Letitia JamesOn November 12, 2014, the Wall Street Journal published "Pension Access for All is Priority for New York City's Public Advocate." The article covers Public Advocate Letitia James' announcement that she plans to introduce legislation in the New York City Council to study how to create pooled retirement savings accounts for city residents without access to employer-sponsored pension plans.

James stated, "Quite simply, too many New Yorkers are not prepared for retirement." She cited research from SCEPA's Retirement Equity Lab, which analyzed city residents' preparation and ability to retire. SCEPA found that 60% of workers in the city did not have access to a retirement savings plan at work, a 17% decrease over the last 10 years.

Her announcement adds to the reform effort of City Comptroller Scott Stringer, who announced creation of an advisory board to study potential reforms at SCEPA's Confronting New York City's Retirement Crisis conference in July, 2014. Public Advocate James gave the keynote address at the event.

This article appeared on Huffington Post's Money blog on October 17, 2014. 

We recently disagreed with Andrew Biggs and Sylvester Schieber when they said the retirement crisis is not real. They responded with data showing that people over the age of 65 maintain their standard of living not through adequate retirement savings, but work.

Here's the rub -- work is not retirement. To the contrary, when people have to work in old age due to inadequate retirement savings, that's a retirement crisis.

The Urban Institute and Social Security Administration (SSA) predict that poverty rates among the middle class elderly will be slightly lower than their parents and grandparents. Biggs and Schieber are right about that -- but only if older Americans double their work effort.

Working in old age is not only a violation of this country's historical social contract with workers -- that after a lifetime of work, older Americans should have the choice to leave an increasingly unfriendly workplace without fear of poverty. It is also ineffective. At The Schwartz Center for Economic Policy Analysis (SCEPA), our research has revealed the reality behind the "work longer" solution to the retirement crisis. The shocking fact is that older workers between ages 62 and 65 have seen their job quality eroded by increasingly more physically and mentally demanding jobs. This is also consistent with a gradual decline in older workers' bargaining power, as evidenced by falling pay for older workers and increasing long-term unemployment rates.

Instead, we propose and support efficient and practical pension systems that allow people to save enough during their working lives to retire when they need to, including both when they choose to no longer work or when they are no longer able to work. These solutions include preserving and expanding Social Security benefits by gradually increasing the Social Security payroll tax gradually (which has been stagnant for almost 30 years), securing existing defined benefit plans, and creating universal Guaranteed Retirement Accounts that provide individual, mandatory savings accounts on top of Social Security.

To help highlight the issues and get us to the right policies on retirement reform, we continue the respectful conversation with Biggs and Schieber on the current retirement landscape.

Measuring a Retirees' Ability to Maintain Their Standard of Living

Biggs and Schieber cite one part of a 400+ page OECD report saying the average American over the age of 65 has an income 92 percent of the national average. Unfortunately, this number isn't relevant to the question of a retirement crisis. To understand if people will have enough income to maintain their standard of living in retirement, we need to know how retirees are doing relative to workers.

How we answer this question depends on the metrics. First, income captures both income from retirement savings and earnings from work. Monique Morrissey at the Economic Policy Institute reminds us that American seniors work or look for work at much higher rates than their global counterparts.

Second, because the United States is home to some of the world's most extreme inequalities in income and wealth, the average measure of senior income in the U.S. is skewed upward, distorting the real experience of most seniors.

In this case, median income provides a better reflection of how people are doing. [1] Using the American Community Survey [2], the ratio of median retiree income for those over 65 ($19,400) to the median income of workers aged 25 to 64 ($28,100) [3] is 69 percent, not 92 percent.

But even this measure isn't enough. Rather than just compare the ratio of median income of an older group to a younger group, we must limit the younger group to those with positive earnings, prime-aged individuals engaged in the economy, and limit the older group to those who are retired. With a median income for workers age 25 to 64 at $36,000 and the median income of a retiree [4] at $16,400, the retiree-to-worker median income ratio is 54%. This number is far from Biggs and Schieber's reference in their Wall Street Journal op-ed.

Retirement Insecurity and Income Inequality are Growing

Our research, supported by findings from the National Institute on Retirement Security and the Center for Retirement Research at Boston College, documents that 55 percent of near retirees will have to rely on Social Security as their single source of income in retirement. Biggs and Schieber counter with data from the Internal Revenue Service (IRS) stating that 55 percent of current retiree households receiving Social Security benefits are also receiving income from pensions or savings.

Right, we agree. The private system is failing. Social Security, as designed, is doing its part in maintaining its share of retirement income. The role of pensions is falling. Between 1999 and 2011, employer sponsorship of retirement plans for prime-aged (25 to 64) workers declined from 61 percent to 53 percent. If this trend continues, lack of access to retirement savings vehicles at work will leave more of today's near retirees facing greater insecurity in retirement.

Biggs and Schieber disagree with the very authors of the SSA report they continue to cite. Using the MINT model, Biggs and Schieber praise, the report projects a "dramatic" increase in inequality in earnings and family income at age 67. The SSA documents that median income in the top quintile for those born during the Depression will be 7.5 times higher than those in the bottom income quintile. Among GenXers, the income gap will increase to a factor of more than 10 (see graph below).

inequality graph

Source: Butrica, Smith, et Iams (2012) Social Security Bulletin, Vol. 72 No. 1.

We agree with the SSA findings. Future retirees will not be able to replace as much of their pre-retirement earnings as the generations before them. Professor Alicia Munnell from Boston College notes that, in the recent past, Biggs has inflated the Social Security replacement rate -- making the program look more generous -- by including people who have no earnings in the last five years. Munnell writes, "It makes no sense to include zero years in the denominator of the replacement calculation."

Making Seniors Work is Not the Right Path to Economic Growth

Biggs and Schieber argue that having older people in the workforce promotes economic growth. They are proud that the United States shares the spotlight with Mexico as one of the countries with the smallest pensions and highest levels of older people in the workforce (see the graph below, reproduced from Biggs and Schieber's response to me and also from the OECD report).


Source: As cited by Biggs and Schieber in their response to Teresa Ghilarducci on the American Enterprise Institute website.

At SCEPA, we don't believe Mexico should be our model for how to provide a just and dignified retirement. And while forcing our elderly to work could provide some boost to long-term economic growth, growth is not a reason to make poor policy decisions.

The Joint Economic Committee says we need to get younger people, those 24 to 64-years-old, who want to work a job. Biggs' own institute, AEI, shows that if we push people in their sixties to work, they will have a hard time finding and keeping work. Jobs for older workers are relatively scarce, and age discrimination is rampant.

Living longer doesn't mean people can work longer. Longer lives aren't necessarily healthier or more productive lives. In 2008, men and women could expect to live only 65 and 68 years of their lives free from activity limitations. After age 68, chronic conditions begin to limit the body and mind. Our employment policies should prioritize getting the prime-aged population working, not insisting the elderly have no other choice.

Rather than using fear of deprivation to motivate more 70-year-olds to work at Wal-Mart, let's use pensions to spur economic growth. Pensions and Social Security provide money to households in bad times, thereby stabilizing the economy, and create savings pools. There is a benefit from pensions to anyone convinced of a connection between pools of savings and investments.

Perhaps our disagreement with Biggs and Schieber about the solution to the retirement crisis (efficient retirement institutions that help people save vs. working into old age) has to do with our disagreement about the aims of policy. Biggs and Schieber, like many, view work as a good way for people to supplement their income in old age. We do too. Where we differ is in our belief that pensions and Social Security should provide adequate income to those who want to control the pace and content of their retirement time, to those who cannot find work, and to those with limitations who can no longer work.

End Notes

[1] According to the 2014 OECD Employment Outlook, we also top the list of OECD nations with the highest incidence of low paying jobs, which refers to the share of workers earning less than two-thirds of median earnings.

[2] Mr. Biggs and Mr. Scheiber take issue with our use of ACS and CPS. They argue that these surveys comes short of retirement income reported on federal income tax filings. Monique Morrissey at the Economic Policy Institute has already responded to this.

[3] The median incomes of all those in the 65+ age group come pretty close to 92% of the median incomes of those 15-64 (median total income $19,400 for older people, compared with $20,000 for younger people) which confirms the OECD rough comparisons. But it makes little sense to discard prime-aged workers.

[4] 80.9% of those 65+ do not work, while 19.1% have positive earnings

Thomas Piketty, leading economist and best-selling author of "Capital in the Twenty-First Century" shares his unique view on economic science and what it means to be an economist in an interview at The New School.

On September 30, 2014, PBS Frontline won an Emmy Award for their documentary 'The Retirement Gamble,' that aired on April 23, 2014. The piece investigates the financialization of retirement savings via 401(k)-type accounts and the resulting erosion of an individual's ability to retire.

SCEPA Director Teresa Ghilarducci and Demos Senior Policy Analyst Robert Hiltonsmith, a New School alumni, were interviewed on their work documenting the structural failure of the 401(k) and its corresponding high fees. Ghilarducci states, "The 401(k) is one of the only products that Americans buy that they don't know the price of it. It's also one of the products that Americans buy that they don't even know it's quality."

SCEPA's report 'How 401(k) Plans Make Recessions Worse' describes how the structural flaws of 401(k)-type retirement plans exacerbate recessions in comparison to annuity-backed retirement accounts. The latter, including definied benefit plans and Social Security, serve as automatic stabilizers because they stabilize the economy during both recessions and expansions.

This article appeared on Huffington Post's Money blog on September 30, 2014, and as a letter to the editor under the Wall Street Journal's headline, "There Really is a Huge Retirement Crisis Developing."

The Retirement Crisis is Real

The retirement crisis is anything but imaginary. In a recent working paper, we find that only 44% of workers in the United States have access to a retirement plan at work. Except for workers with defined benefit plans, most middle class U.S. workers will not have adequate retirement income - 55% of near-retirees will only have Social Security income at age 65.

Yet, in a Wall Street Journal opinion piece titled, "The Imaginary Retirement Income Crisis," Andrew Biggs and Sylvester Schieber make a number of startling and misleading claims.

Not Enough Retirement Income

First, they claim that the average U.S. retiree has an income equal to 92% of the average American income. Yet, the latest data from the American Community Survey show that the median income of U.S. retirees1 is less than $16,000 compared to the median American worker's income of $31,000 – hardly 92%.2 Retired workers received an average of $1,294 per month in Social Security benefits as of December 2013. That adds up to a paltry $15,528 per year – far from a princely sum to live on when one's medical bills and the expenses of old age are racking up.

Social Security Supports a Stabile Economy

Second, Biggs and Schieber assert that if Social Security benefits are increased, the country will likely experience lower employment and saving rates. Our new study shows the exact opposite. Social Security benefits actually boost the economy during recessions as beneficiaries maintain spending power in a downturn.

Downward Mobility in Retirement

Third, Biggs and Schieber rightly use a reasonable measure of adequacy - retirees' ability to maintain living standards, which compares retirement income to work earnings. They refer to a Social Security Administration's Office of Retirement and Disability Policy (ORDP) report to note that in 2012 the income of the median 67-year-old exceeded his career average earnings. But it would be a mistake to make much of this statement. The median 67-year-old in the ORDP report is taken from a pool of individuals who continue to work and thus have higher earnings and higher years of education than the typical 67-year-old. Recent work by Gary Burtless shows that 67-year-old men with professional degrees are three times more likely to be working than men with a high school education or less. This ORDP pool from which the median is drawn also includes individuals who are claiming Social Security benefits. This helps explain why their incomes appear higher than their career averages.

Less Retirement Income for Gen-Xers

Fourth, Biggs and Schieber claim that the typical Gen-X (born between 1966 and 1975) household will have higher replacement rates than Depression-era birth cohorts. This claim is misleading because it uses an unorthodox measure of replacement rates. The ORDP report actually shows that the more common measure, wage-adjusted replacement rates, has deteriorated over time. Depression and WWII-era birth cohorts have replacement rates of 95% and 98%, while future retirees (born between 1966 and 1975) will have projected replacement rates of 84%.

Finally, survey after survey shows that retirement security is among the top worry for Americans. If things were as rosy as Mr. Biggs and Mr. Schieber state, why is everyone so afraid?

It is very interesting that Biggs and Schieber decide to use the cited ORDP report to claim that the retirement crisis is imaginary. One of the major findings of this report is that gains in retirement income are largely going to higher socioeconomic groups (whites, the college educated, high earners, and workers with strong labor force attachments). In the age of inequality, the retirement crisis is real.

People need more savings for retirement. Mandatory, protected, and regulated individual accounts in addition to a robust Social Security system will ensure that all Americans have an adequate retirement income and can choose to work or not in their old age.

End Notes:
1U.S. retirees are defined as Americans who are older than 60, are out of the labor force, and had no income from earnings.
2The median worker is defined from a sample of Americans 60 years of age or younger, who were in the labor force.

Thomas Piketty's best-selling book, Capital in the Twenty-First Century, serves as a watershed example of the dual contradictions of capitalism and proves that the last century was characterized by a sharp divergence between social classes. He warns that the main driver of inequality—the tendency of returns on capital to exceed the rate of economic growth—threatens to generate extreme inequalities that stir discontent and undermine democratic values.

Much like Piketty's work, economists at The New School for Social Research strive to analyze the dynamics of capitalism using historical and empirical analysis and, through SCEPA, its policy implications. Following Piketty's remarks, New School Professor Anwar Shaikh and New School PhD Heather Boushey presented their own comments as well as join in a panel discussion to answer the question, where do we go from here?


Thomas Piketty, Professor of Economics at the Paris School of Economics

Anwar Shaikh, Professor of Economics at The New School for Social Research

Heather Boushey, Executive Director and Chief Economist at the Washington Center
for Equitable Growth


posterOn Wednesday, September 9th, I will present King's College's annual Labor Day Lecture 4 p.m. in the Burke Auditorium. Titled, "Bread, Roses and Rest: Security Meaningful Retirement for All," I will discuss the need for retirement reform to ensure that all Americans are afforded the opportunity for a dignified retirement. The event is co-sponsored by the McGowan Center for Ethics and Social Responsibility at King's Collge and Wilkes-Barre's Peace and Justice Center.

You can read more about the event in Northern Pennsylvania's Times Leader's article, "Clinton Appointee to Speak on Retirement Policy at King's."