Below is a recent interview I had with Governing Magazine Editor Penelope Lemov on local and national efforts to mitigate the retirement crisis, in "States Search for Retirement Security Beyond Obama's myRA."

PL: How would you define the stakes states and localities have in public retirement security?

TG: Seventy-five percent of Americans nearing retirement age in 2010 had less than $30,000 in their retirement accounts. The specter of downward mobility in retirement is a looming reality for both middle- and higher-income workers. Almost half of middle-class workers will be poor or near poor in retirement, living on a food budget of about $5 a day. It isn't just a matter of people being able to keep up their standard of living. We're talking about people who will be old and in a chronic state of deprivation -- with all the attendant dislocation that causes. Cities will suffer a decline in the stability of neighborhoods. Neighborhoods are rich when they have grandmothers who are stable and able to function.

The New York Times' Kate Taylor raises the issue of New York City's retirement insecurity in her article, As the City's Elderly Population Swells, Concerns Rise Over Lack of Access to Retirement Plans. She documents the decrease in workers' access to retirement plans at work found in SCEPA's research, Are New Yorkers Ready for Retirement?

"According to Ms. Ghilarducci's research, 59 percent of workers in the city do not have either a pension or a 401(k), up from 51 percent a decade ago. Many small businesses do not have the human resources capacity to manage a 401(k). Moreover, Ms. Ghilarducci says, 401(k)'s are less than ideal for workers themselves, since they charge higher fees and have lower rates of return than pension funds, in part because people can withdraw their money at any time."

The solution: "creating a pooled pension fund for private sector workers that the city itself could manage."

Teresa GhilarducciOn May 21, 2014, I testified before the U.S. Senate Subcommittee on Social Security, Pensions, and Family Policy at a hearing titled, "Strengthening Social Security to Meet the Needs of Tomorrow's Retirees." I submitted an oral and written statement on how the retirement crisis exacerbates inequality.

The hearing is broadcast online. Below is an excerpt from my comments.

"The current voluntary, self-directed, liquid, commercial retirement account system relies on generous tax subsidies and is stacked against workers for five reasons.

  1. Nearly half of workers have no plan at work because the system is voluntary. Only 53% of the workforce have any kind of retirement plan at work, which is down from 60% 10 years ago.
  2. Middle class workers are more likely to take out loans or withdraw money before retirement from their 401(k) or IRA's than the highest income workers. Many workers use their retirement accounts as savings accounts. A 30-year-old who cashes out a $16,000 account will be losing an estimated $470 a month at age 67.
  3. Tax deductions create more inequality in unintended and perverse ways. Two people can save exactly the same amount in their 401(k) plans and IRAs, but the higher earner will get a larger tax deduction and therefore a higher rate of return on their savings. Over just a few years this differential multiplies exponentially so the system unintentionally penalizes middle and lower income savers.
  4. Lower income workers have more conservative portfolios, which is rational, but those portfolios earn less overtime.
  5. Middle and lower income savers pay higher fees; they don't enjoy scale economies in fund management."

retirement crisisToday I joined the Bipartisan Policy Center (BPC) as it launched its Personal Savings Initiative (PSI). As a member of the commission, we will study whether savings rates and available savings vehicles are meeting the retirement goals of Americans and the nation's investment needs.

The initiative is co-chaired by former Senate Budget Committee Chairman Kent Conrad, a Democrat, and Jim Lockhart, former Deputy Commissioner of the Social Security Administration under President George W. Bush.

Accoring to Forbes' coverage of the launch announcement, "Lockhart cited a recent Gallup poll that found that not having enough money for retirement is the top financial worry among middle-aged Americans. Then he recapped some sobering retirement statistics to show why the issue is so important and why Congress should take it up."

The initiative will address important financial security issues, including, but not limited to:

  • The impact of federal policies on private savings.
  • The finances and operation of Social Security Disability Insurance and its interaction with private disability insurance.
  • Interaction of Social Security with personal savings, especially those in tax-advantaged retirement savings vehicles.
  • The impact of long-term care needs on retirement security.
  • The role of homeownership and student debt.

During 2014, the PSI will hold roundtables and issue a series of white papers highlighting challenges related to retirement savings, defined contribution accounts, annuities, Social Security Disability Insurance, and the intersection among housing, higher-education debt, and savings. The commission will develop a set of policy recommendations and model their impact on personal savings, retirement readiness, the macro economy and the federal budget to be presented in a final report in early 2015.

In March, SCEPA Director Teresa Ghilarducci testified before the Minnesota House of Representatives in support of HF 2419, which would study the potential benefits of creating the Minnesota Secure Choice Retirement Plan, a state-administered retirement savings plan for public and private workers without access to retirement plan at work.

Ghilarducci presented SCEPA's report, 'Are Minnesota Workers Ready for Retirement,' which reports a 6% decline in employer-sponsorship of retirement plans in the state. The research supports the implementation of policies that help workers gain access to safe, affordable and efficient retirement savings vehicles to prevent downward mobility among seniors.
Minnesota Retirement Participation Rates
One of the most important aspects of the Minnesota Secure Choice Retirement Plan is that it is safe and cost-effective. The MN Secure Choice plan would facilitate voluntary employee contributions through a simple payroll deduction, rather than complicated private retirement plans that require participants to shoulder the risk and responsibility of finding and paying for the right financial advisor and/or choosing the appropriate investment options. Other advantages include pooled investments, diversified investment portfolio and access to professional money management firms.

On April 8, 2014, I testified before the Washington State Senate in Olympia and presented SCEPA's recently released study, "Are Washington Workers Ready for Retirement." This study finds that employer sponsorship of retirement plans in on the decline from 2000-2012. The availability of employer-sponsored retirement plans in Washington declined by two percentage points, from 62% to 60%. Four out of ten workers in the state do not have access to a retirement plan at work.
Washington State Retirement Data Graph
While this decline is smaller than in some other states, it follows a downward trend across the country. This trend means that, upon retirement, workers without access to a retirement plan during their working years will rely solely on Social Security and Medicare to survive. The support from these federal programs can be supplemented by personal savings, but, as we document below, workers without employer-sponsored retirement plans tend to be less financially secure overall and less able to save sufficiently (if at all) for retirement.

Most workers had less access to retirement plans in 2012 than they did in 2000, but the decline has not been equal across social and economic groups. Particularly stark is the drop in the sponsorship rate for female workers, whose access decreased from 65 percent to 60 percent. Female workers in Washington experienced a decline in sponsorship at more than double the rate of workers' overall sponsorship reduction.

Washington's self-employed experienced a one-third drop in retirement plan sponsorship – falling to 14 percent from 20 percent.

Washington workers covered by a union contract experienced an increase in retirement plan coverage. One quarter of Washington's prime age workers were covered by a union contract in 2012 – an increase from 20 percent in 2000.

Overall, participation in an employer-provided retirement plan is low – only 49 percent of Washington's workers were enrolled in a retirement plan at work in 2012. In addition, nearly half (48 percent) of near-retirement households (ages 55-64) have no retirement plan at all. This is particularly worrisome since households without a retirement plan tend to be ill-prepared for retirement. Even those with employer-sponsored retirement plans may not be able to reach a comfortable replacement rate.

All workers deserve a retirement plan. Workplace retirement plans are a fundamental means to ensure retirement income security and this paints a discouraging picture of retirement readiness for Washington workers. Will this downward trend in the sponsorship and quality of retirement plans continue? If so, what can be done about it?

The leadership in Washington state can lead the nation in the effort to protect seniors against downward mobility in retirement by implementing policies to expand safe and secure retirement plans through the workplace.

Recently I talked to both the New York Times and Businessweek about the retirement crisis. In reading the Times piece, The Gray Jobs Enigma, I am impressed by reporter Steven Greenhouse's subtle message that the only way to ensure financial viability in old age is through a secure retirement account.

Businessweek focused on multi-employer pension plans in An Unpalatable Plan to Rescue Failing Pensions, using Hostess's bankruptcy as an example of a multinational corporation unable to fulfill their retirement pension promises after declaring bankruptcy. The Pension Benefit Guaranty Corporation (PBGC), a small federal agency that oversees the nation's private pension plans, can step in when corporations are unable to deliver on their pension promises. However, with the recent avalanche of failed corporations, the agency responsible for bailing them out may need a bailout itself. Last year, the PBGC posted an overall deficit of $35.6 billion.

This is a dangerous trend, not only for multi-employer plans, but single employer plans who will want to follow. For the long-term, the only viable solution to the retirement crisis is through Guaranteed Retirement Accounts.