New York TimesOn June 24, 2013, University of Massachusetts Amherst Economics Professor Nancy Folbre described the retirement crisis as sinking rowboats. Her point is clear - our current 401(k)-dominated retirement system doesn't work for the individual doing yeoman's work trying to get to retirement security.

She backs up this statement with numerous reports and data, including the National Institute on Retirement Security, books by Jacob Hacker and myself, the Center for Retirement Research at Boston College, the Transamerica Center for Retirement Studies, and my report on GRAs for the Economic Policy Institute (EPI). These sources support Folbre's conclusion, that we need a retirement security system that puts us all in the same boat...an ocean liner. 

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I am pleased and honored to join the U.S. House Subcommittee on Health, Employment, Labor, & Pensions on Wednesday, June 12th at 10:00a.m. as a witness for their hearing, "Strengthening the Multiemployer Pension System: What Reforms Should Policymakers Consider?" Please watch the live webcast.

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On June 9, 2013, NPR's story, "Golden Years Tainted as Retirement Savings Dwindle" reports on a study on the next generation's ability to retire. "Gen. X looks to be the first generation that will not exceed the wealth of the group that came before them, and to potentially face downward mobility in retirement," says Erin Currier, director of economic mobility for the Pew Charitable Trusts. This is similar to conclusions I have found in my own work on SCEPA's Retirement Income Security project, where the current retirement system is failing future retirees. The article includes my quote, "There has to be new institutions that guarantee a modest but safe continual rate of return," she says. "And we can do that by adding to the Social Security system, a place where people can save their money and get a rate of return that's safe."

Pew chart

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On May 16, 2013, SCEPA Director Teresa Ghilarducci joined a panel discussion hosted by the Economic Policy Institute (EPI) on Robert Kuttner's new book, Debtor’s Prison: The Politics of Austerity Versus Possibility. Below are her comments on the structural shift of risk:

"The last 20 years has seen significant growth and change in the character of interactions between working and middle-class households and financial institutions and markets.1

With this financial development and households' increased exposure to financial risk, academic economists and others have embarked on a new inquiry, a body of study some call the "culture of finance." This is the name of an NYU seminar taught this summer featuring business faculty, anthropologists, and investment bank economists. Other scholars call this line of inquiry the "financialization of households," and even others embed it in literature as the "culture or varieties of capitalism" (see among others David Soskice and Peter Hall).2

Generally, the project seeks to understand how and why individuals and households are taking on more and more economic risk. These risks were once managed by government and employers, and sometimes social insurance arrangements or employee benefits, such as pension plans, unemployment insurance, and default risk by banks. These institutions have been replaced by financial institutions and products, and are key to the story of how corporations and banks have shifted the risk of financial loss to households.

The fact that the U.S. retirement is in crisis is no secret here or abroad. On May 14, 2013, The New York Times article How They Do It Elsewhere highlighted a recent Mercer study that graded the retirement systems in the advanced industrialized countries. Not surprisingly, the U.S. received a mediocre C. Considering that the retirement system is failing millions of Americans each year, one might wonder if they graded on a curve.

 
Every country is worried about investing retirement funds correctly, and every country wants to minimize risks to the taxpayer so there aren’t large, unknown bills in the future. In the United States, we use our tax code far more than other countries to try to encourage savings and other socially beneficial behavior. We spend hundreds of billions of dollars to try to incentive saving for retirement through 401(k)’s and I.R.A.’s. That costs us a huge amount of money without much effect creating a secure retirement system. In fact, America’s voluntary system means that nearly six out of 10 workers are not in pension or 401(k) plans.

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On April 10, President Obama introduced his budget proposal for Fiscal Year 2014, which includes a controversial change in how the Social Security program determines benefits for seniors. In short, the President wants the program to determine cost of living adjustments based on a "chained" Consumer Price Index (CPI), rather than a traditional CPI.

The chained CPI assumes that people can easily substitute cheaper goods for households necessities. However, SCEPA Director and retirement expert Teresa Ghilarducci joins the PBS Newshour blog, "Does Obama Have it Right or Wrong on Social Security?," to argue that seniors face the opposite as they age, as more and more of their income is taken up by expensive healthcare services and other products that do not have cheaper substitutes. It is also increasingly difficult for the elderly, especially those with health problems or disabilities, to buy in bulk or go from store to store bargain shopping. This fact is well-documented and led the U.S. Department of Labor's Bureau of Labor Statistics (BLS) to develop a measure of inflation that reflects the true costs of aging: the Current Price Index for the Elderly (CPI-E).

The differences between the chained CPI and the traditional CPI are only .03% lower per year. However, these small cuts year after year would mean that the average retiree would lose $1,147 a year by age 85. The cumulative cuts to people on Social Security reach $28,000 by the time a retiree is 95 according to Social Security advocates. In contrast, linking Social Security benefits to CPI-E would raise benefits by 6% for a 95-year-old rather than cut them by tens of thousands of dollars.

On Tuesday, April 23, 2013, the PBS program Frontline aired "The Retirement Gamble," a news investigation into how the financialization of retirement savings via 401(k)-type accounts has eroded individuals' ability to retire. I am interviewed, along with Robert Hiltonsmith, a policy analyst at Demos and my former student at The New School, on our work documenting the structural failure and high fees of the 401(k). 

Frontline's investigation reveals:

  • On any given street, one household may be paying 10 times as much to invest in a 401(k) as the household next door;
  • Over the course of a lifetime, a seemingly low annual fee of 2 percent can reduce what your balance would have been by more than 60 percent—potentially adding years to your working life;
  • Popular 401(k) providers often charge a plethora of hidden fees, burying them under opaque names like "Expense Ratio";
  • Many financial advisers are not required to provide advice that is in their clients' best interest; they are only obligated to give advice that is "suitable"; and
  • The best way to maximize your return might be to cut Wall Street out of the equation and invest in low-cost, unmanaged index funds.

Watch The Retirement Gamble on PBS. See more from FRONTLINE.