Can public policy and the private sector come together to build a better retirement for American workers?
As part of the CEO Speaker Series from the Council on Foreign Relations, Roger W. Ferguson Jr., President and CEO of TIAA-CREF, responded to questions about the adequacy of the retirement system today. For one thing, within the next 20 years, the Trustees expect that Social Security will be unable to cover roughly 25% of expected payouts.
“The good news is most economists would share a consensus about how to fix Social Security,” Ferguson said. The bad news: “Our politicians are having trouble reaching that consensus.”
Understandably, he added, most Americans are concerned they will not have sufficient savings to cover their needs in retirement. “Private savings have been too low for too long,” he said, and though it is a longer-term problem, the solution is easier said than done. “We, as individuals, have to fix what we can.” Workers of all ages need to save more, and those who are able should prepare themselves for a longer career than they might have anticipated.
For physical laborers, that may not be possible. Social Security, Medicare and Medicaid were designed to help keep the aging population above the poverty line. The primary goal of the retirement industry, he argued, should be to shore up those programs, to protect American workers from falling below the line as they age. “This is about long-term, intergenerational risk management.” That answer may be unsatisfactory to some, he said, but we, as an industry, need to focus on fixing what we can.
There are retirement systems in place that Ferguson believes are a good fit for American workers. A strong model is one that uses automatic enrollment to get people into the plan, that couples employee deferrals with an employer match, and that accumulates savings for both a fixed and a variable annuity. The first guarantees income for life, and the second can provide an inflation hedge.
NEXT: Are there enough incentives and policies in place to encourage savings?
The benefit of being able to save tax-deferred is good, Ferguson said. As to whether it is enough, he believes that success comes down to a combination of public policy and private action. Many people are not deferring much income to their savings, even with the incentives already in place.
The current economic climate makes it unlikely that further policies will be put in place to push private savings, he noted. “I suspect, over time, we aren’t going to get more in the way of incentives to save. It’s up to all of us to leverage fully what we have.”
While he argued there is no optimal relationship between the government and private sector, the appropriate balance is cyclical, and depends upon market fluctuations. “Economics tells us that governments do and should rise when there’s a ‘pure public good’ kind of problem,” and this holds true whether the issue is defense or Social Security. One way to think about it, he suggested, is that the government can set the rules for how transactions among external factors should take place.
Though it is controversial, he admitted, “We need, often, a big government back-stop when things really get out of kilter.” The level of government regulation in place may rise with market instability, but should also be expected to fall as conditions return to normal.
Globally, he said, “there are pockets of strength.” Australia’s superannuation system, for example, requires that everyone save a certain amount and that they save in a way that allows them to have annuities.
NEXT: Changing retirement plans.
The nature of retirement planning products themselves should also evolve, Ferguson said. Financial literacy is too low to ask participants to make decisions that are in their own best interests, and many people need advice and guidance when it comes to retirement planning. Auto-enrollment and -escalation can address some of that, but the misconception that many participants have that their target-date fund (TDF) provides guaranteed income in retirement also needs correction. Even participants who are very happy in their 401(k)—and many employees do appreciate the employer-sponsored benefit, he said—regret that there is not more support for decumulation.
“We all have an interest in making sure that compensation systems are structures with the right set of incentives,” he said. “The real secret is that long-term investors and management have an alignment of interests around getting really smart strategies well-executed over a reasonable period of time.” For plan sponsors, having a goal for the plan in place can lead to a better-informed strategy and benefit plan overall. The benchmarks for plan success are unique to each program, but the plan design should provide a roadmap for meeting those targets.
The focus of many plans is on the savings process and accumulating assets, not the payout that should come at retirement. The second question—What will your account balance look like when it comes time to draw it down?—is largely ignored by the products currently available. “Think of retirement as a shared responsibility between employer and employee.”
Ferguson suggested that a successful program would combine the best aspects of defined contribution (DC) and defined benefit (DB) plans. Demand more from savers, then provide a payout at retirement; the challenge is doing that sustainably for participants.