Monument Group recently held a Women’s Investor-Only Lunch at the Todd English Food Hall in New York. We were joined by labor economist and nationally recognized expert on retirement security Teresa Ghilarducci as our guest speaker. Dr. Ghilarducci provided the limited partner attendees with great insights on the retirement predicament in the U.S., along with practical steps to resolve the issue.
A Broken System
Echoing her book, Rescuing Retirement, co-authored with Tony James, Executive Vice Chairman at Blackstone, Dr. Ghilarducci explained the three necessary features of a sound retirement system. A properly functioning system, she said, helps individuals build sufficient assets, assists them in efficiently investing those funds, and once they are in retirement, helps ensure the effective de-accumulation of assets. She also noted that the retirement system subsidies that most national governments provide should be fair and equitable. On all four counts, according to Dr. Ghilarducci, the U.S. retirement system has failed.
Per Dr. Ghilarducci, just 55 million of the country’s 130 million workers have access to a retirement account through their employer. Many of those who are offered such accounts do not participate or are not saving sufficiently. “The retirement system is not designed for real human beings who have real work lives,” she commented. “The voluntary part is a failure.”
In terms of investment options, Dr. Ghilarducci noted the illogic of 401(k) plans and IRAs, which are intended to fund long-term liabilities, offering only short-term, liquid assets, at retail prices. “We’re paying for liquidity we don’t need and should not want.” An additional flaw is permitting withdrawals prior to retirement for broadly defined “emergencies,” such as home remodeling. The result, she says, is insufficient savings and “an investment portfolio completely ill-matched to the needs of that investment.”
Regarding de-accumulation, Dr. Ghilarducci spoke of the difficulty and risks associated with individuals attempting to appropriately spend down assets once they are in retirement, particularly as they age. “We have five times the rate of any other country in financial abuse of the elderly,” she said. While acknowledging the benefits of social security, she also noted the program only replaces about 40 percent of pre-retirement earnings for those in the middle class, and much less for those above middle-class earnings. In addition, Dr. Ghilarducci reminded the audience, subsidies for retirement accounts in the U.S. are in the form of federal and state tax deductions. As a result, the largest subsidies go to those with the highest marginal tax rate, with much less or nothing at all provided to individuals lower on the income scale. All in all, a broken system.
The solution to this flawed retirement structure, according to Dr. Ghilarducci and Mr. James, is a guaranteed retirement account. This mandatory savings program would require employees to contribute 1.5 percent of their income, with an equal company match. It’s a minimum amount,” she said, “and we expect that over time, participants would increase their savings rate.”
Similar to a defined benefit pension plan, the savings would be invested in a pooled fund. To help ensure the monies are managed appropriately, the program would utilize an exchange where regulated and proven defined benefit managers would oversee the accounts. The savings program, which would be in addition to social security, would offer a diversified portfolio, featuring not only retail stocks and bonds, but also real estate and alternative asset classes not traditionally available via 401(k) plans. In place of tax deductions, each participant would receive an equal annual payment, at no additional cost to the federal or state governments. The authors have calculated the federal payment at $600 per participant.
“Mandatory savings on top of social security that allows people to accumulate what they need, a fair contribution from federal and state governments, and a professionally-managed portfolio, are all very attractive features of our program,” said Dr. Ghilarducci. “The best part, however, is that since all workers are participating, the funds can be annuitized at a group rate rather than the much higher commercial rate that would be required for an individual.”
The annuity payments would commence when an individual begins receiving social security. Recognizing the monetary benefit of delaying the start of social security payments, the authors have proposed bridging the annuity payments to a later claim age.
Following a Q&A session that addressed several topics including possible changes to social security, reform efforts at the state level, and other countries’ approaches to retirement, Dr. Ghilarducci concluded with a call to action for her audience. “We are all practitioners and all professionals and I think we have responsibilities. There is a lot of firepower in this room and I believe we should speak out and do what we can to help to ensure a better retirement future for all.”