0:00

Please stay tuned for important

0:02

disclosure information at the conclusion

0:04

of this episode.

0:05

Hi, and welcome to the Longview. I'm

0:08

Jeff Patak Chief Ratings Officer for MorningStar

0:10

Research Services.

0:11

And I'm Christine Ben's director of personal

0:13

finance and retirement planning at MorningStar.

0:15

guess on the podcast today

0:17

is David John. David is a

0:19

senior strategic policy adviser

0:22

at the AARP Public Policy

0:24

Institute. where he works on pension

0:26

and retirement savings issues. He

0:29

also serves as deputy director of

0:31

the retirement security project at

0:33

the Brookeings Institute. RSP

0:35

focuses on improving retirement savings

0:38

in the United States, especially among

0:40

moderate and low income workers. Before

0:42

joining AARP, David was a senior

0:45

research fellow at the Heritage Foundation. He

0:47

also has extensive public policy experience

0:50

working from Sunny Center Bank, a law

0:52

firm, a Credit Union Trade Association,

0:55

and four members of the House of Representatives.

0:58

David has written and spoken extensively about

1:00

the importance of reforming the nation's retirement

1:03

programs. He is co author with

1:05

J. Mark Euvre of the Automatic

1:07

IRA. a small business retirement

1:09

savings program for firms that

1:11

do not sponsor any other form

1:13

of retirement savings or pension plan.

1:16

In addition, David is one of four co editors

1:18

of the two thousand nine book, Automatic,

1:21

changing the way America saves. David

1:24

holds an ABJ in journalism, an

1:26

MA in economics, and an MBA

1:28

in finance, all from the University of

1:30

Georgia. David, welcome to the Longview.

1:33

Thank you. Thanks for having me. It's

1:36

our pleasure. Thanks again for joining us.

1:38

Before we get into discussing specific

1:40

policy prescriptions, We'd like to

1:42

put a general question to you that we've

1:45

asked our other guests from

1:47

the policy rum. Do we have a retirement

1:49

crisis on our hands in the US? or

1:51

will we have one eventually if we

1:54

don't today?

1:55

I tend to avoid the word

1:57

crisis because it implies something

1:59

that has to be fixed and

2:02

can be fixed immediately, but

2:04

we definitely have a problem that

2:06

is only going to get worse. We

2:09

are at the point right now where

2:11

we are roughly at the last generation

2:14

of retirees who has

2:16

had any sort of a substantial amount

2:18

of traditional pensions. And

2:20

that means more and more people are going

2:22

to be depending on both Social Security

2:25

on one hand and what they've saved

2:27

on the other, and helping

2:29

them to save the most possible.

2:32

And then the key question of

2:34

course, is how to convert that into useful

2:36

retirement income?

2:38

So

2:38

you referenced the fact that we've had this

2:41

steady ebbing away of pensions

2:44

They're exceptionally rare in the private sector

2:46

today and personal savings haven't made

2:48

up for the fact that they've gone away. So

2:51

should retirement savings contributions

2:53

be mandatory either from the employer

2:56

or the employee to address that

2:58

issue?

2:59

You know, I think that automatic

3:01

enrollment fits the bill better than

3:04

anything else to have

3:06

it set up so that we can

3:09

or an individual can focus

3:11

and make their own decisions is

3:15

both more acceptable to

3:17

the individuals and fits

3:19

the needs more than anything else. What

3:21

we do need, however, is

3:23

to make sure that all employers

3:26

enable their employees to

3:29

save for retirement. And I think

3:31

that's going to be the the key political

3:33

and other issue that we're

3:35

gonna have to deal with from now on.

3:39

Nudges like automatically enrolling 401K

3:42

participants appears to be

3:44

one of the great success stories of their retirement

3:47

savings landscape, do you

3:49

think existing allowable nudges

3:52

go far enough or should more

3:54

be permitted?

3:55

I think what

3:58

we've got at the moment seemed to work very

4:00

well, but the question is as you pointed

4:02

out the extent there

4:05

is going to be a nudge to help

4:07

people continue to save.

4:09

And I think one of the key important

4:11

ones going forward is going to be

4:14

reenrollment nudges on

4:16

a regular basis for those who have

4:19

opted out. The other one that's

4:21

coming, which I think is as

4:23

essential as auto enrollment is

4:25

going to be, is some sort of a

4:27

nudge, some sort of an automatic choice

4:30

on retirement to help people

4:32

figure out how to use their retirement

4:35

savings.

4:37

So you mentioned reenrollment. Can you describe

4:39

what that means?

4:41

Well, it means simply that

4:44

if an individual decides that they're

4:46

not going to participate in the retirement

4:48

plan today that they

4:50

get asked again and the auto enrolled

4:53

again. say every two years

4:55

or even every year until

4:58

they decide that they do want to participate.

5:01

That way, someone who's facing

5:04

some sort of financial problem at

5:06

the time that they were first approached still

5:09

has the opportunity to participate

5:11

and to build retirement security.

5:15

One big question is whether the current system

5:18

of employer provided retirement savings

5:20

plans even makes sense given

5:22

that employees often jump around so much. Does

5:24

it make more sense to disentangle

5:26

retirement savings from any one

5:29

specific employer so that retirement

5:31

savings are automatically portable?

5:33

Yes. Actually, it does make

5:36

sense to some extent. We

5:38

don't want to completely decouple

5:42

the two, but having a

5:44

retirement account

5:46

that moves with you automatically and

5:49

easily from employer

5:51

to employer actually solves

5:53

a tremendous number of problems having

5:56

to do with losing accounts

5:59

or being cashed out at the

6:01

wrong time and having to start over your

6:03

new job. we still

6:05

want the employer to be involved, and

6:07

that involves things like

6:10

setting up payroll deduction, and

6:12

even being involved initially in

6:15

trying to determine investments and

6:17

things along that line. But

6:19

the real key is that when

6:22

you move to a new employer, you

6:24

provide them with

6:26

Social Security number and bank

6:28

account number for direct deposit of

6:30

your paycheck, but also a

6:32

number or a way to fight it.

6:34

for your retirement income so that your

6:37

retirement contributions automatically

6:40

continue to build up and you don't

6:42

face portability issues?

6:46

Well,

6:46

I wanted to ask about the whole

6:48

liquidation issue. People

6:51

cashing out entirely at the time they

6:53

leave an employer. How big a problem

6:55

is that?

6:57

It's a huge problem, actually. And it's

6:59

especially a problem when you're

7:01

starting out. Typically,

7:03

an individual leaves their jobs

7:05

or or moves from job to job more

7:08

often when they're starting their career

7:10

than later on. And

7:12

if you're cashed out often

7:15

because, frankly, the easiest option

7:17

for the HR person that's dealing

7:19

with the fact that you're leaving.

7:22

The odds are, a, that you're going to

7:24

spend that money on something else, b,

7:27

that you're going to have some sort of an increase

7:30

tax liability that you weren't expecting

7:32

because you've taken the money out earlier

7:35

and see that you've essentially

7:38

reduced your retirement savings to

7:40

zero. And as I said before, you

7:42

have to start over again.

7:43

So

7:45

I suppose one policy choice

7:48

is to make things more

7:50

portable in the ways that you're suggesting

7:52

Another policy choice is to nationalize so

7:55

that some of these types of situations

7:57

that arise like you're talking about don't

7:59

really come up. you hop from

8:01

one employer to the next and it stays in a

8:03

nationalized plan, akin to something like the thrift

8:06

savings plan. Do you think that's a suboptimal

8:09

approach?

8:10

I think it doesn't make

8:12

whole lot of sense given the

8:14

fact that we have an incredibly advanced

8:17

financial industry at that point.

8:20

And this financial industry is

8:22

really at the leading edge of

8:25

innovation across the world. If

8:27

we had a governmental system, one

8:30

system were much more likely

8:32

to find ourselves locked into something

8:35

that stays the same for the next

8:37

several decades or something along that

8:39

line. think we're actually all better

8:42

off with the competition and

8:44

what that does with fees and

8:46

the like and also the fact that we

8:48

develop much better and

8:50

more effective types of retirement

8:53

investment options.

8:57

What

8:57

about the idea of simply unifying

8:59

the contribution limit on IRAs

9:02

and 401k. So if you don't have a company

9:04

retirement plan or maybe it's not very

9:06

good, you would be free to put

9:08

it all into an IRA instead.

9:11

could something like that work, I guess, the the

9:13

automatic contribution piece would be

9:15

something we would need to solve for. But what

9:17

do you think of that idea?

9:19

You know, I see that fairly

9:21

often, and I also see it from

9:24

entities that are pushing payroll

9:27

deduction IRAs that

9:29

I don't necessarily be in the state programs.

9:32

The one question that you have here

9:34

is that as

9:36

it is structured now with

9:38

a payroll deduction IRA as

9:40

sort of the base in the states that are

9:43

implementing that at the moment, You

9:45

don't have quite the same incentive

9:48

for an employer to move to

9:50

a different and better type

9:52

of retirement plan as their

9:54

company prospers. If

9:57

everything can stay in an IRA

9:59

and an IRA at the moment

10:02

cannot accept employer contributions.

10:05

You really remove that stair

10:07

step process Marquivre and

10:10

I developed the automatic IRA

10:12

about sixteen years ago. And

10:15

our goal at that point was

10:17

that smaller companies would

10:19

be able to take advantage of a very

10:22

simple, easy structure without

10:24

the pressure to make batching contributions.

10:27

And then as the company prospered and

10:30

the owner wanted to share

10:32

some of the profits in a magic

10:34

contribution, and or

10:36

to keep the best employees from

10:38

moving to another company, they would

10:41

move up to something like A401K

10:43

or some similar entity.

10:45

It might be a multiple employer

10:48

plan or something like that. But

10:50

having the two differentiated helps,

10:54

and I was just looking at the median

10:56

contribution to a 401k

10:59

this morning. And it's somewhere

11:02

around three thousand five hundred. dollars So

11:05

increasing the amount,

11:07

the cap really only

11:09

benefits those at higher income

11:12

levels, and those are the people who

11:14

most likely have access to

11:16

A401K anyway. So I

11:18

don't think that's going to have as much effect

11:21

as other ways to improve

11:23

the retirement system.

11:24

Yeah.

11:26

And

11:26

we're interested in talking somewhere about ways

11:29

to promote retirement savings for

11:31

low income workers. Before we did that, I

11:33

did wanna ask you about what's kind of a hot button,

11:35

which is whether ESG should be allowed

11:38

in A401K lineup. What do you think?

11:40

That's the great question.

11:43

And I think that the answer is

11:45

with so many other public policy questions

11:47

is a firm and uncompromising,

11:50

it depends. Essentially,

11:53

it depends on what ESG

11:57

means in a particular investment

11:59

environment and to what

12:01

extent ESG factors

12:04

affect the financial return. The

12:07

first goal has to

12:09

be to help somebody build

12:12

a significant amount of retirement

12:14

assets, especially since so many people

12:16

are going to be depending on those as

12:19

their sole supplement to Social Security.

12:22

But by and large, we do face

12:24

an environmental crisis, and

12:27

we have seen a significant number

12:30

of even regulators looking

12:33

now and recognizing that

12:35

a company's ESP profile

12:37

actually deals with long term

12:39

risk for that investment. So

12:42

to the extent that an ESG

12:45

investment is structured

12:47

in a way that provides decent

12:50

returns and the like, yes,

12:52

it's definitely an option and it

12:54

should be there whether it's the

12:57

default investment option is

12:59

something we're gonna have to decide as

13:01

we go along.

13:04

Going back to the automatic IRA,

13:06

which you co created as an avenue

13:08

to save for people who don't have access

13:11

to a company provided retirement savings

13:13

plan, Can you talk about that group

13:15

of workers who do

13:17

not have access to a company provided

13:19

plan? How large a group is it

13:22

And maybe you can discuss some sort of

13:24

the general demographic contours

13:26

of that group.

13:27

Absolutely. And this is

13:30

a real key issue for

13:32

us. For instance, we

13:34

just had numbers done for us

13:36

by the world expert actually

13:38

on those numbers. John

13:40

Sablehouse who used to be with the Federal Reserve

13:43

Board. And in the US, basically,

13:45

we've got something around fifty seven

13:48

million people and that's about forty

13:50

eight percent of the workforce who

13:53

don't have a retirement plan at work.

13:55

And that's neither defined contributions

13:58

retirement savings plan or defined

14:00

benefit traditional pension. We

14:04

find, in general, that

14:06

there are five groups who are underrepresented,

14:09

and

14:10

these five groups overlap. So

14:12

if you're younger, If you

14:14

are a lower income, if

14:16

you are a person of color,

14:19

a woman, or you work for a small

14:21

business, the odds are that you don't

14:23

have a retirement savings plan

14:25

at work. And just a couple

14:27

of numbers there. So for instance, someone

14:31

who is Hispanic, sixty four

14:33

percent don't have a retirement

14:36

plan. If you're black, it's fifty

14:38

three percent White is

14:40

forty two percent. Less

14:43

than high school education, seventy

14:45

six percent don't have a retirement plan.

14:48

You just have a high school degree, it's fifty

14:50

eight percent. Men and

14:52

women are about the same, actually.

14:55

Although women It's forty nine

14:57

percent to forty six percent and

15:00

the smaller your employer, the

15:02

odds are that you don't have a retirement

15:05

plan. So seventy eight percent

15:07

for the smallest employers with under

15:09

ten. And even though

15:11

however when you get to a thousand employees,

15:14

and most of those are actually

15:18

some form of franchise.

15:21

You still have about thirty four percent

15:23

of lower income. And these are people

15:25

who are going to need it the most. Seventy

15:28

nine percent if you make eighteen thousand

15:30

or less, sixty five

15:32

percent if you're under thirty

15:35

one thousand, etcetera. So

15:37

this is a serious problem,

15:39

and it's a serious problem in

15:41

that the people who

15:43

don't have a retirement plan or

15:45

at least likely to have a retirement plan

15:48

are also the ones who are least likely

15:50

to have some others type

15:53

of financial asset that

15:55

could be used for a secure retirement?

16:00

So that addresses sort of the

16:02

supply, the availability and quality

16:04

of retirement options. What about the demand?

16:07

What have we learned about that among those

16:09

underserved groups if they are presented

16:11

with, let's say, a reasonably

16:14

high quality retirement savings option

16:16

through the employer types

16:19

that you described or in the circumstances

16:21

you described, what have we learned about their propensity

16:24

to actually contribute, to participate?

16:27

You know, that actually is a key

16:29

question. And it's one

16:31

that we see far too

16:33

many people just looking at

16:35

lower income individuals and saying, well, of

16:37

course, they can't afford to save. And

16:40

the fact is we have data showing

16:42

that yes, they can and

16:44

yes, they want to. So if

16:46

we look in A401

16:49

program, with automatic enrollment.

16:52

We find that a lower income

16:54

individual is almost the

16:57

same participation rate

16:59

as those of higher income

17:01

groups. If we look at the

17:04

automatic IRA programs, that

17:06

are going on in the four

17:09

states where they're operating at the

17:11

most. We find even there

17:14

that typically about sixty

17:16

five percent sixty six percent of

17:19

those who are automatically enrolled

17:21

decide to stay in the program and

17:24

continue to save. We've also

17:26

seen during the COVID crisis

17:29

that while a fairly large

17:31

number, certainly not majority

17:34

of individuals who had

17:36

automatic IRA accounts in

17:38

the states, chose to make withdrawals.

17:41

the vast majority of them

17:43

continued their payroll deduction. So

17:46

what they were doing was use their

17:49

retirement assets to meet an immediate

17:51

financial need, but then they

17:53

continue to build up their assets

17:56

in the future. And we have

17:58

data from the Pew charitable

17:59

trusts and various others,

18:02

whereas we have an AARP paper

18:04

that looked at this when

18:06

an individual has and

18:08

uses emergency savings,

18:11

in this case, a deduction from

18:13

a Roth IRA which is allowed.

18:17

The household balance sheet actually

18:19

is much stronger, and this

18:21

implies that they will have a much

18:23

better opportunity and ability

18:26

to save for retirement in future years.

18:29

I wanted to ask about that, David,

18:31

because you've written about the value

18:34

of embedding that emergency

18:36

savings option into a retirement plan

18:38

or sort of side by side with the retirement plan.

18:41

that's something that we also discussed

18:43

with Bridgette Madrian at length

18:45

on a previous podcast. So

18:47

let's discuss the key benefits of

18:49

those types of rainy day

18:51

funds that are meant to defray emergency

18:55

expenses, and the connection with

18:58

retirement savings, which I guess you just

19:00

addressed a little bit.

19:02

We find that

19:05

on average an individual or

19:07

a household actually is

19:10

likely to have some sort of a financial

19:13

emergency on a relatively

19:15

regular basis that we don't mean

19:18

every year, although some fairly

19:20

substantial number of people have

19:23

two in the space of a year.

19:25

And we find that somewhere

19:27

in the neighborhood of fifty five, fifty

19:30

six percent of individuals find

19:33

that these financial emergencies. And

19:35

by this, I mean something like an unexpected

19:37

health care expense, a

19:40

car that breaks down where you desperately

19:42

needed to get to work. As

19:45

we had in my neighborhood a few years

19:47

ago, a storm that rips up

19:49

your roof or something like that

19:52

can have a real terrible

19:55

effect on a household

19:57

balance sheet. But when

19:59

people have some sort of an

20:01

asset, typically an emergency savings

20:04

account, and we actually urge

20:07

that people have a specific

20:09

amount for emergencies that

20:11

is separate from your general savings

20:14

and, of course, from your retirement savings.

20:17

If you have that and you can use

20:19

that to meet even a substantial part

20:22

of that financial emergency,

20:25

that the household balance sheet, as

20:27

I just said, it remains much stronger

20:29

and you're much less likely to

20:32

find that the cost of

20:34

borrowing or of cutting back

20:36

on other things hurts your

20:38

day to day financial activities. And

20:41

as you go forward then, the

20:43

recovery process is much faster

20:46

and essentially you

20:48

are in a position where you can continue

20:50

to grow, you can continue to save,

20:52

you can continue to build

20:55

your family's financial security. So

20:57

it really is something that

20:59

is an essential safety

21:02

valve, if you will. And it

21:04

also, as far as we can tell,

21:06

and the data is sometimes little

21:08

hard to find at this point because this is

21:10

all fairly new. but it

21:12

also reduces the number of

21:14

people who need to pull money out of

21:17

their 401 case or their retirement

21:19

savings accounts. and

21:22

allows those balances just to continue

21:24

to grow. So

21:26

when these options are made available, what's

21:28

the uptake been like based on what

21:31

we can tell? And then also maybe sort of relatedly

21:33

tax incentives and you

21:36

know, for those who maybe are avail

21:38

of this option, are there potential

21:40

tax incentives that can serve as an inducement

21:42

for them to participate or no?

21:44

Those are the two key questions

21:46

that we need to deal with going

21:48

forward. The easy one is the

21:50

tax incentive. There is not at

21:53

this point. If an employer

21:56

contributes money to

21:58

a short term savings account,

22:01

an emergency savings account, and

22:03

you want these accounts to be in

22:05

a liquid form, whether

22:07

that's on in a bank account,

22:10

a credit union account, or

22:12

even a payroll card if you have one

22:14

that has reasonable fees,

22:16

something that you can use immediately. The

22:19

employer contribution is counted

22:21

as income in

22:24

and taxed as such in the period

22:26

in which the contribution is

22:28

made. So if an

22:30

employer made, say, a five

22:32

percent contribution to your

22:35

emergency savings account in

22:37

August your taxable

22:39

income for August just went up by

22:41

that amount. The

22:43

key question that we have to deal with

22:46

is enrolled. In

22:48

the US, it is questionable

22:52

whether automatic enrollment is

22:54

allowed into an emergency savings

22:56

account. and most of the programs

22:59

that exist at this point require

23:01

an individual to sign

23:04

up. and we see much the

23:06

same problem as we did with retirement

23:08

accounts before automatic features

23:11

came into play after the Act

23:13

of two thousand and six. And

23:15

that people have the idea,

23:18

yes, this is something I want.

23:20

So, for instance, it's in an AARP

23:23

national survey. We found

23:25

about seventy percent of people

23:27

who were asked said, yes,

23:29

I need to have an automatic savings

23:31

account, and I want to have an automatic

23:33

savings account. However,

23:36

because of the difficulty

23:39

of signing up or the fact that people

23:41

just never get around to it. probably

23:44

only about ten percent of

23:46

those individuals actually do

23:49

sign up. So this is an

23:51

underutilized factor. We

23:54

just saw an experiment in

23:56

the United Kingdom where

23:58

they actually were allowed to

24:00

use automatic enrollment with

24:03

a series of employers who

24:05

primarily employed hourly workers

24:07

and lower income workers. and

24:10

the participation rate went

24:12

up fifty percentage points.

24:14

In other words, from about two percent

24:17

of workers to about fifty two

24:19

percent of workers, and the amount

24:21

saved in the average account went

24:24

from about thirty pounds to

24:26

about a hundred and thirty pounds. Now

24:28

that doesn't sound like a lot,

24:31

but this was a fairly short

24:33

study, so they didn't have tremendous

24:36

amount of time to build up those savings.

24:39

And of course, this is the group of lower

24:41

income workers. So basically,

24:44

they were contributing only a

24:46

fairly small amount. But what

24:48

this shows is that if the

24:50

US Obama's automatic enrollment

24:53

into an emergency savings account,

24:55

as well as a retirement savings

24:57

account, literally millions

24:59

and billions of people could have

25:01

this kind of security?

25:04

With ideas like this

25:06

rainy day fund idea, we

25:09

can help but wonder if they'll

25:11

enjoy the greatest adoption among

25:13

employers that are treating their employees pretty

25:15

well. on other fronts, offering

25:17

good quality affordable healthcare, good

25:19

quality 401s and so forth. So

25:21

do you share that concern that such programs

25:24

might not be available to the people who need

25:26

the most, like, to the hourly workers you were

25:28

just talking about?

25:29

I always worry about whether

25:32

programs are going to reach the hourly

25:34

workers because these, as we've

25:36

said, are the people who really

25:38

need this kind of financial

25:41

support more than others. The

25:44

one thing that I think is

25:46

helping at the moment

25:48

And this is a temporary phenomenon, is

25:51

the fact that there are

25:53

so many jobs that are going unfilled.

25:56

So even in our area of West

25:58

Virginia, jobs that used to

26:00

pay seven or eight dollars an hour

26:02

are now paying fifteen dollars to eighteen

26:04

dollars an hour. and

26:06

employers are going to find and

26:09

are finding from what we've been able

26:11

to see that adding a benefit

26:13

like emergency savings,

26:16

even if they don't offer other

26:18

types of benefits, can help them

26:20

to attract and keep the workers

26:23

they need. But when it comes

26:25

right down to it, yes, this is a benefit

26:27

like retirement savings that

26:30

needs to be available to

26:32

employers at very low

26:34

cost and very simple

26:36

burdens on the employer

26:38

to implement, the easier

26:41

and the cheaper that we can make this

26:43

for employers to offer the

26:45

more likely it is to reach

26:48

the audience who really eats this. Howard

26:51

Bauchner:

26:52

A separate but related issue is

26:54

that The retirement plan landscape

26:56

is pretty bifurcated. Large employers often

26:59

field high quality plans

27:01

with very low costs and in

27:03

small employer plans by contrast

27:06

are often not great. How

27:08

could better policy address that?

27:11

Yeah, you're absolutely

27:14

right. I mean, we do have this divide.

27:16

And actually, I'd even add the third

27:18

divide there because

27:20

it's a second divided to the third part,

27:23

is that you then also have the

27:25

significant number of people who don't have

27:27

any plan at all. I think

27:29

the answer to these is

27:32

somewhat similar to what we've been discussing

27:35

with the emergency savings plans

27:38

that the competitive

27:40

pressures are making better

27:43

retirement plans available at

27:46

a lower cost to

27:48

employers. One of those

27:50

is the pooled employer

27:52

plan, also known as multiple employer

27:55

plans. which is sort of like a

27:57

group rate health insurance type

27:59

of retirement plan that

28:02

a number of employers can offer.

28:05

But part of it is going to

28:07

be tax incentives for

28:09

employers. Part of it is going

28:11

to be an east

28:13

regulatory burden for employers

28:16

while still absolutely protecting

28:18

the employees. We

28:20

don't want to remove all

28:23

consumer protections as

28:26

a way to accomplish this. And

28:28

part of it is going to be at the

28:31

long term effects of,

28:34

say, a required offering

28:36

through a state program. one

28:39

of the things that we've seen data from

28:41

and the Pew program has

28:43

done a fantastic job of starting

28:45

to assemble this. is

28:48

that if a state requires

28:51

a company to participate

28:54

in a retirement on either the state

28:56

facilitated Auto Ira plan

28:59

or another plan, a

29:01

significant number of employers look

29:04

at this and decide that maybe

29:07

after the experience they've had with the

29:09

state program or otherwise that

29:11

they start to move up to a 401k

29:14

or to some other type

29:16

of pooled employer plan or something

29:18

along that line. So first

29:21

off is getting people

29:23

involved and getting employers involved.

29:27

And then as we move forward, hopefully,

29:30

we can find a way to, so

29:32

that the added benefits that larger

29:34

employers have can spread

29:36

down to smaller employers. In

29:39

the long run, we do need a

29:41

much more detailed, much

29:44

more effective and

29:47

encouraging retirement program

29:49

to be available to as many workers

29:51

as possible because that really

29:54

is going to help deal with What

29:56

was the first question that we discussed as to

29:58

whether there is going to be a crisis or not?

30:00

The better the employer plan, the

30:03

better the outlook for the future.

30:06

We wanted to delve into the

30:09

automatic IRA, which you helped introduce

30:11

more than sixteen years ago along with

30:13

other researchers at brookings

30:15

and the heritage foundation. Can you

30:17

discuss the goals of the automatic

30:20

IRA and also how they work?

30:23

Sure. This was

30:25

a case where Mark Yefrie, who

30:27

at the time, was at brookings, and

30:29

I was at Heritage. and

30:32

I were invited to

30:36

be jointly on panels with the

30:38

idea that we would provide

30:40

entertainment by fighting

30:42

and disagreeing with each other.

30:45

And instead, we found that we agreed

30:47

on far more than we disagreed. and

30:49

we sat down at backstage

30:52

at an Hebrew event and developed

30:55

the automatic IRA. The automatic

30:58

IRA is a payroll

31:00

deduction IRA, something

31:02

that people have always known about combined

31:05

with automatic enrollment. That's

31:08

the name. And the goal

31:10

is to have as simple

31:12

a program as possible. The

31:15

state contracts, the

31:17

state, it was originally a national program,

31:19

but it's now being implemented mainly in states.

31:22

The state contracts with

31:24

a private sector record keeper

31:26

and a private sector investment manager

31:29

or a couple private sector investment

31:31

managers And by doing

31:33

that, they get the service

31:36

at the lowest possible level

31:38

as far as cost go. It

31:41

is a very simple program. When

31:45

the program is required of employers,

31:48

and depending on the state, it's

31:50

either required of all employers or

31:52

perhaps employers with more

31:54

than five employees know the like.

31:57

The hard decisions have already

31:59

been made. So the

32:01

employer doesn't have the liability

32:04

for choosing investments and

32:06

making those kinds of decisions. And

32:09

the employer also doesn't

32:12

have the compliance requirements

32:15

because those are also handled by the

32:17

states. All the employer

32:19

has to do is to

32:23

had their employees information

32:25

that the state provides and

32:27

let the employees know that unless

32:29

they say they don't want to participate,

32:33

that they will be enrolled in

32:35

the program. The contribution

32:37

level is usually about five

32:39

to six percent of income, and

32:42

that goes into typically a

32:44

target date fund. Because

32:47

this is a payroll deduction Roth

32:49

IRA, the tax benefits

32:52

are at retirement. so you

32:54

pay taxes on the amount that

32:56

you contribute going in. But

32:58

that means, in the case of a financial

33:00

emergency, that you can withdraw

33:03

those contributions at

33:05

any point without any

33:07

sort of tax penalty. any

33:09

investment growth is treated separately

33:12

in that case. Our goals

33:14

were to, as I say, to make it as simple

33:17

and easy for employers

33:20

and employees. And we

33:22

actually had a major financial company

33:25

who did a poll of employees Employers,

33:29

excuse me, for this very

33:31

early on. And typically

33:33

when the program was described to

33:35

a small business employer, the

33:38

immediate reaction was to throw up

33:40

their hands and start to at vote along

33:42

the lines of, oh my gosh, you already

33:45

ask me to do this, this, and this, and now

33:47

you want me to do that, that that

33:49

I'm already getting angry, etcetera.

33:52

but the pollsters said that

33:55

much to his shock, the more

33:57

that the program was described to

33:59

the employer, the happier the

34:01

employer got. And

34:04

we have seen in Oregon,

34:06

California, Illinois, and now

34:08

Connecticut. And very soon,

34:10

Maryland, that employers typically

34:13

find that they're actually pretty happy with

34:15

this process, that it doesn't cost

34:17

them anything to implement

34:20

for the vast majority of them.

34:22

And for others, it's more along

34:24

the lines of a few expenses that

34:26

office supplies. For both

34:29

Mark and my point of view, the

34:31

goal was to make it easier

34:34

for more people to save and in particular

34:36

for lower income. people to save.

34:39

From Heritage's point of view

34:41

and we had some interesting discussions internally,

34:44

Heritage by the way is a conservative think

34:46

tank. The goal was

34:48

to enable people to build their

34:50

own retirement security through their

34:52

own efforts. which

34:54

is a very traditional conservative

34:57

value. And the autoira

35:00

seems to have met all of those

35:02

goals to date?

35:05

The original idea was for the automatic

35:08

IRA to be a national plan, but that stalled

35:10

out in congress. One could argue that

35:12

where we are today though with states and municipalities

35:15

fielding separate plans. Maybe

35:17

that's less efficient than it should

35:19

be and in results and higher the necessary

35:21

fees going to the financial services

35:24

sector to administer these separate plans.

35:26

Do you share that concern? Do you think it's

35:28

somewhat overblown?

35:30

I think it's somewhat overblown at

35:32

this point. Yes, the the plan

35:34

was to have the Auto

35:37

Ira implemented nationally.

35:40

And going into two thousand and

35:42

thirteen, we had bipartisan

35:45

port in both the House and the Senate,

35:48

and we had the support of

35:50

the Obama administration and

35:52

during the campaign excuse me, this

35:54

is in two thousand and nine two thousand

35:56

and thirteen. And we had

35:58

the support of the McCain campaign

36:01

during that presidential campaign.

36:03

Unfortunately, the

36:05

terms of the debates changed

36:08

rather radically due to the

36:10

health care proposal

36:13

that came out of the Obama administration, and

36:16

we have not really been able to move

36:18

forward with that. In

36:20

the state's issues, for

36:22

the most part, the programs

36:24

that are actually being implemented are

36:27

very similar. They're mostly

36:29

automatic IRAs. There

36:31

is mostly a requirement. Most

36:35

small businesses the

36:37

cost is minimal compared

36:40

to some of the other options, especially the

36:42

option at this point of implementing

36:44

a small business 401K

36:48

However, it will get better.

36:50

And we have two factors that we

36:52

think are going to be interesting. First

36:55

off is that it

36:57

is starting to look like some states,

36:59

especially the smaller states, which

37:01

would have obviously smaller populations

37:05

being served there may join

37:07

together with larger states to

37:09

offer a joint program. and

37:12

this would help to keep these somewhat

37:15

lower there. The other

37:17

option is that as

37:20

more and more states start looking

37:22

into this and we have

37:24

foreign operation and we have

37:26

ten states that are implementing programs

37:29

at the moment that increasingly

37:32

this is going to become obvious that

37:34

this is a a

37:36

workable solution and

37:39

the more states that implement

37:41

it successfully and

37:43

uncontroversally, The

37:45

more likely it is that Congress is

37:47

going to start to look at this once again

37:50

as a national program. So,

37:52

I don't really regard this as

37:54

a problem. We don't have the kind

37:56

of design differences

37:59

from states to state that would be

38:01

a problem. We do still need

38:04

to address the question of

38:06

a business that uses an autoira

38:09

and has operations in

38:11

multiple states, some of which

38:13

may be covered by an autoira and

38:15

some of which may not be. precisely

38:19

who has to participate and who

38:22

doesn't. And I think that's something that's

38:24

also being handled so far on

38:26

the state level. So

38:28

we shall see going forward. But the goal

38:30

is still the national program. The

38:33

goal is to make sure that every

38:35

America has the upper to save for

38:37

retirement regardless of where

38:39

they're working and both

38:41

as far as business and

38:43

geographic location. I

38:46

wanted

38:46

to get your thoughts on retirement

38:48

decumulation, so for people who

38:51

are retired and drawing upon

38:53

their portfolios. That seems to be a big gap

38:55

in our current system, the fact that we hand

38:57

people their money upon retirement and

38:59

basically tell them to go figure it out. that

39:01

there aren't -- No. -- aren't good

39:03

nudges and guard rails to ensure

39:06

against a disastrous outcome of

39:08

some kind So what are the best ideas

39:10

to address that in your view to help

39:13

people along the way figure

39:15

out how to spend

39:17

from their assets in retirement?

39:19

You know, this is the worldwide problem.

39:22

We received this question being

39:24

addressed in every single

39:26

country that has a defined

39:29

contribution system at this

39:31

point. For very good

39:33

reasons. The first focus

39:36

was on building an accumulation system.

39:39

But now we are reaching the point where

39:41

we are starting to see a significant number

39:43

of people retiring and using

39:46

those savings. And we

39:48

are seeing solutions being

39:51

discussed in every country.

39:54

Australia, for it is in the process

39:57

of implementing a retirement

39:59

income program that

40:02

superannuation programs

40:04

will be required to offer to

40:06

their membership. As

40:08

far as the US goes, the

40:11

worst possible option that

40:13

you can have to some extent

40:16

is to be automatically enrolled

40:18

automatically invested,

40:20

automatically chosen

40:23

or urged to save

40:25

a specific amount and now

40:27

having absolutely no

40:29

experience managing investments to

40:31

be handed your lump sum of retirement

40:34

benefits and said, okay,

40:36

go ahead, only you know how to manage

40:38

this. That's a prescription for

40:40

disaster. And we

40:42

see that when people retire,

40:45

they break into two different

40:48

groups. On one hand,

40:50

we have a smaller group who looks

40:52

at this money and says, wow, I

40:54

bridge. I can basically go afford

40:57

to spend it on just about anything I

40:59

want because I'll never be able to

41:01

use that much money and they spend

41:03

too quickly. And then the

41:05

flip side, which is actually the larger

41:08

group, is that they look at this lump

41:10

sum regardless of how big it is

41:12

and say, oh my gosh, this is all

41:14

we're ever have, which is

41:16

not correct. And there

41:18

will be some sort of terrible financial

41:21

crisis And if we spend any

41:23

of this or much of this, depending on

41:25

the person, we will not be able to

41:27

handle that crisis So they

41:29

basically have a retirement life

41:32

that has less income that

41:35

they should have. So we

41:37

do need desperately an automatic

41:40

option that is flexible and

41:43

easy to understand to

41:45

help people move from the

41:47

psychological question of

41:49

savings and a lump sum to

41:52

using this money as and

41:54

seeing it as a stream of income.

41:58

Probably the one that

42:00

Mark Yvonne, Bill Gail, and I addressed

42:02

in a bookings paper, which

42:05

was one option, was to

42:07

have people automatically enrolled

42:09

in what's essentially a phased withdrawal

42:12

program. And in this

42:14

case, the retirement

42:16

savings would be moved into

42:18

a professionally managed investment

42:22

fund. where hopefully it

42:24

would continue to grow throughout their retirement.

42:27

And the retirement program would

42:30

send them a monthly income

42:32

based on the annual performance of

42:35

the pool of assets. So

42:38

essentially, they would be guaranteed that they

42:40

would receive a monthly income but

42:42

that monthly income could vary

42:45

from year to year. The

42:48

value of this is that

42:50

it is a default on

42:53

one hand. So it's something it

42:55

helps to move them psychologically

42:57

from seeing the lumps some to seeing

43:00

the income stream, but

43:02

also is very flexible. So

43:04

at any point, they could decide

43:06

I'm going to pull out a certain

43:09

amount of my money and buy an

43:11

annuity guarantee that I have

43:13

income to cover my expenses

43:16

and I don't have to worry about the investment

43:19

returns of my pool. Or

43:21

if they have a terrible health diagnosis,

43:24

they could decide a different way to use

43:27

their retirement income. But that's

43:29

only one option. I mean,

43:31

another option is

43:33

for people to be

43:36

encouraged or helped to

43:39

determine based on their Social

43:41

Security benefits, as

43:44

a set amount, how much

43:46

additional guaranteed income

43:49

they did to meet their basic

43:51

expenses and then have

43:54

a separate pool for emergency

43:56

savings than the like. I mean there are a lot

43:59

of different ways that we can do this.

44:01

There is a great deal of innovation going

44:03

on at this point, which is very encouraging.

44:06

But one thing that I think is

44:08

a mistake is to focus solely

44:11

on existing investment products

44:14

like annuities and the sort

44:16

rather than encouraging the kinds

44:19

of innovations that we should see.

44:21

This is especially true now that we've

44:23

moved into an inflationary environment

44:26

which kind of changes the picture long

44:28

term. You

44:30

mentioned Social Security, and we wanna pick your brain

44:32

about that. But you also mentioned Annuities just

44:34

now, and we're curious The

44:36

secure act, as you know, made way

44:38

for more planned sponsors to offer annuities

44:41

in the 401 plan context.

44:43

Yeah. Do you think that's a good idea? And

44:45

should the types of allowable annuities have

44:48

been more narrowly defined?

44:51

Yes, actually, they

44:53

should have been. When it comes right

44:55

down to it, the big problems with

44:58

including an annuity, during

45:00

the retirement savings period

45:03

before you retire is portability

45:07

on one hand. what happens

45:09

if you have worked for Employer X

45:12

for fifteen years and

45:14

you've accumulated fifteen years'

45:17

worth of an annuity. And

45:19

you now change jobs to someone

45:22

who has a different provider or

45:24

a different retirement plan. Do

45:27

you find yourself with slices

45:29

of annuities, small slices

45:32

of annuities, that could be expensive?

45:35

Or do you find yourself having

45:38

a fairly large surrender fee

45:40

to liquidate that annuity

45:43

part and move it to your new employer's

45:45

plan. Those are problems that need

45:47

to be dealt. Now already there

45:49

are some employers or

45:51

some providers, excuse me, who

45:54

actually have an investment that

45:56

mimics a purchase of an

45:58

annuity, but the actual

46:01

purchase isn't made until retirement.

46:04

The other question is

46:06

to what extent the annuity

46:09

provides significant retirement

46:11

income? This is especially true

46:14

for lower income individuals. The

46:16

UK had a requirement

46:18

up until several years ago where

46:21

seventy five percent of your retirement

46:23

savings had to be annuitized by

46:26

the time you reached age seventy

46:28

five. and in practice that method,

46:30

most people annuitized when they retired.

46:33

Unfortunately, because this was

46:35

a universal requirement, This

46:38

meant that some people were receiving annuity

46:41

payments of twenty five dollars or

46:43

fifty dollars a month. when

46:45

it would have been far more effective for

46:48

them not to have annuitized to

46:50

have access to a lump sum. So

46:53

the Secure Act made

46:55

it much easier for

46:59

employers to add annuities

47:01

to a retirement savings program,

47:04

but the devil was in the details and

47:06

how those are implemented how

47:09

you deal with questions of portability,

47:12

suitability based on income

47:14

level or other purposes, and

47:16

things like that. We did

47:18

hear stories during the

47:21

UK requirements of

47:23

individuals who annuitized,

47:26

and then finally, almost immediately

47:28

came up with terminal

47:31

diagnosis for cancer, something

47:33

like that. And at that point

47:35

then because most of the annuity

47:37

products tended to be single

47:40

pay that most of

47:42

their retirement savings were not available

47:44

for their family to use

47:47

going forward?

47:47

I wanted

47:49

to ask about Social Security, which you

47:51

referenced David. Many younger

47:54

workers and even older workers

47:56

approaching retirement age are dismissive of

47:58

Social Security because the trust

48:00

fund is set to run out of money in two thousand

48:02

and thirty four unless Congress takes

48:04

steps to shore it up. Are they being

48:06

overly pessimistic in your view?

48:09

Yes. very definitely. So

48:11

even without the trust fund,

48:14

Social Security can pay somewhere

48:16

in the neighborhood of seventy five percent of

48:18

the benefits just from its cash flow.

48:20

And years ago,

48:22

I talked to a very

48:25

conservative public trustee

48:27

of Social Security. And

48:31

he pointed out that if

48:33

Congress can find the money to

48:36

who pay the last

48:38

year of the trust fund.

48:41

Therefore, to pay full Social Security

48:44

benefits. They can also find roughly

48:46

the same amount of money the following year

48:48

when the trust fund is exhausted to

48:50

continue to pay full benefits. Now,

48:53

I worked on Capitol Hill for

48:55

thirteen years. And during,

48:58

especially my last stint

49:00

on the hill, which started in nineteen

49:02

ninety five, Social

49:04

Security was an issue. And and

49:08

the number and the

49:10

events of phone calls

49:13

that came in from people

49:15

who are concerned about receiving

49:17

their full Social Security benefits

49:20

cannot be underestimated. The

49:23

real pressure is there. If

49:25

necessary, Congress could

49:28

change the structure of the trust

49:30

fund fairly simply. I don't

49:32

anticipate they do that other than

49:35

a major Social Security reform.

49:38

But these benefits especially

49:41

for people who are approaching retirement

49:43

or even in their forties

49:46

at this point. are very, very

49:48

unlikely to ever be changed downward.

49:52

Maybe for the various highest income,

49:54

but even in that case, that would be very

49:56

unpopular. This is a

49:58

commitment that our

50:01

society has made to retirees.

50:03

And I don't see any way practically

50:07

or politically that that commitment

50:09

won't be honored?

50:12

Notwithstanding that, it probably is the case that

50:14

there are opportunities to make some adjustments

50:17

that could -- Yes. -- you know, fortify

50:19

the program. And it maybe isn't a

50:21

single adjustment, perhaps it's a mosaic.

50:24

different adjustments. Are there any in particular that

50:27

you would favor? Howard Bauchner:

50:28

You know, I'm going to duck

50:30

that for the simple reason. that

50:33

one of the things from studying Social

50:35

Security for many years that

50:37

I learned is that the various parts

50:39

of Social Security interact. So

50:42

hypothetically, if you're

50:44

modeling something, you

50:46

could say, well, what we need to do is

50:49

raise taxes to x and

50:51

do something else with retirement

50:54

age. And therefore, on

50:56

paper, this seems to solve

50:58

the problem. But the reality

51:00

is that the different parts of Social

51:03

Security and this includes the tax rate

51:05

and includes retirement age

51:08

It includes the benefits structure.

51:11

Basically, the structure is such

51:14

that the lower your income The

51:16

higher the proportion of your preretirement

51:19

income will be replaced by Social

51:21

Security. They all interact in

51:23

a very complex way. So

51:26

when you actually look

51:29

at how a pattern

51:31

or a group of reforms work

51:33

together, you sometimes find

51:36

yourself very surprised with the

51:38

result. So I'm not going to predict

51:40

what would work and what would not. I

51:42

just will simply say that this is a

51:44

much more complex problem than

51:46

it appears on paper and a much

51:48

more complex problem than what

51:51

you see in most of the popular press

51:53

at this point. Well,

51:55

David, this has been a very enlightening discussion.

51:58

Thanks so much for sharing your time and perspectives

51:59

with us. We really appreciate it.

52:03

Certainly, this has been fun. Thanks for having

52:05

me. Thanks so much, David.

52:09

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52:12

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52:43

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52:49

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52:49

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52:50

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52:53

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52:54

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52:57

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