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Retirement Planning > Saving for Retirement

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

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What You Need to Know

  • Teresa Ghilarducci has proposed replacing 401(k)s with a mandatory, government-run savings program.
  • Andrew Biggs says the retirement crisis is overblown.
  • One thing they both agree on: The retirement reform bills in Congress are sorely lacking.

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.

“Today, we are actually seeing defined contribution plans adopting some of the things that made traditional pensions work,” Biggs points out. “So, we are going towards automatic enrollment and shifting away from do-it-yourself investment portfolios in favor of target-date or lifecycle funds. Fees on these funds have dropped considerably, as well.”

In sum, Biggs says, the progression of retirement savings in the U.S. has been “kind of messy, because everything in the U.S. is messy.”

But, ultimately, “retirement savings are up,” he says. “Participation in these plans is up. Retirement incomes are up. So, I think we are going in the right direction.”

Causes for Concern

Ghilarducci agrees that progress has been made, but she is more skeptical about what the future holds if workers continue to have to voluntarily commit to saving, and if they are left to their own devices when it comes to the conversion of investments into retirement income.

“We need to make sure that people start accumulating retirement savings from the very beginning,” Ghilarducci says. “My proposal is to create a mandatory private pension system to go alongside Social Security.”

Biggs says he appreciates the desire to help more people access savings opportunities, but he wonders whether mandatory savings would harm lower-income workers who need to prioritize shorter-term financial priorities.

“I think we also need to keep in mind that some retirees, the lowest-income retirees, will tend to be mostly protected by Social Security, even during a time of high inflation,” Biggs says. “People at the top of the income distribution are protected as well, because they have their assets as a hedge.”

In this sense, Biggs says, it is more concerning to think about the average middle-class worker and whether they are going to be positioned for a stable and dignified retirement.

“There isn’t a single story to tell,” he says.

Key Policy Proposals

Asked about what new policy proposals they are most interested in at the moment, Biggs and Ghilarducci both cited the concept of creating a national retirement account clearinghouse that could help people to find and potentially consolidate their retirement accounts.

For her part, Ghilarducci strongly dislikes some of the provisions included in the big retirement reform bills current making their way through Congress. For example, she says the proposal to allow people to delay taking required minimum distributions until age 75 would only benefit the wealthy while reducing tax revenues. She says the same is true of the proposal to permit substantially larger 401(k) plan “catch-up contributions” for people who are over 60.

“A lot of the ideas in these bills really only help people at the top,” Ghilarducci suggests. “There’s only a small percentage of people who actually get real wage increases after the age of 50, and a disproportionate number of those are white men with professional degrees. So, if you want a proposal to help white men with professional degrees and high incomes, this would be the legislation for you.”

Biggs says he is actually mostly in agreement with Ghilarducci on that point.

“I don’t really like the legislation much more than Teresa does,” he says. “The reality is that the financial incentives to participate in retirement plans don’t do a heck of a lot. At the end of the day, I’m optimistic about our system, but if you think more people need to be saving for retirement, we have to automatically enroll them or we have to mandatorily enroll them.”