Fixing Retirement Part 3

by Phil Anderson

“...as soon as 2025, as many as 30 million Americans, many of them originally middle class, will find themselves either poor or “near-poor.” 
From “How to Solve the Retirement Crisis: A Politico Working Group Report”

“The great lie is that the 401(k) was capable of replacing the old system of pensions,” Gerald Facciani former head of the American Society of Pension Actuaries (quoted in the Wall Street Journal)

Continuing our look at the retirement crisis, this article discusses several proposals to provide secure pensions to all workers. As the Wisconsin retirement task force considers action on this issue, they should consider all options. They should consider options that will actually solve the problems and not just tinker around the edges. Economist and retirement expert Teresa Ghilarducci says, “What we need in this country is not a voluntary, do-it-yourself saving system...we need a structure...where we can save and have a guaranteed retirement account.” 

Defined contribution retirement savings programs (IRA, 401k’s, etc.) are a poor substitute for a defined benefit pension which provides a fixed payout at retirement. This is the conclusion of many experts including the original creators of the 401K idea. These tax sheltered savings plans were never intended to be the primary source of retirement income. They were intended to be an additional supplement and to provide a tax break for already well off people. 

But these inferior savings programs have become the the dominant way for Americans to save for retirement (if they save at all). The replacement of traditional pensions with high risk 401k plans exposes workers to wild swings in the stock market and eat up investment returns with high fees. It has not been good for most people. 

Professor Ghilarducci has advocated creating universal guaranteed retirement accounts (GRAs). Her latest book, “Rescuing Retirement: A Plan to Guarantee Retirement Security for All Americans,” is co-authored Wall Street executive Hamilton “Tony” James and proposes a national solution. The plan provides universal retirement savings for all workers. Each worker would have 3% of their wages invested a personal account (half contributed by the employer). Their savings would be pooled and invested in long-term assets by professional managers insuring lower costs and better returns on investment. At retirement the accumulated account is converted to an annuity to provide stable, guaranteed income for life (Google – A Comprehensive Plan to Confront the Retirement Savings Crisis by Teresa Ghilarducci).

The proposal requires no new taxes, new bureaucracy, or taxpayer money. The program uses long term investment strategies typical of defined benefit programs. By pooling investment funds economies of scale and risk control strategies can increase returns and provide greater investment security. Professor Ghilarducci says typical 401ks return only earn 3–4% annually. But by investing with a longer-term approach, GRAs can return of 6–7%. Public pension funds have a median 8.5% rate of return over 25-years. Individuals would be able to choose between private money management firms, state agencies that manage public pensions, or a self-funded federal entity to manage their accounts. To leverage existing infrastructure the Social Security Administration would be used to track accounts and make payments. A tax credit would help lower income people afford to participate.

Another proposal is to use Wisconsin’s current public employee retirement program as a model for private sector workers. In 2013 a group of retired pubic servant proposed this idea and started advocating for “Retirement For All.” This proposal would create a defined benefit plan built on the operating principles and practices of the Wisconsin Retirement System (WRS). It would be a state sponsored program but entirely privately funded. To read the proposal go to www.powrs.org/resources/White%20complete.pdf to read the proposal.

The WRS is the best public retirement program in the country. It is a fully funded, full service, defined benefit pension program. It is paid for with employer and employee contributions plus investment earnings. Currently the WRS has about $100 billion in assets. Investment returns pay 80% of pension annuities and all operating costs. No taxpayer money is used to pay retirement benefits. Wisconsin State and local governments spent only 1.26% of their budgets on pension contributions in 2009. Every dollar spent generated $6.22 in increased economic activity in the state. Public pensions are a win-win for everyone!

The WRS serves 572,000 active public employees and retirees. That number represents 12% of Wisconsin’s adult population (20% when families are included). The WRS is the result of over 100 years of bipartisan effort to provide retirement security to public servants. WRS has NEVER failed to meet any obligation nor required any taxpayer bailout. Even when suffering large investment losses, such as during the 2007-08 economic crisis, the WRS, though its internal risk management features, successfully weathered the crisis.

A defined benefit system for private sector workers could greatly benefit Wisconsin and the thousands of small businesses in the state – 80% of which have fewer than 25 employees. Businesses that are too small to afford quality retirement benefits could now offer them through a state-assisted system. This would enable them to compete more effectively for quality employees. This would attract more businesses to Wisconsin, helping to rejuvenate our economy. “Retirement For All” is a win-win for Wisconsin business, workers, retirees, taxpayers, and the economy.

Retirement USA is an national organization working for retirement solutions that, along with Social Security, will provide universal, secure, and adequate income for future retirees. Their web site lists 12 “principles” for a good retirement system. They say every worker should be covered and have an adequate retirement income after a lifetime of work . Retirement shouldn’t be a gamble. Retirement should be the shared responsibility of employers, employees, and the government. The system should pool assets and be professionally managed to minimize costs and financial risks. It must be administered by a government agency or a non-profit institution and governed by trustees representing all stakeholders. The system must operate in the best interests of all – not the financial services industry. They also suggest a number of ways to  fix the retirement crisis. Check them out at  www.retirement-usa.org. 

These ideas need to be considered by the Wisconsin task force. Like all the problems we face as a nation, there are solutions. The question is, do we have the political will, foresight, and sense of community to do what is good for everyone?