and is a corporate director of several companies; for example, he’s the chairman of the board of Costco.

Would the investment firm that he runs, Blackstone Group, have a business role in the GRA plan?

Probably not. He invests money only for very large pension funds, and most of his funds are closed. His motive, as far as the GRA is concerned, isn’t to make more money for his business.

You refer to GRAs as an “annuity.” I assume that’s “annuity” in the generic sense?

Right — an annuity like Social Security pays or that a defined benefit plan pays, not a product that insurance companies sell. Those products aren’t popular, and they don’t work.

You write that GRAs would bring people an annual return of at least 6% or 7%. How do you figure that?

It’s just an estimate, not a guarantee. The principal would be guaranteed [as much money as a worker contributes]. That’s minimizing the downside risk. The upside will be a return that’s smoothed out over the whole group and over time.

When can money be withdrawn from a GRA?

Either when you start receiving Social Security benefits or before then [if you opt to] delay collecting Social Security. The whole idea is that the retirement system isn’t there to help you accumulate money for your heirs.

Is that what people do now?

One of the problems with the system is that we’re giving tax breaks for bequests. That’s not the intention of a tax break for retirement saving. It’s not there for rich people to leave money to their children. That’s bad public policy.

Do you think that all workers will want a GRA?

It’s a budget solution to a problem, [alternative solutions to which] people don’t want. We can cut benefits, raise taxes or force people to save. When you ask which they want, whether Republican or Democrat, they’d rather be forced to save. Right after Trump was elected, we surveyed 3,000 people. Most picked forced savings of those three options. And people don’t like their 401(k)s — and they really don’t like their IRAs.

But probably there would be plenty who say they don’t want the government to force them to save.

I’m not naïve to think everyone is going to agree with our plan. But I’m speaking to people’s common sense and their emotions of fear and shame. I want to change those feelings into power and hope. The only way you get there is to have a strong Social Security system and constant savings in a well managed financial plan.

What reaction to the GRA have you had from government?

High-ranking leaders from both parties are very intrigued that it bolts onto an already-established system, Social Security. No politician has [introduced] a bill – but we’re not doing this for next year. We’re planting the flag for a really good idea that can come up at the right time, which might be the next recession.

When do you think that might occur?

Most economists assume there’s an over 50% probability of a recession in two years. The economic expansion has gone on for 10 years now. There’s a lot of concern about debt. Most of us expect a correction. [Prior to Feb. 4], stocks have gone up about 300%, but earnings and sales of corporations have gone up less than 70%.

And that all means?

There’s a big mismatch between the valuations, the stock market and companies. What firms are doing with their money is buying other companies; they’re not investing in new ideas. Very little innovation is going on.

You first published this GRA plan, in less fleshed-out form, in 2008, the time of the financial crisis. What was the reaction then?

People were really open to it. The staff of Sen. Ted Kennedy, who died right around then, was very interested in expanding the Social Security system with these accounts. But short-term problems were the question: The banks and the auto industry had to be saved rather than [focusing on the long-term problem of funding retirement].

Do you think a GRA has a better chance now?

Absolutely. People will be very receptive to it when the stock market takes a dip. A lot of people are smarter and more sophisticated now. Having these ideas on the table when the time is right is very important. That’s why I’m doing what I’m doing.

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