How to solve the retirement problem in the United States

When labor economist Teresa Ghilarducci was in graduate school, she helped her mother’s union in Sacramento, Calif., Negotiate a new pension plan.

Today she is campaigning for mandatory pensions for all Americans. The 64-year-old professor from the New School of New York is considering a plan that would invest in professionally managed funds and be added to workers’ social security accounts. She and Kevin Hassett, who headed President Trump’s Council of Economic Advisers, recently published an article advocating for a program modeled on the Thrift Savings Plan for federal workers.

In Ghilarducci’s mind, the United States went wrong in adopting 401 (k) s and other tax-deferred retirement plans in the early 1980s and companies began to abandon or freeze their plans. defined benefit pension plan. She says the “do-it-yourself retirement system” works well for the richest 5%, but has left tens of millions of people with no retirement income outside of Social Security.

Under the plan she and Hassett are proposing, the workers would invest in a government fund, heavily in stocks early in their careers. As retirement approaches, the money would be gradually shifted into income annuities to provide a stable pension-like income in addition to their social security.

Ghilarducci has studied retirement issues throughout his career. His opinions were shaped in childhood. When she was 10, her father was fired, her parents finally divorced, and the family’s middle-class life evaporated. Her family ended up living in subsidized social housing and receiving Medicaid and social benefits. She went to the University of California at Berkeley on a scholarship, and then got her doctorate. the. “I subscribe to Catholic social teachings,” she said, “We don’t take care of the poor because they are poor and we are rich. We take care of the poor because we are all the same.

The economist advised Hillary Clinton and Bernie Sanders, but unlike some progressive politicians, Ghilarducci believes market investing is the key to better retirement for most Americans.

We reached Ghilarducci on sabbatical in his home state of California. A modified version of our conversation follows.

Barron: Is the American pension system broken?

Ghilarducci: It really is that simple. You need to save money, invest it well, and spend to make it last the rest of your life. These are the three things a retirement system needs to do, and in all three areas we’ve gotten worse.

Why is it broken?

It is broken because of government policies and the lack of power of the workers. We have moved away from a system where the government provided a social safety net to give tax breaks to people so that they could provide pensions themselves.

And the fact that government policies favored employers over unions meant workers had no say in negotiating a defined benefit plan. The government has also eroded the social security system by gradually raising the full retirement age to 67, which has had the effect of drastically reducing benefits at all ages.

Can this be fixed?

Yeah. And it is not difficult. The way to fix this is to make sure everyone is saving for retirement early in their careers, saving regularly, investing well, and spending mostly on annuities. There are a lot of issues, like health care costs and climate change, that are much more difficult to solve.

Your plan is modeled on the very successful and well studied Savings savings plan. How would the money be invested?

In a low cost lifecycle fund, a set of assets appropriate to the participant’s age. It would be a diversified fund; you won’t just have stocks and bonds. They could include private equity and real estate, all of the assets that the rich get in a professionally managed setting. [pension] plan.

And the incentive to save?

The government would match premiums up to 3% for middle- and low-income workers, typically for those earning less than $ 50,000 a year.

In terms of retirement withdrawals, you offer annuities.

Annuities are an effective way for people to ensure that they will not run out of money for the rest of their lives. It should be a low cost life annuity with survivor benefits, purchased by the individual and provided by the government.

What about Social Security?

It would be in addition to social security and not replace it. You will either get two checks or a larger Social Security check.

Would you delete the 401 (k) plans?

I would let them compete with a more efficient system: a universal government program that has low fees, is federally subsidized with a 3% match, and has no conflicting retail advisers who have no fiduciary duty.

Large employers who need to attract employees will have their own 401 (k) plan, probably more generous than the government plan. This plan is really aimed at people who have no plan at all.

Would that not add to the federal deficit?

No. We are now spending $ 250 billion in deductions for the heaviest and most inequitable wealth system. So if we just take that $ 250 billion and redistribute it to the 63 million people who don’t have a pension plan, and we just cut back on the subsidies that we give to high-income workers, there is no would have virtually no new expenses.

It’s hard to believe that creating pensions for 63 million people wouldn’t cost a lot.

Because the people we cover are low income people, giving them 3% of their salary isn’t that expensive. What is expensive is giving huge deductions to the most senior people for their pension contributions.

You have been called a socialist.

I am not a socialist. I am just very practical. I am now working with Kevin Hassett to get mandatory pensions. So if I’m a socialist, Kevin Hassett, Trump’s top economic adviser, is a socialist.

In fact, many socialists say that I betray progressive values ​​by calling for a funded pension that invests in the private market rather than a massive expansion of social security.

How many Americans do not have enough for their retirement?

More. I just did the numbers: 72% of Americans approaching retirement will not have enough to maintain their standard of living if they retire at 65. And if everyone works to age 70, about half will still not have enough to maintain their standard of living.

How is personal debt taken into account in retirement decisions?

You have more seniors who are reaching retirement age and have a mortgage. This rate has doubled over the past 20 years. Retiring with debt makes you more fragile. You are more likely to lose your home if something goes wrong. And you have a lot more seniors with credit card debt. You can tell a 90-year-old not to bother paying their credit card. Just leave it as default. But the elderly are not crooks or scoundrels, they pay off their debt at great expense.

How do people know if they have enough money to retire?

I hate to talk about this topic because when I do a seminar for regular people I know most people won’t have enough money and I have increased blood pressure levels in the room.

As a general rule of thumb, at age 30 you should have the equivalent of your gross annual income in your retirement account, at age 50 you should be eight times, and at age 65 you should be ten to 12 times.

What should people do if their employer fires them before they’re ready to retire?

This question concerns more people than you can imagine: 52% of retirees say they have retired earlier than expected. Either they were kicked out by layoffs or, in fact, because of age, or they were kicked out because of their own health and physical or mental limitations, or those of a spouse.

So what should they do?

They should be prepared to have a longer period of unemployment. It takes an older worker twice as long to find a job, and they are much more likely to find a job that pays much less than before. They should probably plan to downsize on a more permanent basis.

But for most people, except those with a terminal illness or without dependents, waiting as long as possible, until age 70, to claim Social Security is a good choice. You’ll get a much higher monthly benefit if you wait, and that benefit is adjusted for inflation for the rest of your life. Most people underestimate how long they will live.

You’ve done some research on how long people live after retirement. What did you find?

People who have less wealth are likely to die much sooner. So I see not only an inequality in the wealth of retirement, and not just an inequality in the length of life, but an increasing inequality in the length of retirement, because the people who have the most can retire earlier.

When do you plan to retire?

I am a full professor and holder of a chair, so I control the pace and content of my work. So I am thinking of retiring at 70. People who control the pace and content of their lives tend to work longer.

Thank you Therese.

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