By

Teresa Ghilarducci“We both agree that people deserve to retire. We both agree that saving is not just a matter of personal discipline, but rather retirement happens in a well-designed structure, in an eco system that allows people to save from their paychecks every minute that they work.” – Teresa Ghilarducci

 


It started as a lunch meeting but by the time it had finished, it became a meeting of the minds over the need to solve the retirement crisis by launching a new national program to deliver workers adequate retirement income.
Pension expert and academic Teresa Ghilarducci, a renowned labour economist, broke bread with Hamilton ‘Tony’ James, Chief Operating Officer of Blackstone, one of the world’s leading investment firms, and discovered they had more in common than an appetite for lunch.
That shared interest led them to co-author the book, Rescuing Retirement: A Plan to Guarantee Retirement Security for All Americans, which sets out a plan to replace the American 401 (k) system with one that would pool resources to generate higher investment returns, be universal in coverage, and provide a guaranteed lifetime benefit.
“We come from different worlds, but when we met to talk about the huge need to (fix) the retirement crisis, we were finishing each others’ sentences by the end of the lunch,” Ghilarducci, a professor of economics at The New School for Social Research, told ARIA during a recent conversation.
“We both agree that people deserve to retire. We both agree that saving is not just a matter of personal discipline, but rather retirement happens in a well-designed structure, in an eco system that allows people to save from their paychecks every minute that they work.”
Like Social Security, the Canada Pension Plan (CPP), or defined benefit workplace plans, the new model being pitched by the authors would facilitate the accumulation of retirement income because “it doesn’t take the initiative of the employer or employee to contribute … it’s part of the cost of working,” she continued.

“We also agreed that just saving isn’t enough, that people need to save in a safe place where you get the maximum risk-adjusted rate of return, and most Americans, because of this individually directed retail account in a 401 (K) or IRA do not have access to a good investment platform.”

They were, in fact, “dismayed that trillions of dollars in assets that were set aside for long-term retirement are matched to short-term hyper liquid investments.”
Because the model would be applied nationally, a growing asset pool would allow for access to asset classes not available to individual savers, generating higher returns and lower fees, explained Ghilarducci, adding: “We both were appalled at the inefficiency of that (DC) system.”
The vast majority of people don’t seek to retire rich, but rather to retire comfortably, she added. And they want to know that they will have a secure stream of income for the rest of their lives, something that isn’t guaranteed with a defined contribution savings plan. Under a DC scheme, savers are given a lump sum payout upon retiring, and then have to figure out how to make that money last. The authors’ model calls for savings to be annuitized, providing that lifetime income. Other key components of the plan include:

• Universal coverage
• Plans that are individually owned and effectively managed
• Being deficit neutral, or no cost for low-income families
• Providing lifetime income through annuities
• Having bipartisan appeal.

“Any country that lets people withdraw savings before retirement is baffling, but having to withdraw the money in a lump sum is insane, period!”
The model being proposed is essentially a target benefit plan, a hybrid approach that marries elements of DB and DC. From the former it would involve mandated participation and employee/employer contributions, and from the latter it would release employers from fiduciary responsibilities, other than providing contributions.
The plan was developed in large part with employers in mind, said Ghilarducci.
“I know based on my research … that employers don’t like our system. They don’t like 401 (k) brokers anymore than workers do. And they certainly don’t like the fact that they have a lot of responsibility but have very little control over what their employees can do. They want their pension contributions to be effective, and so our plan helps lift (from them) the onus of the legal responsibility, financial choice, and the expertise, and just helps employers discharge their responsibility to help pay for pensions.”
The management of the fund would likely be contracted out, perhaps to Social Security or one of the larger state pension plans, negating the need to establish a new structure, she said.
The authors followed up on that lunch by writing an op-ed piece and got such a positive response they decided to write a white paper on the subject, followed by the book that was released in September. Ghilarducci said she is now preparing for “what has to be in the second book.”
Although at least 29 states are considering or have implemented savings plans, a federal approach is most efficient given the nature of employment today, with employees and employers being increasingly mobile. Under a federal plan, workers would have continued coverage as they moved from job to job, or across the country, she continued.
“Companies and workers are mobile nationally and no one wants to deal with all these different plans, so the solution has to be national … and the federal government will have a lot more muscle and influence to bargain down fees and get more diversified portfolios. In managing money … size is gold. To take advantage of scale, you need to do it at the federal level.”
She added that the plan outlined in the book could enhance Social Security benefits by delaying the need to start taking them. If a worker began saving at age sixty and turned those savings into income at sixty five, that would provide a bridge to delay Social Security income, resulting in higher benefits.
“Our plan is to help everybody at whatever age to accumulate retirement income.”
Many pension experts have concluded the current 401 (k) DC-style system of retirement savings isn’t working, with numerous studies pointing to a retirement crisis of inadequate income. For Ghilarducci, you don’t have to dig too deep to realize that.
“Thirty five years of experimentation with a voluntary system is my footnote. I rest my case on experience. No country or system that is not mandatory ever achieves universal or consistent participation.”

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