Blowing Smoke at the Retirement Crisis
This blog was written by Teresa Ghilarducci and Joelle Saad-Lessler and originally published by the Huffington Post on December 21, 2012.  

The lobbying group for the mutual fund companies surprised Americans with a report that declares all is well with their retirement income security. The Investment Company Institute's (ICI) December report, "The Success of the U.S. Retirement System," asserts that the retirement system adequately prepares Americans for a comfortable retirement.

We know that private groups often bend the truth closer to their interests, and ICI is paid to make 401ks and IRAs look good. But the degree that ICI distorts the truth in this report defies convention and common sense.

So let's take a closer look at the assertions made in ICI's report and figure out how they tortured the data until it gave them the findings they wanted.

First, ICI goes so far as to claim that the switch from defined benefit (DB) type pension plans to defined contribution (DC) type plans leaves workers better prepared for retirement. However, workers are better off if their employer shoulders the risk and guarantees a pension for life in a DB plan, rather than putting their savings in a DC account that is subject to the gyrations of the market. They are also better off if their employer contributes towards their retirement, if they can pay lower fees, and if their money is professionally managed -- all of which are attributes of DB plans and absent in DC plans.

Second, they compare the poverty rate among older Americans in 2011 to what it was in 1966. Notice their choice of time period. Most of the improvements in poverty accrued from 1966 through the early 1980s, before defined contribution plans proliferated. In fact, if the economists at ICI really wanted to prove that defined contribution plans leave retirees better off than defined benefit plans, why not compare the poverty rates for those two types of retirees?

Third, they use survey data that finds that younger households save for priorities such as education and housing, and only start saving for retirement later in life. They claim this is adequate based on simulations where a married couple household earning $87,000 begins saving at age 37 using a 401k-type private account and makes "moderate" contributions. According to their simulations, this household can expect to replace 93 percent of its pre-retirement consumable income in retirement. However, they assume employees will contribute 6 percent of their income (which they sustain until age 65), with a 3 percent employer match rate. With a median employee contribution rate of 2-3 percent, these simulations are unrealistic. This is especially true considering that close to half the workforce does not have access to any type of retirement account at work, and for those that do, more and more of their employers are dropping their match.

Fourth, ICI reports that 81 percent of near-retiree households have pension savings. However, they fail to mention the puny amounts accumulated. According to their numbers, median retirement assets for households earning $30,000-$54,999 were only $4,300, while households earning $55,000-$79,999 had a meager $28,000. It is a heroic overstatement to consider these sums an indication of a success story.

We and other retirement economists have been doing our best to alert Americans to the inadequacies of the U.S. retirement system to avert a retirement crisis. We are trying to fix a broken system while ICI is busy blowing smoke to divert attention from the problem. No one gains from maintaining the current system, except the investment companies that make a profit on the high fees they charge unsuspecting workers trying to save enough to escape the clutches of poverty in retirement.

Shame on you, ICI.

Teresa GhilarducciMy new study with SCEPA researchers Joelle Saad-Lessler and Eloy Fisher, "The Automatic Stabilizing Effects of Social Security and 401(k) Plans," documents how the economic recovery is impeded by market-based retirement plans, such as 401(k)s, and shows how government-supported accounts such as pensions and Social Security stabilize and support economic recovery.

This study makes it clear that the private sector's historic transition towards market-based retirement plans and away from traditional pensions has not only harmed investors who lost their savings in the Great Recession, but injured the overall economy. In fact, 401(k)s not only de-stabilize the economy, they significantly undermine the benefits of other stabilizing programs, including the federal income tax, unemployment insurance, and Medicare and disability insurance.

As the first-ever comparative study of how large pension institutions impact the long-term business cycle, the study compares the effects of Social Security against market-based retirement vehicles such as 401(k) plans. The size of both of these systems - 93% of American workers are covered by Social Security, and 63% possess 401(k)-type retirement plans - gives them a significant influence on the economy.

The study finds that market-based retirement accounts increase the volatility of the business cycle, contributing to an overheating of the economy during expansive periods and exacerbating economic contraction during recessionary spells. On the other hand, Social Security helps to reign in the economy during periods of expansion, and stimulating it during recessions - a function known as an automatic stabilizer. The study finds that for every $1 increase in real GDP, 401(k) plans reduce government programs' automatic stabilizing impact by 15%.

Our study provides hard proof that 401(k)s are a lose-lose for both individuals and the economy. They expose individuals' retirement savings to market risk and hurt the economy's overall ability to create jobs and spur consumption. Economists of all stripes understand the importance of automatic stabilizers to the economy. Now is the time for policy makers to follow by addressing the unintended consequences of incentivizing market-based retirement accounts at the expense of programs that are a win-win for everyone, including traditional pensions and Social Security.

As retirement plan coverage declines nationwide and Congress fails to articulate a solution at the federal level, I announced a proposal to offer low-fee, low-risk personal retirement accounts to all workers by providing private-sector employees access to state-level public retirement institutions.

California State FlagThis plan opens state pension funds to new customers from the private sector. Private-sector workers or employers could voluntarily open an account in a state-level public retirement fund such as the California Public Employees' Retirement System or CalPERS. Workers and/or employers would contribute at least five percent of pay into an account guaranteed to earn at least three percent above inflation. At retirement, workers would have the option to convert their savings into an annuity, a guaranteed stream of income for life. The plan is detailed in "Meeting California's Retirement Security Challenge," published October, 2011 by the University of California at Berkeley Center for Labor Research and Education.

Calling the proposal "a meaningful retirement security option for California private sector workers," California State Treasurer Bill Lockyer lauded the plan in a speech at the 21st Annual Northern California Public Retirement Seminar. Lockyer noted that it promises to "make a major dent in the [pension] gap between public and private workers."

The recession's effect on state budgets has diverted the discussion about pension reform to the promises made to public sector retirees. While state officials debate how to reform public pensions, all workers deserve access to safe, effective retirement plans. Private-sector workers have been, and will continue to be, battered by the double jeopardy of increasing market risk in their 401(k)s and decreasing employer coverage. Opening a window for private workers in high performing public pension funds provides a practical blueprint to stave off an impending retirement crisis.

The proposal takes advantage of existing state pension infrastructure to invest private-sector funds. States, through their employee pension plans, sponsor not-for-profit financial institutions that consistently receive the highest returns for the least cost. In fact, public pension plans outperformed 401(k) plans or IRA accounts by 20 to 40% over the last 30 years. These funds are able to use their bargaining power to lower fees, and public pension fund traders have a longer-term view, which stabilizes markets and protects individuals from swings in asset prices.

All states could offer a similar structure overseen by an independent board of trustees and administered like TIAA-CREF—the pension plan for university professors—or the Thrift Savings Plan for federal employees. Pension contributions would be pooled and invested professionally with an emphasis on prudent and low-risk, long-term gains. This would effectively shield workers from the high fees and poor investment choices they face when left to fend for themselves in the retail market. Most importantly, these accounts would be portable, allowing a worker to continue investing in the account as they move from job to job. Though these funds would be kept in a separate investment pool from public sector funds, having private sector workers invested in the same system would shore up public support for state public pension funds.

On February 16, 2012, New York City Comptroller John C. Liu gave a State of the City address at the City College of New York to lay out his vision for the future of the city. His speech, titled, "Bridging the Great Divide," highlighted retirement security as an issue that needs attention from our city leaders and residents and cited the work of my research team at SCEPA. The speech was covered by NY1The Observer, and The Brian Lehrer Show on WNYC radio. Below is an excerpt of the speech or, you can watch the full video on the Comptroller's website.

"We partnered with a renowned expert on pension and retirement issues at The New School, Dr. Teresa Ghilarducci, who is here with us today. Teresa and her staff did outstanding work for us, in a report called "Are New Yorkers Ready for Retirement?"—and the answer to that question, by the way, is unfortunately a resounding no....

Dr. Ghilarducci has been advancing the concept of Personal Retirement Accounts for private sector workers. For employers who choose to participate, the program would pool employee and employer contributions into a professionally managed retirement fund, one that can leverage economies of scale and offer portable, efficient, low-cost pension benefits. Studies have shown that when offered the chance, workers will participate in retirement plans with their own contributions....

Dr. Ghilarducci's proposal is to have the same staff that manages the New York City pension funds oversee a fund for private workers. This fund would leverage the expertise of the Asset Management Bureau, but the money it invests would be wholly provided—not by taxpayers—but by participating employers and their employees.

This idea, by the way, is now being considered by the California legislature. What a shame it would be if a great idea, homegrown here in New York City, was launched elsewhere first. Let's not forget that Frances Perkins, the driving force behind Social Security, worked in New York State government before she became FDR's Secretary of Labor and the first woman cabinet member. Who knows? Bigger things may lay ahead for Dr. Ghilarducci."

GraphThe financial security of the next generation of New York retirees is at risk. If current trends persist, 37% or close to 750,000 workers approaching retirement who live in metropolitan areas of New York State, are projected to be poor or near poor in retirement.

This impeding crisis, documented in a recent report by SCEPA and New York City Comptroller John C. Liu, is due to the decline in employer sponsorship of retirement savings vehicles, the increasing prevalence of defined contribution (DC) plans over traditional defined benefit (DB) plans, and the overall erosion of household savings.

To assess the future impact of these factors on the retirement readiness of New Yorkers, SCEPA published "New York's Retirees: Falling Into Poverty," a research report on the downward mobility of New York's next generation of retirees. We looked at workers who are currently ages 25-64 and are living in metropolitan areas of New York State (46% of whom live in New York City), and we projected the income stream that will be available to them when they reach age 65.  Results show that if current trends persist, many middle and low income workers will experience downward mobility or a steep drop in their living standards when they retire, and several will face severe economic hardship:

  • 23 percent of workers ages 25-64 living in New York State metropolitan areas will not have the assets needed to prevent them from being poor when they retire at age 65. This means their total net worth, including all of their savings for retirement in employer-sponsored plans and Social Security built up over their lifetime, will not be sufficient to keep them above the NYC adjusted poverty level of $13,662.
  • 36 percent of workers ages 55-64 living in New York State metropolitan areas who are nearing retirement are at risk of being poor or near-poor, meaning they will be living at or below 200 percent of the NYC adjusted poverty level of $27,324.
  • 74 percent of currently low-income workers and 35 percent of currently middle-income workers ages 50-64 living in New York State metropolitan areas are projected to be poor or near-poor in retirement.
  • Although workers who participate in a retirement plan are at a lower risk of being poor in retirement than those who do not save for retirement, workers whose primary retirement plan is a DC plan fare significantly worse than those whose primary plan is a DB plan. Thirty-eight percent of workers ages 25-64 whose primary plan is a DC plan will be poor or near-poor compared to only 7 percent of DB plan participants.

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




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.


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.


  • 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.


  • 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.


  • 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.