California flagI'm happy to announce that California Governor Jerry Brown signed the California Secure Choice Retirement Savings Trust, SB 1234, into law. The Act will expand access to retirement savings plans to the 6.3 million private sector workers who currently have do not have access to a retirement plan through their employer. The law creates the first retirement savings plan for private-sector employees administered by the state.

Statements of support for the law from State Senator Kevin de Leon, who co-sponsored the bill, and the National Conference on Public Employee Retirement Systems (NCPERS) are available online. Articles from the New York Times, which recently came out in support of the law, the Sacramento Bee, and 89.3 KPCC Southern California Public Radio also cover this landmark legislation.

The California Secure Choice Retirement Savings Program will provide a low-fee, low-risk savings vehicle that would be a win-win for employers and employees in the state. Employers will not have to worry about fiduciary or administrative duties; they will have to do nothing more than send a small percentage of an employee’s paycheck via payroll deduction into the new program, unless the employees opt out. Employees will have an efficient way of saving for retirement through the workplace.  The new savings program would achieve economies of scale that would be passed on to employees in the form of lower fees without adding to the state’s pension obligations. The state must conduct a feasibility study before implementing its plan.

When half of the workforce has no retirement plan, it is more important than ever that we come up with innovative solutions – and the states are at the forefront of this fight. I hope they will be an incubator for a comprehensive national solution.  Guaranteed Retirement Accounts served as a model for the California legislation.

On September 14th, the Pension Rights Center, SCEPA, and Dēmos, a New York-based advocacy nonprofit, hosted a forum with state officials to discuss proposals to expand pension coverage for private sector workers at the state level. Titled “Retirement Security for All: A Forum for State Action,” the event included officials from California, Connecticut, New York, North Carolina, Pennsylvania, and Rhode Island. With an emphasis on collaborative reform efforts, the forum was an acknowledgement of the increasingly urgent need to address a lack of retirement security.

Earlier this year, Massachusetts became the first state in the nation to pass a state-administered retirement plan for the private sector. Its plan covers employees at nonprofit organizations, while California’s plan would cover any eligible private-sector worker. Other states and New York City are considering similar arrangements.

Working longer is often posed as a solution to the retirement crisis, or the systemic lack of savings for those nearing retirement. However, an often overlooked factor in policy debates calling for a raise in the retirement age is the clear evidence that life expectancy rates have not improved equally for all Americans.

Average life expectancy has increased markedly since World War II.  The average American born in 1950 would live to 68 years old.  By 1980, life expectancy would increase to 73.88 years and to nearly 78 years by 2007.[1]

These remarkable increases, however, belie a growing disparity of life expectancies among different socio-economic groups. The longevity of people in the top half of the income distribution has improved much more than those in the bottom half.[2] This increasing inequality of outcomes has occurred with remarkable speed.  For example, the Inter-American Development Bank estimates that from the 1983-1997 period to the 1998-2003 period[3] the differences in life expectancy between the highest 20% and lowest earning 20% of Americans (for those ages 35-76) grew from 0.7 to 1.5 years among women, and from 2.7 years to 3.6 years among men.[4]

Life expectancy at age 65 has improved the least for African American men and the most for non-Hispanic white men across race-sex groups.  In 2007, the average 65-year-old black man was projected to live 15.2 more years, whereas the 65-year-old white man would live 17.3 years longer.  This disparity is a wholly new development: from 1950 to 1955 elderly black and white men (and women in 1950) lived an average of 12.8 years (and average of 15 years for black and white women).[5] Although such demographic observations are telling, they do not explain the drivers behind the growing disparity of health and longevity outcomes.

To this end, other studies have sought to isolate a broader range of socio-economic variables.  One such detailed analysis by Meara, Richards and Cutler (2008) notes that education is a driving force behind longevity and mortality differentials.[6] They note that differentials in life expectancy among race-sex groups (at age 25) remained constant from 1990 to 2000, but that differences significantly increased between high- and low-education groups.  Indeed, low-educated women (both white and black) had statistically significant lower life expectancy in 2000 than they did in 1990.[7] Given the high correlation between education and life-time earnings, such findings reinforce the evidence of research analyzing the impact of income inequality on life expectancy and mortality.

Finally, what do these numbers suggest for retirement planning and policy?  Simply put, raising the eligibility age for Social Security and Medicare will have much worse impacts on some – generally more vulnerable – populations. Blindly increasing the retirement age will lead to higher older-worker unemployment,[8] more disability claims and worsening retirement prospects for those who can least afford it – and all this will come at a high social cost for state and local governments alike.

A more realistic goal is to have staggered retirement ages, as has been proposed in other OECD countries.  That means lowering the retirement age for those who entered the work force earlier (generally with less education, and who have earned less) and raising the retirement age for those who spent more time in post-secondary institutions, who generally earn more over their life time and who can afford healthier lifestyles.

In the September/October issue of Labor and Sense, Katherine Schicchitano kindly mentions my work on guaranteeing access to pensions.

The article, “Recent Battles in Wisconsin and San Jose Shows Why We Need Universal Pensions,” highlights the uncertain future of defined benefit pensions, or plans that guarantee payments throughout retirement, due to declining union membership. My proposal is mentioned as a strategy to assistant low- and middle-income households prepare for retirement.

With the recent passage of California legislation that creates retirement accounts for private workers, states are taking action to expand retirement security. I am working closely with state elected officials to support similar efforts across the country. Below is a summary of a new report on my state plan for reform, known as State GRA's.

STATE GUARANTEEDRETIREMENT ACCOUNTS: A Low-Cost, Secure Solution toAmerica's Retirement Crisis

The share of workers without any retirement plan at work has risen dramatically over the past decade. The percentage of workers whose employer did not sponsor any type of retirement plan rose from 39 percent to 47 percent—a 21 percent increase. This alarming trend is a call to action for state and local policymakers who want to prevent old age hardship by ensuring all workers can invest adequately, efficiently, and safely for their own retirement.

We propose states offer all workers a voluntary, low-fee, low-risk, State Guaranteed Retirement Account (State GRA) to help boost savings for retirement. State GRAs are individual accounts where benefits at retirement are based solely on contributions and returns.

THE STATE GRA'S MAJOR FEATURES ARE:

Consistent contributions: as in a 401(k)-type plan, workers and/or their employers would contribute at least 3 percent of pay into their individual State GRA. Contributions could be channeled through the already-existing payroll deduction system, reducing administrative burden and minimizing costs.

Pooled investments: all individual account assets would be invested together in one large pool, with an emphasis on low-risk, long-term gains. Pooling takes advantage of economies of scale and minimizes financial risks.

Guaranteed returns: each account would be guaranteed to earn a return of at least 3 percent, or about 1 percent above inflation, protecting funds from the volatility of the stock market. Because funds are invested in longer-term assets as one large pool, the risk and costs associated with insuring the minimum guarantee would be negligible, and could be backed by private insurance contracts without posing any risk to the state or employers.

Portable accounts: Individual State GRAs would be portable; the account would automatically move with a worker from job to job.

Lifelong retirement income: at retirement, workers would convert all or part of their State GRA balance into an annuity—a guaranteed stream of income for life—to ensure that they do not outlive their savings.

Independent administration: a newly created independent board of trustees would oversee the plans' operations. The board would assume all fiduciary responsibility for the fund's investment decisions and administration.

Public investment management: costs could be minimized by using the already-existing public pension infrastructure to invest the funds. State pension funds operate on a not-for-profit basis and have highly skilled, professional investment managers and administrators that are charged with overseeing and investing more than $3.1 trillion in retirement savings. Assets in State GRAs would be kept in a separate investment pool from public pension fund assets.

The New York Times today unveiled a thoughtful series on the deficit, Debt Reckoning: The Fiscal Deadline in Washington. In "Study Questions Tax Breaks' Effect on Retirement Savings," economic policy reporter Annie Lowrey identifies the lopsided and ineffective tax breaks for retirement accounts as a major contributor:

"Every year, the federal government spends more than $110 billion on tax deductions to encourage Americans to save more for retirement. A new study suggests such provisions may have little effect on the amount Americans save." That's because they go to people who least need the help!

We agree that these tax breaks are ineffective in raising retirement savings and benefit the highest earning tax payers (read SCEPA's analysis of retirement tax expenditures). But instead of eliminating them, we should rearrange retirement tax deductions into a tax credit. This would allow every American to set aside money in a retirement account of his/her own. If we cut the retirement tax expenditure and merely use it to reduce the government debt, we will still face an overwhelming retirement income debt that will result in a retirement crisis (the gap between what Americans need for an adequate retirement and what they have is close to $6 trillion, according to Anthony Webb at Boston College's retirement Research Center).

America's debt crisis has forced Congress to re-evaluate and possibly reform the tax code. They should use this opportunity to restructure the tax code to solve the upcoming retirement crisis.

For further investigation into this topic, below is video of a forward-thinking event hosted by SCEPA and the New America Foundation in 2009 that asked academics and lobbyists to defend and critique three major tax breaks – those for retirement, housing and employee health care. You can also read Lauren Schmitz's analysis of the costs of these tax expenditures at the state level.

Raising the eligibility age for Social Security and Medicare is based on the assumption that elderly Americans can and should work more. In a new Policy Note by SCEPA Research Assistant Anthony Bonen, "Older Workers and Employers' Demands," he presents new evidence that rejects the assumption that elderly Americans are physically and mentally able to work for pay later into life and that, by extension, employers will find older people to be desirable employees. Bonen find that older workers' physical and mental job requirements have increased between 1992 and 2008. These findings align with Neumark and Song's (2012) conclusions that older workers are facing more age discrimination. Together, these findings suggest that raising the retirement age – essentially is a cut in benefits – would hurt most older American workers.

This Policy Note describes older workers' self-reported job descriptions in 1992, 2002 and 2008. Data comes from the University of Michigan's Health and Retirement Survey (HRS), which conducts panel surveys biennially with over 5,000 respondents over the age of 50. We find that:

a) the downward trend in the physicality of job demands, observed in 1990s, is trending back up, and;

b) the downward trend in the physical demands of jobs held by the elderly was never apparent for the oldest working cohort, ages 62 to 65, who are eligible for early Social Security retirement.

These findings suggest different policy implications than what Johnson asserts. In particular, attempting to force older Americans to work longer by increasing Social Security and Medicare eligibility ages will have deleterious physical and/or mental impacts on many elderly workers, particular those with more demanding, often lower paying, jobs.

The New York Times ran a letter to the editor by Bonen echoing the report's findings from the perspective of a millennial.

pbs

PBS Newshour's Business Desk blog asked me to comment on the impact of raising the retirement age. Despite conventional rhetoric, the physical and mental demands of older workers' jobs have intensified, making raising the retirement age poor economic policy.

As a recent SCEPA policy note documents, job quality for older Americans from 1992-2008 has declined due to an increase in jobs that require physical demands or traits, such as good eye sight. The increase in physically-demanding jobs is associated with service sector jobs, a decline in bargaining power, and increased unemployment among older Americans. There is no way to distinguish between older workers who are unfit for working longer than those whose jobs can be performed well into a worker's late 60s or 70s. For these reasons, raising the retirement age or the medicare eligibility age would harm vulnerable older Americans in low-paying and difficult jobs.