Retirement Security

New York Times is Pessimistic about Americans' Retirement. Let's Fix That.

Mark Huelsman — Mon, 26 Jan 2009 20:59:00 -0500

The New York Times pens an editorial today that's half-kvetching at the current state of retirement security and half-prescriptive for policymakers interested in preserving a comfortable retirement for the boomers and beyond. Are they optimistic about a market rebound that acts as a cure for shockingly low account balances (and can you tell I just got my quarterly statement)? Consider the following passages:

The last 25 years was a time of low inflation rates and low interest rates, which boosted stock prices. Going forward, inflation and interest rates have nowhere to go but up...

So far, the cumulative wipe-out of household retirement savings totals about $2 trillion, and no one believes that the downturn is anywhere near over. As a result, participants in 401(k)’s are in greater danger than ever of coming up short in retirement...

The wipeout in 401(k)’s has made it clear that it is not enough to get more people to save more...

Decidedly pessmistic. Alas, the piece is not bereft of hope or constructive talk. The Times cites President Obama's campaign proposal (that has acheived bi-partisan support) for a universal/automatic IRA as a way to give workers access to a savings vehicle. Good. They also give oxygen to an idea out of the Center for Retirement Research at Boston College that focuses on a shared-risk account that could provide a buffer of security for middle-class retirees. There are many ideas along this line on a broad range of economic ills, and some deserve serious thought from Congress and the new Administration.

"There needs to be a better way to reasonably ensure that a lifetime of savings can’t be undone by forces beyond one’s control." Agreed. Just as important, however, is the need for a better way to reasonably ensure access and enticements for those who do not currently have adequate savings. This is a near impossible sell in an age of dwindling consumer spending, and the Times piece has an appropriate dooms-day quality to it.

But there seems to be an underlying implication that the 401k system is tragically flawed. This seems to me unfounded. There are big ideas that don't completely destroy our current system. The policy fix, it seems, in a world where retirement savings is on the burden of the individual, is to share risk, incentivize and reward good behavior, increase transparency, and create a "confidence floor" for people so they aren't worried about losing everything in a wretched market. And when they start losing a lifetime of savings by doing what they've always been told to do, there needs to be some sort of backstop. All of this is doable.

More positive news: fixes that jive with these principles aren't all that expensive. The auto IRA would bring with it minimal costs. As would a saver's bonus. 401k fee transparency was in in 2008. And the cost of big ideas like KIDS accounts, universal 401ks, and national 401k insurance pales in comparison to the figures leaping out of Capitol Hill these days.

"Many Americans didn’t have enough savings coming into the downturn." Congress and the new President are trying to fix our economy. In doing so, let's also fix that.

Before we picket AARP...

Mark Huelsman — Wed, 22 Oct 2008 21:45:00 -0400

In today's Washington Post (and Newsweek, I suppose), the usually sensible Robert Samuelson nominates himself leader of the under-35-voter mob that is supposed to march on the American Association of Retired Persons in protest. Before I grabbed my pitchfork, I thought it might be a nice idea to see what all the fuss was about. It turns out, Mr. Samuelson is encouraging us to "get angry" at AARP (and old people) for mortgaging my generation's future all for the sake of lining the already-stuffed pockets of America's seniors. I see several problems with this approach, not the least of which is the fact that older Americans have disproportionately been walloped by the foreclosure crisis.

My core concerns lie in Americans' retirement and financial security, so I glanced at AARP's positions on such issues in their "voters guide" that has Mr. Samuelson so troubled. First, in the commitments checkbox, AARP asks the candidates to "commit to help end gridlock by working across party lines to develop and support common-sense, bipartisan solutions on health care and financial security." Both candidates in their written response essentially agreed to do so. Innocuous as it is, this hardly strikes me as something I should be angry about.

Second, and more to the point, I found this nugget: "Half of all workers have no organized way to save for retirement such as pensions or 401(k) plans. AARP supports guaranteeing workers access to automatic payroll deductions to an IRA (Individual Retirement Account) in the workplace if their employers do not already provide them a pension or 401(k) plan."

For the record, both candidates, again, essentially agreed. My admitted obsession with automatic enrollment aside, this strikes me as not pandering to current retirees, but future ones. Current workers (especially those of us under 35) plan to retire someday. Thus, we have a vested interest in policy that nudges us into a better retirement that doesn't rely solely on government programs. It misses the point to say that AARP and other organizations are only concerned with today's retirees. In fact, they have a multi-million dollar advertising campaign ("Divided we Fail" and "Future Champions") designed to pin down the candidates on bi-partisan solutions for the long-term health of our financial and entitlement systems, among other things, in which current under-35 workers have as large a stake as anyone.

Making AARP the lone boogeyman ignores the fact that a good chunk of their advocacy agenda is centered around today's workers. I have no doubt our next president and the one after that are going to have to make difficult decisions on entitlements and our financial system, but it seems to me that advocating for common sense solutions for current and future retirees is a decent starting point.

Battle of the Bulges: Obesity, Financial Illiteracy and the Role of Behavior

Jamie Zimmerman — Wed, 28 May 2008 21:56:00 -0400

I've recently been thinking about the similarities between our national epidemics of obesity and financial illiteracy. Both are socio-cultural phenomena created through generations of misinformation, misunderstanding and perverse incentives. Factors like (but not limited to) easy credit and encouraged consumerism without proper consumer disclosure and easy access to abundant, cheap astonishingly unhealthy foods has created a culture of overindulgence on so many levels. Both problems tend to fall disproportionately on poor, low and even some moderate-income households, which lack easy access to alternative options (like banks red-lining disadvantaged neighborhoods; public school cafeterias serving french fries most everyday yet not offering physical education classes). And both are believed to have huge social and economic costs that are now reaching epic proportions. If similar forces are causing and/or driving these problems, then shouldn't efforts to tackle both childhood obesity and financial illiteracy also be similar? Only recently has this become apparent to those fighting the battle of such rhetorical bulges.

At the high-level International Conference on Financial Education host this month by the US Department of Treasury and the Organization of Economic Cooperation and Development, INSEAD Professor Klaus Wertenbroch presented his research on psychological biases in financial decision-making. He told a story of how explaining to a high school aged girl how much money she could save (and earn through compound interest on savings and investments) if she did not buy that one Coke each day out of the vending machine at school. He explained this as "a message that clicked" with the student that she can make good financial decisions just by changing her attitude toward money. But the message about the coke in the vending machine everyday "clicked" with me in another way - it's the same sort of message those in the fight again obesity make as well. Overall, the messages are similar - yes, knowledge is important, but healthy habits (behavior) stem also from attitudes. We seemed to reach this consensus at the OECD/Treasury Conference but failed to come up with any agreement on concrete solutions to the financial literacy glut in the United States. The problem is, creative messaging to change attitudes will only go so far if access to more "healthy" options (access to financial services; physical education classes and salads in schools) are not - and have not traditionally been - readily available.

However, one buzzword that had stemmed from new insights of behavioral economics might offer an innovative approach - Nudge, as recently made popular by the new book by Thaler and Sunstein. The power of the "nudging" (some wonks like to call it libertarian or soft paternalism) people in the right direction and the idea seems to be catching on in both health and financial education circles. As Dr. Wertenbroch put it "we need to create choice environments to coax people in the right direction." And while he referred explicitly to financial decision-making, this could obviously be applied to healthy eating and living habits as well. For instance, why don't we do more to default people into the more "healthy" options (healthy school lunches offered; auto-defaults into retirement accounts or other financial products such as savings accounts)? Why not use new media more actively to "nudge" people toward physical and financial fitness? Marcin Polak presented on the Polish government's investment in "edutainment," which used popular mass media and internet to launch an effective campaign against financial illiteracy, is actually quite amazing. I don't see why we couldn't emulate something similar in the United States.

It seems like experts and policymakers alike are finally realizing that in order to win the fight to effectively change unhealthy behaviors - and the perverse environments our society has created that enable and indeed encourage such behaviors - some creative and active "nudging" back in the right direction is going to be necessary.

LATimes Supports New America's Retirement Bill

Rourke OBrien — Tue, 13 May 2008 19:47:00 -0400

The Los Angeles Times published an editorial today in support of Assemblyman Kevin de Leon's plan to provide workers who are not eligibile to participate in an employer sponsored plan access to a safe retirement savings product.

This is obviously a major boost to New America's efforts to create a voluntary, portable, low-cost, high quality retirement account structure for all workers in California. See this previous post for more.

Stay tuned for updates as this important (and ambitious) proposal travels through the state legislature en route (we hope!) to the Governor's desk.

A Different Kind of Universal Coverage

Rourke OBrien — Thu, 01 May 2008 16:17:00 -0400

A bill recently introduced in Sacramento, and supported by Governor Schwarzenegger, has the potential to cover almost every California worker. No longer will those unlucky enough to work for an employer who doesn't provide coverage be left vulnerable. No longer will those who seek to buy coverage on their own be priced out of the market. And best of all, it will cost virtually nothing. Interested? Good. But we aren't talking healthcare-we're talking retirement.

Today, more than one-third of today's seniors subsist almost entirely on income from social security - an average payment of just over $1,000. For those workers (most of us) who aren't fortunate enough to be covered by a defined benefit, employer-sponsored pension plan, i.e. checks for life, the only way to prevent retirement of destitution is to start saving now. But unfortunately, many workers lack access to the products and services necessary to begin planning for retirement

The need for action is clear. Every day, six million Californians, or roughly 43% of workers in the state, go to work for an employer that does not provider any type of retirement pension or savings plan. And its not that these companies don't want to. Any business owner will tell you their frustration in trying to offer their employees a retirement savings plan. Investing the time to simply comprehend all options, not to mention the increased cost and liability of offering a plan, has led many businesses to simply stop offering retirement plans altogether.

And employees of small businesses, by far California's greatest employer, are even less likely to be covered by a retirement plan. Why? Simple economies of scale. In order to offer a retirement savings plan (401(k), 403(b), etc.) to workers employers are required to pay a series of fixed costs to the financial services provider. With a relatively low number of accounts, the marginal costs associated with each account are high, meaning small employers aren't getting the same bang for their buck as larger corporations. Its no surprise that less than 2 in 5 small businesses in California provide their employees with some form of retirement pension or savings.

Assemblyman De Leon's proposal calls for the creation of the California Employee Savings Program. The basic idea is quite simple. The state of California will offer a basic IRA to workers who are not already covered by an employer plan. Individuals will open the accounts directly with the state or a designated financial service provider (think Fidelity, Vanguard, etc.); employers are asked to facilitate payroll deductions into the account. By being part of a collective pool of workers, individuals in the California Employee Savers Program will pay significantly less in fees.

Naturally, in proposing a new program in a state facing major deficits, we understand the first question on most everyone's mind is about cost. Well that just may be the best part. The California Employee Savings Program is designed to be entirely self-financing. Participants will be charged fees on their account, just as they would on retirement savings product. These fees will be calibrated to cover the costs associated with operating the program, ultimately at a rate much lower than individuals could find on the private market.

We understand that, as with any grand proposal, the devil is in the details--and the details in this proposal get technical very quickly. New America has been collaborating with some of the best minds around the country to help California successfully develop a way to give more workers access to a retirement savings account. We are exicted about the historic opportunity before us.

We hope that legislators in Sacramento will actively engage this proposal on its merits and that pundits and the public will not render their final verdict until the details have been worked out. Through debate and compromise, there is no reason why the state of California cannot ensure more workers have access to a safe and affordable retirement savings product. We hope the inherent bipartisan nature of this proposal-which seeks to help Americans build retirement security through individual agency, savings and investment-will encourage both sides to work together in good faith.

And perhaps once this endeavor succeeds, a bipartisan Sacramento will be poised to again tackle universal coverage-in healthcare.