Dear readers: Your humble scribe has been producing content on what is being called an imminent pension crisis, for the Alliance for Retirement Income Adequacy (ARIA), a site designed to foster an informed discussion about retirement issues. It has been quite an education, and I thought I’d share the stories with you. A category has been created, ‘Not so golden years,’ where this content will be archived.
“We are on the verge in America of actually doing something that responds to the retirement crisis. The surprise is that … it’s happening at the state level. But in America that’s where a lot of social policy gets made.” – Teresa Ghilarducci
By John Devine
There’s something about staring into an abyss that sharpens the senses to avoid a cataclysmic tumble of the type pension experts warn await people who have little to no promise of future retirement income.
The bleak retirement picture facing millions is the result of a failed 30-year experiment with savings-type schemes, according to pension experts like Teresa Ghilarducci, director of the Schwartz Center for Economic Policy Analysis at The New School for Social Research.
“For the first time since the Great Depression we are seeing people coming into retirement … worse off than their parents or grandparents.”
Since the Great Depression, social policy has expanded to provide retirement security, says Ghilarducci. Social Security in the United States grew to meet needs, and supplemented occupational pension plans. As a result, poverty rates for the elderly have fallen steadily since the 1940s.
“There was an ethos and a system that helped workers save for their retirement. What happened in the last 30 years is that we have had a generation working within a system of Social Security that was not expanding, and with a voluntary savings plan on top of it.”
The result, she says, is a cohort nearing retirement that stands to experience poverty rates higher than the generation before them.
Sounds pretty bleak, but Ghilarducci says there are signs policymakers are beginning to awaken to the reality of the looming pension crisis. She points to the recent passage in California of legislation to create a state-run plan for low- to middle-income workers as one such example of progress.
That plan is a low-cost pooled-investment fund structured to deliver retirement income to Californians who are not participating in any type of plan, DC or DB, its author, State Senator Kevin de León told ARIA (see that story here).
“We are on the verge in America of actually doing something that responds to the retirement crisis. The surprise is that … it’s happening at the state level,” says Ghilarducci. “But in America that’s where a lot of social policy gets made.”
The California program contains elements of Ghilarducci’s own plan for providing adequate retirement income. Her proposal to create Guaranteed Retirement Accounts (GRA) has gained national attention, including a recent column in the New York Times in which she detailed the dismal retirement prospects facing millions of people if things don’t change.
The accounts would be run by the state, allowing for the pooled-investment fund to realize savings and efficiencies. A board of trustees, obligated to find the best manager for the fund, would administer it on a non-profit basis.
“They will send it out to bid, but likely the only institution that will be able to handle all this money in an efficient way will be a state’s pension system.”
The plan, a hybrid cash-balance scheme, would be portable from state to state, and would provide a “near guaranteed rate of return” to be determined by the trustees based on the fund’s performance.
“The idea is that workers could vary their target benefit depending on how much they contribute – the same principle as a pension, in that if you save now, you get something later. Mainly it’s a way to help workers save for their retirement. One of the best features of Guaranteed Retirement Accounts is that fairly knowable rate of return – it may fluctuate in a range, but it won’t fluctuate wildly with the stock market.”
Other key principles include mandatory participation and not being able to withdraw funds until retirement. And because it is locked in, “you can get a higher rate of return because you don’t have to pay for the liquidity … and you are sheltered from the temptation to spend you retirement fund.”
Ghilarducci is critical of schemes, like the UK’s new auto-enrolment program, that allow employees to opt out. Canada’s Pooled Retirement Pension Plans (PRPP) also proposes to let workers opt out. Her proposal sees employee contributions as being mandatory.
“I’m treating it more like Social Security or unemployment insurance – you can’t opt out of those programs. I think (an opting-out option) is going to cause trouble in the UK down the road. Some people … will opt out because their present-day needs are so pressing.”
The perils of going with a voluntary approach to retirement savings can be seen in today’s pension gap, she says. The evidence of the 30-year experiment with savings-type plans is that people haven’t put enough aside, and those who may have are subject to market upheavals.
Traditional defined benefit plans began to be replaced by defined contribution schemes about 30 years ago, pushed by the lobbying efforts of special interests, she says. Highly paid executives benefitted the most from this new approach, through the provision of generous tax breaks, while the financial industry was able to realize substantial earnings from fees collected to administer individual and group investment funds.
“But there was (also) some aspect of misplaced hope that the financial markets would never fall or that somehow human beings could save voluntarily for 40 years.”
Mostly, ordinary people were simply powerless to halt the demise of a successful pension structure, defined benefit, and the introduction of one, defined contribution, now deemed a failure, However, with plans like her own and the California scheme gaining attention and action, a new day may be dawning for retirement planning, says Ghilarducci.
“If Gov. Brown had not signed the de León legislation, we would have been on the verge of just watching that cohort go into poverty. We still have a problem, but we are going to reverse the bad effects of our 30-year experiment.”
John Devine writes for the Alliance for Retirement Income Adequacy. Read the ARIA blog at ariapensions.ca.