Are 401(k)s Enough? Ghilarducci and Biggs Debate Future of Retirement

Teresa Ghilarducci, the Schwartz Professor of Economics at the New School for Social Research, is perhaps best known for her public policy proposals seeking to reform the defined contribution retirement plan system.

For example, Ghilarducci has proposed replacing 401(k) plans and their income tax break with a mandated government savings plan for all workers. One formulation of the plan calls for mandatory savings of 5% of salary, with the government handling all investment decisions, guaranteeing a rate of return above inflation, and ultimately paying out the retirement money in a lifelong annuity.

Earlier in October, Ghilarducci joined Andrew Biggs, another well-known figure in the world of retirement planning, on a webinar hosted by Yahoo Finance, the Bipartisan Policy Center and the Alliance for Lifetime Income. The pair debated some of the top retirement planning trends currently affecting advisors, employers and workers.

In the world of financial planning and retirement, Biggs is perhaps best known for his criticism of the broad base of research suggesting there is a “retirement income crisis” looming in the United States. He is a senior fellow at the American Enterprise Institute.

Given their differing perspectives, the conversation proved to be both lively and informative, with Biggs and Ghilarducci identifying more than a few areas of agreement where they feel policy progress is possible in the near term.

DB to DC Transition Has Peaked

According to both Biggs and Ghilarducci, when it comes to policy discussions about the current state of the U.S. retirement system, it is important to understand that defined benefit pension plans have been waning for a long time, both in the union and private employment context. At this point, the DC system has firmly taken the lead, and DB plans can be expected to shrink even more.

“The DB pensions never really covered everyone, either,” Ghilarducci points out. “They were best when unions negotiated them, but since unions have been crushed in the last 30 years, the defined benefit system really only lives on in the private sector.”

According to Ghilarducci, defined contribution plans have been the more important retirement savings vehicle for many American workers for the better part of two decades. As of the start of 2022, she notes, DC plan assets were approaching $10 trillion.

“People like Andrew and I, who have had stable working lives and who have been covered by 401(k)-type plans all of our lives, we’ll do just fine in the DC world,” she says.

Ghilarducci says the DC plan system doesn’t reach everyone, though, which is why she advocates for a mandatory, government-operated system. She says a mandatory savings approach will better support the millions of Americans who experience career disruptions and intermittent employment, or those who happen to work for small businesses or in the non-profit sector.

“People who have little or only intermittent access to retirement savings accounts won’t be OK,” Ghilarducci warns.

Messy, Steady Progress

Biggs agrees that DB plans are often viewed with unfounded nostalgia. Of course, many people have benefited strongly from lifetime participation in a private pension fund, he says, but that has never been the majority of the U.S. workforce.

“First, you had to have a defined benefit plan, and most people never did,” Biggs says. “And you also needed to stay with the same employer for your whole career, and not everyone did that. If you did that, it was great.”

Biggs says the shift to 401(k) style plans has had key advantages, for example in the sense that employees can take them from job to job. They are also much more common and easier for employers to administer.

Some of the DC plan downsides, according to Biggs, are potentially confusing investment menus and the challenges of drawing retirement income from market-based accounts.