Los Angeles TimesGeorge Skelton's column in today's LA Times announces "A Retirement Plan for the Forgotten." This new plan, introduced in the California State Senate by Senator Keven DeLeon, would create a pension plan for California’s private sector workers that do not have access to a retirement plan through their employer.  This personal pension program would be a not-for-profit, low-cost and universally portable retirement plan for the millions of Californians that do not have a workplace retirement plan.

The legislation is co-sponsored by Senate Leader Darell Steinberg. "It's a very important bookend to the pension debate," Steinberg says. "The debate in society is 'Why should some folks get a [traditional pension] when the majority no longer do?' This asks a different question: 'Why shouldn't we strive to bring everyone up to a reasonable and decent level of retirement security?'

Retirement Security NYC

 

 

THE CHALLENGE

Because benefits from Social Security average only about $1,200 per month, many American workers rely on employer-sponsored retirement plans to supplement their income in their senior years. These retirement plans have played a vital role in reducing the risk of lowered standards of living and poverty during retirement—but recent research has shown that employers are becoming less likely to offer them.

January 2012 report by the New York City Comptroller's Office and the Schwartz Center for Economic Policy Analysis found that between 2000 and 2009, the percentage of employers in New York City sponsoring a retirement plan for any of their employees fell by 8 percentage points, from 48% to 40%. As a result, a growing group of New Yorkers is at risk of facing significant economic hardship in retirement. Currently, more than one-third (36%) of households in which the head is near retirement age (55-64 years old) will have to subsist almost entirely—and more than 50% primarily—on Social Security income, or will not be able to retire at all due to having liquid assets of less than $10,000.

In workplaces where employers still offer retirement benefits, plans are most commonly defined contribution (DC) plans, where each worker has an individual account such as a 401(k). Many DC plans charge high fees that eat away at returns, require workers to choose from a complicated menu of investment options, and are vulnerable to painful losses in bear markets. Since most retirees do not convert their lump-sum DC savings into annuities, they also risk prematurely exhausting their assets.

THE SOLUTION

Nearly two million private sector workers in New York City do not have access to a retirement plan through their employer. For workplaces where no retirement plan currently exists, New York City Personal Retirement Accounts (NYC PRA) would pool employee and employer contributions into professionally-managed retirement funds, significantly boosting retirement income for participating workers.

WHAT THE NYC PRA OFFERS PRIVATE SECTOR EMPLOYEES:

  • Full portability.
  • Low fees due to economies of scale.
  • Higher returns from professionally managed investments.
  • Reduced risk of outliving retirement savings by providing a lifetime annuity.
  • A significant supplement to Social Security. In some cases, employees would experience a more than 50% increase in retirement income.
  • Guaranteed employer match.
  • Automatic enrollment with the ability to opt-out at any time.
  • Self-employed workers would be allowed to participate.

WHAT THE NYC PRA OFFERS EMPLOYERS:

  • The ability to offer retirement benefits to their workers at a low cost.
  • A choice between offering their own employer-sponsored retirement plan, such as a defined benefit or a 401(k) plan, and enrolling employees in the NYC PRA.
  • Legal indemnity from fiduciary responsibility and benefits insured by the Pension Benefit Guaranty Corporation.

WHAT THE NYC PRA OFFERS TAXPAYERS:

  • Retirement benefits without reliance on taxpayer dollars.
  • Potential government budgetary savings by lowering the burden on social service agencies to provide for seniors who lack retirement income.

John LiuToday I joined with New York City Comptroller John C. Liu to announce a new pension plan for the city. NYC Personal Retirement Accounts (PRAs) will help provide retirement coverage for the nearly two million workers in New York City without access to retirement benefits through their employers.

The NYC PRA proposal is based on my State GRA plan that is now being considered by the California state legislature. The plan would pool employee and employer contributions into retirement funds that would be managed and invested by the Bureau of Asset Management (BAM), a unit of the New York City Comptroller's Office. BAM is responsible for overseeing the investments of New York City's five employee pension funds.

A recent report by SCEPA and the Comptroller's Office, "Are New Yorkers Ready for Retirement?," found that more than one-third of New York City households near retirement age will have to subsist almost entirely on Social Security income because they have less than $10,000 in liquid assets.

"Our city is already experiencing the early stages of a burgeoning retirement crisis. Reports indicate that the number of elderly people in New York City's homeless shelters shot up 55 percent over the last ten years. Half of that increase occurred in the last two years alone," said New York City Comptroller John C. Liu. "If we don't help people save for retirement during their working years, the later strain on the city's social services will be overwhelming," Comptroller Liu added. "We are not, nor do we want to be, a city that lets our retirees go hungry and homeless. Teresa's idea for New York City Personal Retirement Accounts will help workers attain a dignified retirement," he said.

NYC PRAs would supplement Social Security—which currently averages $1,200 per month—and significantly boost retirement income for participants. NYC PRAs would be portable and employees could opt-out of the program at any time. Self-employed workers and freelancers, a notable portion of the New York City workforce, would also be allowed to participate.

The proposal grants legal indemnity for fiduciary responsibility to participating employers. Benefits would be insured by the federal Pension Benefit Guaranty Corporation, which covers traditional pension plans currently in place in the private sector.

While NYC PRAs do not require any taxpayer funds, they could potentially reduce the burden on social services for seniors who lack retirement income and deliver significant governmental budgetary savings.

Flag of CaliforniaOn May 30, 2012, the California State Senate passed bill SB1234. The legislation would create a statewide retirement program for private workers, targeting those who are not covered by a retirement plan at work. The proposal is based on my State GRA plan, and is now in the hands of the California Assembly.

The bill's sponsor, Sen. Kevin de Leon, D-Los Angeles, said before the vote, "We have an opportunity to pull together this very fragmented population, pool their resources together and hopefully we can compound with a solid interest over the course of many horizons and have something for them left during their retirement."

CBS MoneyWatch: Bill Creates State Retirement for Private Workers

Sacramento Bee: California Senate Votes for Private Retiree Plan

The Retirement Savings DrainDemos, a nonprofit advocacy group and a SCEPA partner on retirement security, published a report "The Retirement Savings Drain: Hidden and Excessive Costs of 401(k)s." Written by Policy Analyst and New School PhD student Robbie Hiltonsmith, the report reveals the excessively high fees and costs associated with 401(k) retirement plans that are hidden from plan holders. Hiltonsmith finds that the average two-member household will lose over $150,000 over their lifetime from their retirement savings to pay these fees - without their knowledge. More than 40 media sources and columns have covered the report, including an exclusive with Consumer Reports and pieces inReuters and the New York Post, among others. The media coverage has hinted toward other possibilities for retirement income security such as Guaranteed Retirement Accounts(GRAs). "What we need is a low cost set-it-and forget-it option," Hiltonsmith says. "You get your four percent return, the balances don't go up and down like a yo-yo and at retirement you get all or part of it as an annuity."

On June 20, 2012, Hiltonsmith appeared on Fox Business Network's Willis Report to discuss the dangers of hidden 401(k) fees. He says, "someone's going to be retiring off these 401ks but it's not going to be the ones saving."

I have been working on new research documenting that, despite the growing tax breaks and intensive advertising campaigns for 401(k) and IRA retirement accounts, Americans nearing retirement are more likely than previously expected to experience downward mobility in their golden years. Specifically, people ages 50 to 64 - 58 million in 2010 - will likely not have enough retirement assets to maintain their standard of living when they reach their mid-sixties.

Using data from the U.S. Census Bureau's Survey of Income and Program Participation (SIPP), SCEPA's new Fact Sheet, Near Retirees' Defined Contribution Retirement Account Balances, is the first to provide a breakdown of defined contribution (DC) retirement account balances by income.

SCEPA income chart

Three quarters of near retirees (ages 50 to 64) have annual incomes below $52,201, with an average total retirement account balance of $26,395 . When stretched out into an annuity over an average retirement lifetime, this sum does not provide a significant addition to a monthly Social Security benefit (see Table 1.) Further, the median value of retirement account balances for half of near retirees is zero, meaning that over half of this group has no retirement savings.

Individuals with incomes over $52,201 per year have more in their retirement accounts, but their balances are not high. Their average retirement account balance for this income group is $105,012. Because only a few people have very high balances, the median balance is much lower; 50 percent of people ages 50-64 in the top 25 percent of the income distribution have retirement account balances of only $52,000.

The numbers are lower than previous estimates based on the data set. Previous estimates rely on the Survey of Consumer Finances (SCF), which aims to measure the net assets of U.S. families by over-sampling people likely to be wealthy to provide more precise estimates of wealth. This includes assets that only the wealthy own, such as municipal bonds and business assets. In contrast, the SIPP allows researchers to conduct analyses of government programs for the low-income population, over-sampling the low-income population. Since the two data sets focus on different groups of people, SIPP estimates of retirement wealth differ from estimates based on SCF data and more accurately represent the American population.

Older AmericansIn collaboration with the W.E. Upjohn Institute for Employment Research, I published a report that details the corrosive economic effects the Great Recession has had, and continues to have, on older unemployed workers. The paper, Unemployed Older Americans: A Profile, is based on data from the U.S. Census Bureau's Survey of Income and Program Participation (SIPP).

The U.S. labor force is aging, and so are the people who are unemployed. In March 2011, the U.S. population comprised 305 million people, of whom 36.6 million were age 55-64; over a third (37.5%) of that population were not working -- 4.1% were officially unemployed, and 2% of those out of the labor force were discouraged workers. If we include discouraged workers among the unemployed, 4.8% of older Americans were willing to work but did not have a job in 2011. And these rates are up from the date the recession officially ended in March of 2009. At that time, the official unemployment rate for older workers was 3.04%, the discouraged rate was 1.71%, and the fraction of older Americans who were willing to work but unable to find a job was 3.57%.

While the harm caused by unemployment is unique to each person, this study focuses on the staggering variety of challenges and perils shared by older people. Our analysis results in three broad findings.

First, across every category, for instance male, female, white or nonwhite, an older unemployed person is now more likely to be unemployed longer than any other age group, including teenagers (Johnson 2009). As a result, older people who lose their jobs have a higher risk of remaining unemployed and withdrawing permanently from the labor force in involuntary early retirement.

Second, older workers who retire earlier than expected are less likely to have pension income or household wealth compared with those who retire voluntarily (Munnell 2008) and face higher rates of depression and anxiety (Bender and Jivan 2005 and Bonsang and Klein 2011).

Third, being unemployed is always trouble, but if you are in your late fifties, but not yet 64, you are in big trouble. Why? The age for eligibility for Medicare is age 65, but older people in general, and especially those who are unemployed, tend to experience a steep increase in need for medical care earlier than age 65 (Tu and Liebhaber, 2009). We also find that a loss of health care coverage among this group may cause economic losses beyond those who are unemployed and aged 55-64. The larger population may pay a higher price as uncompensated health care expenses incur. Moreover, since older Americans are more likely to withdraw from the labor force after experiencing a long bout of unemployment (Coile and Levine 2006), we speculate about whether job retraining programs designed to draw this population back into the workforce make sense.

This research is timely in light of the current discussion of the micro impacts of the Great Recession and for debates about the role of jobs and healthcare policy.