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By John Rekenthaler | 10-25-2016 02:00 PM

Do We Need a Two-Tiered Retirement System?

Having different retirement ages for different types of workers could be more compassionate and good for the economy, too, argues Focus Consulting partner Michael Falk.

John Rekenthaler: Hi, this is John Rekenthaler, vice president of research at Morningstar. I'm here today to talk with Michael Falk, partner at Focus Consulting Group. Michael has a new book out: Let's All Learn to Fish … To Sustain Long Term Economic Growth

So, what you have here is a policy book, right. This is your recommended policy on a broad spectrum of issues for the United States.

Falk: Through an economic lens.

Rekenthaler: Through an economic lens …

Falk: This is not right leaning, this is not left leaning, the lens is about economic growth, and you get some really interesting results when you use that lens. On some topics, you look like your way on one side and other topics you are on the other. 

Rekenthaler: Right, because your retirement pillar falls down if we don't improve national health and improve the educational outcome.

Falk: Because people cannot work long, will not have the skills.

Rekenthaler: So how do we improve health?

Falk: How we improve health is ... Unfortunately, I joke about this, but it's not funny. We don't have healthcare in America anymore, and in most places in the world healthcare doesn't exist. We have sick care. We don't actually treat people to be more resilient. We don't catch things early. It's not about maintenance of good health; it's about coming in at the incident of an injury or illness. So, we really have sick care.

Well if you reverse that concept and build in actual care for someone's health on the front end, as Ben Franklin said, "an ounce of prevention is worth a pound of cure." So the first step is changing the incentives, such that people have the incentives to actually care for themselves. The research is phenomenal. They say up to 90% of the illnesses and injuries that we actually experience in our lifetime--on average, right, varies person to person--are preventable ...

Rekenthaler: Self-inflicted, in a way.

Falk: ... if we change our behavior, right. We change our diet. We change our exercise. We change our habits.

Rekenthaler: OK. You've got a fairly substantial set of discussion--framework or specific principles for how this could be done.

Falk: Yeah.

Rekenthaler: Let's move then to education.

Falk: Happy to. Education has been historically a destination--we think about it, right? We go to grammar school. We go to middle school. We go to high school, university. Education, when we think in the eyes of the world--technology, innovation that's occurring today--education has to be lifelong. So instead of thinking about it as a destination, think about it again as a behavior or habit--lifelong learning.

Because as the world changes, and people are talking today, will the robots take our jobs? And I kind of chuckle about that because historically technology has cost some people employment; we have to identify and understand that. It's also historically created more jobs on the back end. But there's a lag. And with the speed of innovation today that lag is getting worse and worse. And some people are unfortunately being pushed out of the workforce because of technology. We need that not to happen.

But the reality is, coming back to retirement, if too many people retire, too many people are disabled, too many people don't have the skills to work and fertility rates are dropping around the world, we won't have enough workers. The robots actually could be the answer to save our production needs. Which is a little twist of a different way of looking at.

Rekenthaler: That's the glass half-full version of the robots.

Falk: It is.

Rekenthaler: Instead of pushing out needed workers, it's more--no, we have a worker gap and the robots …

Falk: Can fill the gap. Exactly and that's important.

Rekenthaler: So you do have some proposals in there for how workers should be differentiated at retirement, different classes of workers. Talk about that, please.

Falk: I phrased this in the book as a kind of a more compassionate retirement policy. What we know is that knowledge workers--you know, John, you and I, we can work past the age of 70 given proper health. We have the ability to continue to work. So why would we want to leave the labor force at age 65 or 62 as an example, 66 to 67 because Social Security for us in the U.S. is aging.

But for some people who are into actual more physical labor, the statistics are stark. Forty-five percent of the people who are at the age of 58 or older who are involved in physical labor are finding that labor is having a negative impact on their health or causing them the inability to continue to work--45% of those folks. And that doesn't even begin to talk about the people who don't have the ability to hold down work.

So, what if we don't level the retirement age focus on a single age for all people, and what if we have two different ages? One that is the master older age because our productivity can extend much later in life. And the other one which is a fundamental earlier age for those people who qualify because of their employment. And I talk about in the book ways to avoid people from gaming the system.

So, we have a more compassionate thought about retirement. If you are unable to continue because of the type of labor input that you've provided to society during your life, maybe we should let those people retire early. But for everybody else, you and I, we need to stay in the workforce longer out of necessity for economic growth.

And why should the world pay us to retire if we can continue to work? Think about that. Social Security pays people to stop working. That's an interesting way of looking at Social Security. But the policy of Social Security itself, people ask me, what do you think about it? I think very positively about it. It has got some tweaks that we could make; I won't go into some of the proposals now. I make my own proposal in the book. The reality is, the percentage of people who are dependent upon Social Security during retirement is very significant. The numbers from the Social Security Administration, I'll give you a couple sample numbers: 65% of retirees get at least 50% of their income from Social Security; 36% of retirees get at least 90% of their income from Social Security. Now those are for spousal married couples, there are differences for single verses married. When you start to look at statistics like that, we can't be cavalier about Social Security. We need to strengthen it. We want it, we need it to be around for a lot of the population.

Rekenthaler: So, I gather with these proposals that you've talked about in retirement and specifically the two-tiered structure, you feel that not only makes more sense for the people involved--those who have been doing physical labor not to be pushed into doing it when their bodies are giving up and those who have brains to use them--but overall that it makes more sense, or it will improve our economy.

Falk: We could argue that it's more fair for everybody.

Rekenthaler: Besides equity, but there's an overall economic argument that this will …

Falk: Massive, massive. There are some dirty little secrets about longevity, life expectancy, and Social Security. People who are in more advanced jobs, higher incomes, maybe higher education, maybe as a heuristic we can say a knowledge worker, but that may be over coloring positively--we tend to live longer. Well for the folks who live longer conceptually then you'd say they're actually costing the Social Security more money. People who are laborers, who are maybe less than university-educated, maybe lower incomes, their life expectancies are shorter. So, by having this two-tiered [system] we acknowledge and start to level the ability for people to have life post-retirement. And we actually make the system fundamentally more easy or simple to fund.

Rekenthaler: Thank you, Michael.

Falk: Thank you John. Pleasure to be with you today. Thank you for allowing me to share some of my concepts in the book.

Rekenthaler: And thank you for joining us.

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