Alicia Munnell: Married Couples Are in the Retirement Danger Zone

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Our guest on the podcast today is Alicia Munnell, the director of The Center for Retirement Research at Boston College. Alicia is a towering figure in the retirement research space. She and the team at the Center for Retirement Research produce articles and white papers on a wide variety of retirement-related topics, including Social Security, tax policy, retirement preparedness, and healthcare. Prior to joining Boston College in 1997, Alicia was a member of the president's council of economic advisors and assistant secretary of the Treasury for economic policy. Previously, she spent 20 years at the Federal Reserve Bank of Boston, where she became senior vice president and director of research in 1984. Alicia has written scores of articles and authored and edited many books over the years; most recently, she co-authored Falling Short: The Coming Retirement Crisis and What to Do About It. Background Alicia Munnell bio Alicia Munnell research archive Center for Retirement Research at Boston College Books by Alicia Munnell

Retirement Preparedness

"Is There Really a Retirement-Savings Crisis?" by Anne Tergesen, The Wall Street Journal, April 23, 2017. "The Wealth of Households: An Analysis of the 2016 Survey of Consumer Finance," Center for Economic and Policy Research, November 2017. "Women, Marriage, and the National Retirement Risk Index," by Alicia H. Munnell, Wenliang Hou and Geoffrey T. Sanzenbacher, Center for Retirement Research at Boston College, June 2019. "Exploring the Retirement Consumption Puzzle," by David Blanchett, Journal of Financial Planning, May 2014. "David Blanchett: If You're Retiring Now, You're in a Pretty Rough Spot," The Long View, Sept. 18, 2019. "The Extraordinary Happiness of Retirees," by Steve Vernon, Global Coalition on Aging, May 16, 2016.

Defined-Contribution Plans "The Federal Government Should Fix the Pension Coverage Gap," by Alicia H. Munnell, Marketwatch, June 6, 2018. "An Analysis of Retirement Models to Improve Portability and Coverage," by Alicia H. Munnell, Anek Belbase, and Geoffrey T. Sanzenbacher, Center for Retirement Research at Boston College, March 2018. "Are Americans Really Able to Manage Their 401(k) Plans?" by Alicia Munnell, NextAvenue, May 17, 2012. "401(k) Plan Fees: What Is Reasonable?" by Liam Pleven, The Wall Street Journal, Feb. 20, 2015.

"A Safe Harbor for Annuities Could Help Retirement Savers," by Aron Szapiro, Morningstar blog, Oct. 18, 2018. "State-Based Retirement Plans for the Private Sector," Pension Rights Center. Social Security "Social Security's Financial Outlook: The 2019 Update in Perspective," by Alicia H. Munnell, Center for Retirement Research at Boston College, May 2019. Status of the Social Security and Medicare Programs: A Summary of the 2019 Annual Reports, Social Security and Medicare Boards of Trustees. "Alicia Munnell: The Social Security Fix No One Wants," by Jane Wollman Rusoff, ThinkAdvisor, Jan. 30, 2018. "The Implications of Social Security's 'Missing Trust Fund'," by Alicia H. Munnell, Wenliang Hou, and Geoffrey T. Sanzenbacher, Center for Retirement Research at Boston College, June 2019. The Role of Home Equity in Retirement Planning "Retiree Housing Wealth: Battered but Still Significant," by Alicia Munnell, MarketWatch, Feb. 4, 2015.

"How Much Does Housing Affect Retirement Security? An NRRI Update," by Alicia H. Munnell, Wenliang Hou, and Geoffrey T. Sanzenbacher, Center for Retirement Research at Boston College, September 2015. "Can a Reverse Mortgage Help Save an Underfunded Retirement?" by Michelle Singletary, The Washington Post, July 2, 2018. "This Secret Tax Break Could Help You Save Thousands of Dollars a Year If You Own a Home," by Sarah Max, Money, Aug. 27, 2018 Long-Term Care "Long-Term Care: How Big a Risk?" by Leora Friedberg, Wenliang Hou, Wei Sun, and Anthony Webb, Center for Retirement Research at Boston College, November 2014. "Can Increasing the Long-Term Care Insurance Elimination Period Make Coverage Appealing Again?" by Michael Kitces, Nerd's Eye View, Jan. 7, 2015. Transcript

Christine Benz: Hi, and welcome to The Long View. I'm Christine Benz, director of personal finance for Morningstar, Inc.

Jeff Ptak: And I'm Jeff Ptak, global director of manager research for Morningstar Research Services.

Benz: Our guest on the podcast today is Alicia Munnell, the Director of the Center for Retirement Research at Boston College. Alicia is a towering figure in the retirement research space. She and the team at the Center for Retirement Research produce articles and white papers on a wide variety of retirement-related topics, including Social Security, tax policy, retirement preparedness and healthcare. Prior to joining Boston College in 1997, Alicia was a member of the President's Council of Economic Advisers, and Assistant Secretary of the Treasury for Economic Policy. Previously, she spent 20 years at the Federal Reserve Bank of Boston, where she became Senior Vice President and Director of Research in 1984. Alicia has written scores of articles and authored and edited many books over the years. Most recently, she co-authored Falling Short: The Coming Retirement Crisis and What to Do About It.

Alicia, welcome to The Long View.

Alicia Munnell: Delighted to be here.

Benz: So, let's start with the state of retirement readiness in the U.S. We've been asking some of our guests to share their perspective on whether there's a retirement crisis. You co-authored a book with the coming retirement crisis in the title. So, you clearly agree that there is. How worried should we be about today's retirees and future ones running out of money or having a substandard of living in retirement?

Munnell: As the title of the book suggested, I think retirement preparedness is a serious concern. About half of today's working households are not going to be able to maintain their standard of living once they stop working. The reasons are twofold. On the one hand, the need for retirement, wealth and retirement income has gone up because we're living longer. We're working a little bit longer, but the whole retirement span is increasing. We have high and rapidly rising out-of-pocket healthcare costs. And interest rates are very low. So, for whatever income you are aiming for, you need a bigger pile of money.

On the income side, we have less coming from Social Security in terms of replacement rates. And that's for a host of reasons. The full retirement age is moving from 65 to 67, which means for those people who are retiring at 65, they're going to get relatively less. Medicare premiums come out of the check before the check goes in the mail and Medicare premiums are going up. And a growing number of households are going to be subject to income taxation on their Social Security benefits. And also, with the rise of two-owner households that spouse’s benefit is basically going away. So, without thinking of anything about the financial challenges facing Social Security in 2034, replacement rates, that’s benefits as a percent of pre-retirement earnings, are going to go down.

So, on top of that, you have this issue of private-sector retirement plans, they've shifted from the old-fashioned defined-benefit plan to the defined-contribution plan, namely the 401(k). There's no reason that you couldn't accumulate the same amount of money in 401(k)s, but for a whole host of reasons, balances are really modest. The last time we had a comprehensive survey that showed both balances in 401(k)s, and in IRAs together, the median household covered by a retirement plan, approaching retirement and had a balance of $135,000. So that was for 2016. We're going to get a new survey in 2019 and maybe that goes up to $150,000. It's still not a lot as the only supplement to Social Security.

Benz: Right. So, let's delve into some of these specific issues. And we want to do that later on. But before we do so I'd like to just talk about retirement preparedness by age cohort. Can you give us an update on where the so-called silent generation is relative to baby boomers, relative to Gen Xers, and so on?

Munnell: So, in the calculations that we do, we find that younger people tend to be less well prepared, basically because of the declining amounts that are going to be coming from Social Security and the increase in life expectancy. The young people entering the labor force now also have a lot of student debt and the looks that we have done show that they have accumulated much less wealth than people of comparable age in earlier cohorts. So, the sort of the younger, the worse. In terms of gender or marital status, we find that actually married couples who tend to be richer overall than single people, actually are the least well prepared. And that's really for a couple of reasons and that they no longer get the spouse's benefit from Social Security. We find that two-earner couples don't compensate for the fact that only one of them may be working and contributing to a 401(k). There's no doubling up for the fact that your spouse might not be contributing. And then to the extent that there's been previous divorces, that also undermines the financial security and retirement preparedness of these couples.

Benz: Yeah, I thought that was somewhat surprising finding, especially the discussion of married couples and how married women, I think we've long known that women are more at risk than men, but married women being more at risk than perhaps had been considered. Can you discuss that?

Munnell: It was one of those results when you go, seriously. And you sort of hand it back to your research assistant and say, make sure this is right. But once we looked at it closely, it really did make sense, because most married couples are two-earners these days. And so, it used to be that you'd have a single earner, and then a wife would get a benefit equal to 50% of her spouse's benefit. So essentially a bonus increased how much households were getting from Social Security. Now, each earner gets his or her own benefit, and there's no additional amount for the spouse, which means that benefits compared to the earnings before retirement, have really gone down. And then this other thing that we were quite surprised to see is that in many couples, only one of the two workers may be covered by a 401(k) plan. And if couples really thought about it carefully, what they would want to do is the one who could contribute more should contribute some additional amount to take into consideration that the non-covered spouse wasn't really saving for retirement in a meaningful way. And that doesn't happen. So those two factors together really seem like an adequate explanation for this surprising result.

Benz: And let's discuss why women have historically been a particularly at-risk group when it comes to retirement preparedness, some of the factors behind that.

Munnell: So, it's always women have been traditionally paid less and had more sporadic work histories, and therefore were dependent on their spouses' earnings. And particularly when, at older ages, the spouse dies. They saw a reduction in their Social Security benefit. They saw the end of a defined-benefit pension or reduction in that benefit, in many cases. And so, to the extent that benefits were based on earnings, they had sort of less of a base. And so, they were dependent on benefits from the main earner and when the main earner died, they were particularly at risk.

Ptak: You've done a good job of characterizing sort of the retirement security of these different cohorts. But maybe just step back just based on the research, how are you defining sort of the state of retirement security? Maybe we can focus on single women for a moment, which it sounds like that's a vulnerable cohort. And so, when you look at your data, what is it in the data that's jumping out at you and saying that, you know, this is a cohort that's at risk.

Munnell: So, I think of cohorts as being age groups: baby boomers, early boomers, millennials. I think the more important thing is the trend over time between old and young and that the situation is getting worse, not better, is the most concerning aspect of the trends. And that you have younger people not able to save as much, but they're going to be living longer. And they are going to be getting relatively less from Social Security and healthcare costs probably are just going to continue to increase. So, I think the trend over time is really not good. In terms of looking at a given cohort I think the surprising result is that couples are particularly at risk. And that's because they are mostly two earners and in two earners, you get relatively less from Social Security because the second earner no longer gets a spouse's benefit. And the failure to save for spouse who is working, who is bringing in income, but who's not putting aside anything for retirement. The covered spouse could save more, and I think that's a way that could actually improve the status of two-earner couples, but they don't at this time.

Benz: So, in terms of defining success or failure financially in retirement, it really comes back to can someone essentially continue the standard of living that they had while they were working in retirement? Is that what you and other retirement researchers are looking at?

Munnell: So that to me seems like the most relevant I mean, you could use another standard, like the poverty measure. But I think for middle-class people, that's not a particularly relevant standard. So basically, to the extent that you want to live in retirement at about the same level of enjoyment before retirement seems like the logical thing. You know, economists are into consumption smoothing.

Benz: Right.

Munnell: You want to keep things steady over your whole life. And so that's the way I look at it. And so I think not in terms of absolute dollar amounts, but kind of how much is your income in retirement compared to your income before retirement?

Benz: Right. Our colleague, David Blanchett, and others have done some work on the sort of trajectory of spending in retirement. And at least David and some other researchers have come to the interesting conclusion that, it's not necessarily a straight line of consumption in retirement, that people spending does tend to trend down, especially sort of in the middle period of retirement, does that influence your thinking at all in terms of retirement preparedness? Does that maybe make it a little better than it might look at first blush?

Munnell: A colleague and I used to talk about sort of three periods of retirement. The initial period where you travel and do things that you've never done before. And then sort of the period where your house becomes more your frame of reference and you putter in the garden, and then a period towards the end when you need healthcare costs. So, I think that probably treating as one homogeneous block doesn't make sense. Then, of course, you would need more in the beginning when you're doing stuff, and more at the end when you need healthcare and less in the middle. And I think that's reasonable. I think whenever you look at these trends, you want to be careful that the reason that expenditures are changing is not because people's money is going down. So, are these people sort of cash constrained? Or are they making a purposeful decision on how much they want to spend?

Benz: Right.

Ptak: What does your research suggest that is the most difficult of these three phases you mentioned for retirees to navigate? Do you find it sort of that end stage, given the fact that you have healthcare costs that are very, very difficult to predict and perhaps unfunded in important ways? Or is it perhaps that initial phase where they're splurging a bit more, and perhaps they miscalculate how much wherewithal they'll truly need in order to make it through the subsequent phases?

Munnell: Certainly, from my perspective, the first stage sounds like fun, the last stage does not sound like fun. So, I think the thing is always, when you're thinking about lifetime financial decisions is to be in some sustainable mode. And so, it would definitely be a mistake to sort of blow all your money in the beginning and then being pressed and worried about healthcare costs towards the end of life. So, you know, smoothing in some way makes the most sense.

Benz: We had a similar discussion with David Blanchett a few weeks ago where we talked about his view of the state of retirement preparedness. One thing he brought up and I'd be curious to get your take on it, is when retirees are surveyed, it's a pretty happy component of our population. Does that affect your thinking at all? Or is it two separate matters that you can be happy and poor?

Munnell: So, I don't understand it. You are right. These surveys if you ask people how happy they are, they're very happy, and then they lose their left arm in an accident and they're unhappy for six months, then they're happy again. And so they're extremely resilient and very upbeat. We actually had somebody visit from South Korea who said in all their surveys, people are really sad all the time. But I think it must be the ethic in the United States that you're supposed to be happy. And so people are extremely positive, generally when answering that question, both before retirement, and after retirement.

Ptak: So, to what extent do you think that sort of measures of satisfaction happiness, if you will, should enter into the overall calculus by which we assess retirement preparedness? Could one argue that, it's not a retirement crisis? Because if you were to actually survey those who are in retirement, they wouldn't characterize it that way themselves, they actually feel pretty settled and content in their current life.

Munnell: So, I actually went back because I have a colleague who is always arguing that there's no problem here and look at the happiness thing, and there's sort of a slight downward trend over time, but it's not dramatic. There are couple of issues here. One, many of the people in retirement now have old-fashioned defined-benefit plans. And people who have those really feel more at ease than those who don't. Secondly, they retired before the Social Security retirement age was moving from 65 to 67. So, they got relatively more from Social Security. Many have bought their houses, decades ago and they're just in better shape. People retiring now are going to have a 401(k) plan. They're going to take out their $135,000 and how they are going to allocate that over their retirement period is not clear to me. I think they need some help. They're going to get less from Social Security, they're going to have higher healthcare costs than those coming before them. So the trend is in the wrong direction and one does get a sanguine picture if you're looking at all retirees, because as I just said, they retired under better conditions than current and future generations.

Benz: One question that's been in the back of my mind has been, how robust the data are in terms of depicting retirement preparedness, it seems like there could be situations where mom moves in with adult kids, because she doesn't really have any funds. And how are we capturing that really?

Munnell: So, I haven't looked at it recently, but I think there is some trends towards multigenerational households. Actually, I think I will look at that. But we have a lot of surveys, we have a lot of economic data about people that have matched to their earnings records. And so my sense is that these household survey data that we have are pretty good. You can sort of blow them up and you get the same number in the aggregate that the Federal Reserve puts out on most dimensions. And so it's probably not perfect, but it gives a sense and the trends are not hard to discern. If you raise the Social Security retirement age by two years, that's equivalent to a 15% benefit cut if people don't change their age of retirement at the same time, you can see the percent of the Social Security benefit that goes to pay the Medicare premium. So, you can see all this stuff that's sort of incontrovertible and it seems like people are not going to have enough money for a host of reasons. And so we've been looking at Social Security.

We've been talking about Social Security, we being you and I, about Social Security and sort of 401(k) plans. But roughly half today's workers are employed at a company that doesn't provide any retirement plan. So, we have a big coverage gap that really hasn't changed in about 40 or 50 years and Social Security is going to provide less. And so those people are definitely going to be more at risk. The one bright spot here is that people have an asset that they could use in retirement but don't. And that is the equity in their house. And they're just extremely reluctant to tap it in any way. They could just buy a cheaper house and take some money out. But people love their house and rarely do that. They could get a reverse mortgage, which would allow them to stay in the house and get some equity out. But that's not a very popular product; it's a complicated product. And then in Massachusetts, we have a property-tax deferral program, so you could say I don't want to pay my taxes and essentially enhance your income by doing that. But people are very reluctant to have a lien on their house. So that's sort of an untapped resource that could provide some support as these other sources of retirement income decline.

Benz: So, let's delve into some of those different pillars that you discussed, maybe starting with the defined-contribution plans. First, let's just talk about that transition from defined benefit or pension plans to the defined-contribution system. Based on what you've said, it sounds like your view is that it has been a suboptimal transition in a lot of ways. Let's just talk about that evolution and how that has affected retirement preparedness.

Munnell: So, I think the demise of the private-sector defined-benefit plan was inevitable. That is really a well-defined plan for people who spend their careers with a single employer. Also, it's a plan that puts all the risk on the employer. And with the influx of sort of a more mobile labor force, particularly because of the influx of women, and increased competition from other countries in the 1980s, this became expensive and sort of well, not really appropriate for the changing times. And so the idea of moving from a defined-benefit plan to a defined-contribution plan was probably inevitable. I don't think there's any way we're going to go back to the defined-benefit plans. But we do have a particularly peculiar type of defined-contribution plan in the sense that it puts all the onus on the employee. The employee has to decide whether or not to join, how much to contribute, how to allocate those contributions, what to do when they move from one job to another, and then what we're going to see soon: how they deal with their balances once they retire.

Now, there has been a lot of work on the behavioral side that have made this sort of better. Auto enrollment means that people are put in and then have to opt out if they don't want to participate and inertia keeps a lot of people in. The target-date funds has really helped improve the asset-allocation decision and there have been efforts essentially to try to make it a little bit more automatic, a little bit more like a defined-benefit plan. But it has been sort of mixed success, because if you auto enroll people at 3% contribution rate, they tend to stay there. And so what happens is that you see a decline in contribution rates, which you see looking at Vanguard data or any other provider data. And that means that you need to combine auto enrollment with some sort of escalation in the default-contribution rate if you want to keep it up. So, I think that the switch from defined-benefit to defined-contribution plans was inevitable. We're not going to go back. And so the trick here is to make sure that 401(k) plans for those lucky enough to have one work as well as they possibly can.

Ptak: And so how do we close that gap? How do we how do we get to that optimal defined-contribution system and narrow some of the differences that one would observe, defined contribution versus defined benefit as you were outlining previously?

Munnell: So, I don't think it's very hard. If I were in charge, I would say that all 401(k) plans had to have auto enrollment. And they had to have automatic increases than the default contribution rate up to 10% or 12%. And the low-fee target-date funds and then there's also this problem that money leaks out. I think that whole leakage issue could merit some rethinking. But it would be I think, relatively modest changes to sort of maximize the efficacy of 401(k) plans in this country.

Benz: So, when you say leakage, that's money that gets pulled out of 401(k) prior to retirement, how would you solve that?

Munnell: So, leakages occur in three ways. One: money leaks out when people change jobs, it's almost impossible to roll your money from one 401(k) plan to another--there is no time pressure on having it done in a timely fashion; there's no standardization in terms of forms; the new employer doesn't have to take the money. So, there's a big incentive to either cash out or roll over into an IRA at that point. So that's one source of leakage. The second source of leakage is sort of in-plan withdrawal. So, after 59.5 people can take their money out without a penalty. Basically, if I were in charge, I'd change that age to at least 62. Then we have hardship withdrawals, some of which are really withdrawals that are allowed in the case of unexpected events, sort of health events or employment events, but they also allow money to come out for housing or education, which is not an unexpected event. And I think I would get rid of the ability to take money out for those purposes and stay with real unexpected hardships and then not penalize people when they have to take money out in that event. And then the final way that money leaks out is through loans that are not repaid. And that is, that's not as big as the others, the largest sources, this money being cashed out when people change jobs.

Ptak: So what about the first type of leakage that you mentioned where people change jobs and they go from plan to plan--wouldn't that argue untethering defined-contribution plans from the employer and instead giving employees, eligible employees, the option of investing in a plan that basically follows them wherever they happen to go, which I know has been floated in a number of different quarters by a number of different parties. Do you think we need to break that link between employer and plan which dominates today?

Munnell: I think that would be, I've thought about that a bit from time to time. And it seems like a good thing. I don't think employers like running plans. It's a diversion from their main activity, and fraught with peril, as you can see from a lot of lawsuits. I think that taking the burden off the company would be a great idea. And then it also would make it much easier to move the accumulations with the person when they change jobs. So yes, I think having some third-party administrator would be a great way to go.

Ptak: It might also help to address the bifurcation in quality of plans, would it not, where there's sort of a have and have-not quality when it comes to defined-contribution plans depending on sophistication, size, wherewithal of the plan sponsor, whereas maybe at a smaller employer, they don't have the same ability to deliver a quality plan that a large employer would. So, do you think it would help in that respect as well?

Munnell: Yes, I do. I mean the data on the costs to the employee by the size of the employers is stark, I mean, for small plans, fees are just enormously high still. For large plans, fees have really come down over time. And so yes, I think it would be an equalizer in that regard.

Benz: So, one of the challenges is getting young people engaged with saving for their retirement, which is a heavy lift, getting them to kind of empathize with their future selves in their 60s and 70s and beyond. So, how do you think that can be achieved? It sounds like auto enrollment you believe is auto enrollment plus inertia is a big part of the solution. But do you have any other thoughts on sort of lighting a fire under younger folks. Speaking of fire, this FIRE movement, is there something there in terms of the financial independence that you sort of accentuate that as part of the discussion as opposed to retirement, which young folks might not naturally care about?

Munnell: So, when you're, you're right – when you're in your 20s, you know retirement's the last thing on your mind. It also is very important that these kids are coming out of college with enormous student loan debts. And so they have to sort of figure out when they should put money into the plan, when they should be paying off their student loans, when not to run up their high-fee, credit card debt. So, they're really faced with a conundrum. And the millennials also came out of college at the time when the economy was in the tank, and so they got a very slow start. So, this most recent cohort has just had almost everything working against them. And I think as long as people come out with student loans of that magnitude that it's going to be hard for them to save for retirement.

Benz: Let's talk about something you referenced earlier, Alicia, which is the fact that many people work for employers that simply don't field a plan at all. So, there is some movement it seems on that front with legislation that would make the multiple-employer plans more prevalent. Sounds like you would be supportive of that idea, or what solutions do you favor for people who currently are working in a workplace without a plan?

Munnell: So yes, certainly the SECURE Act and other legislation winding its way through Congress has a big focus on expanding access to multiple-employer plans. I don't think it will do any harm. I will be really surprised but then I've been surprised before in my life, that if it really moves the needle much on coverage. I just, it's not clear to me that it will. The way I think to get people covered is to have some sort of auto IRA-type arrangement. There are some proposals for that during the Obama administration, but nothing got done at the federal level. And so you have these state initiatives coming online--Oregon's up and running, California is starting--where employers in those states where they are not providing a retirement plan of their own, have to auto enroll their employees in a system whereby they deduct 5% or whatever the rate of their pay and put it in an IRA. And the employees can opt out, as always, with any type of auto arrangement. But it seems like it's a way to bring a lot more people in the system than what we're going to see with the multiple-employer initiative.

Benz: You favor, it sounds like more aggressive nudges. So, making auto enrollment mandatory and so on. Do you favor mandatory contributions on the part of the employee or the employer?

Munnell: The nice thing about the auto IRA initiative is that really the burden on the employer is very small--all that he is forced to do is really just tell the employees that this is happening and that he is going to put 5% of their salary in an IRA. And if they want to opt out, this is what they can do. And then there's a little monthly, I mean an hour, of work to have these contributions be put in on a regular basis. So that would involve no contribution from the employer, but the employee will find that over a period of months and years, he will have thousands of dollars that would never have been available to him otherwise, and this money, although it's sold under the guise of saving for retirement, it also means that people have some kind of buffer account. If something goes wrong with the roof or something goes wrong with the car that they'll have some access to money in the case of emergencies. So, I think that I'm not against multiple-employer plans. They sound just fine. I just and I think they will be aggressively marketed by financial-service firms. So that might make a difference. But I'll be surprised if it's anything profound.

Ptak: What do you think that company-provided retirement plan should be doing to help in the retirement-deaccumulation process, for instance, would offering annuities, as the SECURE Act makes more readily accessible be a step in the right direction?

Munnell: Yes, I think that all of us interested in this area had focused on accumulation for the first part of the 21st century. Now, it's really clear that people are going to arrive at retirement, they're going to have a pile, a modest pile, and the question is, what should they do about it? And when I first started looking at 401(k)s, my concern was that people were going to take all their money and go around the world and I'm much less concerned about that now than they're going to spend too little. And I think that they're scared. And they're worried about expensive healthcare events at the end of their life. And I think they're just going to husband their resources and really deprive themselves of necessity. So, some orderly way of drawing down a portion of balances seems absolutely necessary. And the idea of embedding some type of annuity, low-priced annuity, in a 401(k) plan seems like a good step forward. And these can either be these immediate annuities, or deferred annuities where you purchase something at 65 and you get the payment in at 85 or some later age, but I think that people are going to need help.

Benz: So, switching gears, Social Security has been a big focus for you throughout your career. So, let's talk about the current financial state of Social Security itself--the program, how bad is it?

Munnell: So, I love the Social Security program; it is the backbone of this retirement system. And I love it because everybody's in it, and everybody gets something from it. And so, there's no stigma to getting your benefits and it just provides a source of support. So, when you look at the program, you have a situation where costs are rising, primarily because the ratio of retirees to workers is increasing, but you have stable revenues. So, when you have rising costs and stable revenues, you produce deficits. If you look at the program over the next 75 years, which is what the Social Security actuaries do, they say that the deficit is 2.78% of taxable payrolls. And so, what does that mean? That means that if you increased the tax rate today, the combined tax rate on employees and employers by 2.78%, that you would have enough money to pay full benefits for the next 75 years.

Now, you'd still have to do more because you get deficit years in the future. That's a doable fix. And so economically, it's a doable fix; politically it seems very difficult to accomplish. And there is an action-forcing event coming up, because even though we're running sort of annual deficits, we have a trust fund that was created by the 1983 legislation. And we're kind of using that trust fund so the system can pay full benefits, but that trust fund is going to run out and it runs out in the early 2030s. And if nothing is done, benefits would need to be cut somewhere between 20% and 25% at that time, so the 2030s used to be, just eons in the future.

Benz: Right.

Munnell: So far, you never had to think about it, it's now getting closer. And so we're really going to have to figure out a way of closing this financing gap so that we don't have abrupt benefit cuts.

Ptak: So, you mentioned one potential fix, what are some of the other fixes that you would propose to shore up Social Security's finances to foreclose the possibility of benefit cuts like you, like you described?

Munnell: So, it's so easy to say, and it was what was done in the past: we should close this gap between revenues and expenditures by half on benefit cuts and half on tax increases. I really am not there. I think that we should preserve benefits because people have so little else on which to rely. And so, it's really a question of looking at ways of raising money. And one thing we've been focusing on recently is why is the shortfall so large? Because basically, the current tax rate is enough to generate the replacement rates that Social Security is signed up to provide if the contributions could earn interest. But we don't have a trust fund really; we had this little one that came in 1983. But we don't have a funded system. We essentially made the decision in the early 40s and 50s that we were going to pay benefits to the first generation of people covered by this program, even though they had not made lifetime contributions. So, they got benefits far in excess of anything they put into the system.

My personal view is that was a good decision. These people had come out of a depression, they fought in World War I and this was an equitable way to get people a lot of coverage quickly. But part of today's deficit is really the missing interest because we don't have the trust fund. And I guess I would think about trying to separate off the burden of this legacy debt from the rest of the costs of Social Security and maybe finance that through the income tax or through some broad base tax so that it's not all put on the backs of today's workers through the payroll tax, which is a fairly regressive tax, because you have no deductions and it's capped at 130 something. So, I would try to finance what needs to be financed by today's workers, through the payroll tax and finance what really is due to historical decisions by the income tax.

Benz: So, it sounds like you wouldn't favor benefit cuts. Would you put means testing under the heading of a benefit cut?

Munnell: Yes. And also, I mean, that's so not consistent with the whole philosophy of Social Security, the idea is that we all pay in, we all get something out. There is a lot of progressivity in that system. I mean, low-income people are helped in a number of ways in the sense that the benefit is progressive, that high-income people get a benefit that's relatively small compared to their contributions. Whereas low-income people get a much higher return on their contributions; lower-income people don't have to pay taxes on their benefits. There is a whole issue that needs to be addressed in terms of response to this dispersion in life expectancy by income levels and some rearrangement to offset that trend would be a good idea. But basically, the idea of trying to say we're going to means test it just doesn't… It would undermine the whole support for the program. So no, I don't like means testing.

Benz: It would make it easier for people to sort of marginalize it and say, it's a program for the poor or whatever. So, let's talk about how people should think about this in terms of their own plans. At what age would I need to be where I feel like OK, I'm in the clear, what is promised to me will be something that I will legitimately get. At what age under which should people think well, maybe I should give my planned Social Security benefit a little bit of a haircut to account for some potential changes?

Munnell: That's really a good question. So, if everybody sits down at the table, and tries to come up with a solution, I would think that people who are already receiving a benefit would be pretty safe. On the only way that their benefits might come into play is if there's some adjustment to the cost-of-living increase that people get each year. But I would think if you've already claimed your benefits, you're probably good. And things should probably be phased in in terms of security, but people who are going to be 55 or over as you approach 2030, are probably also going to be protected. Certainly, we saw on state and local plans that cost-of-living adjustments are sometimes thought of as different than sort of promised guaranteed benefits. And so maybe that might come in play. But basically, if you're going to be if you're in your mid-50s as you approach 2034, whatever the year is, then you can pretty much count on the current benefits. At younger ages, if the world doesn't see things my way, there may be some cuts to benefits.

Benz: So, this idea that benefits could change. Do you think that that contributes to this tendency, when we look at claiming ages for Social Security, you still have people claiming at 62 or certainly before their full retirement age? Do you think that sense that there could be changes is what is prompting some people to step up and claim earlier than perhaps they should?

Munnell: So, this brings up a really important point, because I said the house was one of the levers that people had to improve their outlook for retirement, the other one is working longer. And one of the payoffs to working longer is claiming your benefits as close to age 70 as possible. If you claim benefits at 70 instead of 62, the monthly benefit is 76% higher, and that is an annuity an inflation-indexed annuity. So that money you will get for as long as you live, and it will keep up with rising prices. And so if people could postpone claiming, they would be in much better shape. We did an exercise that show that if people could claim at 70 that 85% of people would be able to maintain their preretirement standard of living. So, claiming later is important.

There has been a tendency towards people working longer, be highly correlated with education, you know, people with Ph.D.s work forever and people with college degrees work more than those who do not have them. And so there is this link. This story has come up before whether fear that Social Security won't be there. I think there's a little bit of that. I don't think it's really the dominant thing. I think a lot of people who claim early now fall into to one of two groups: either they're people with defined-benefit plans, they're well set up for retirement and just want to stop working; or they are people who have some kind of health issue either with themselves or their spouse. And so I think that a lot of people who can move and should move have moved to later claiming. I think this issue of whether the program's going to be there is kind of minor, but it just is a terrible way to run a railroad. It's the most important program we have. It's just irresponsible that anybody has to worry about what their benefits are going to be under this program. They should get sound footing so that people can relax.

Benz: So you've referenced on several occasions, Alicia, the research and the work that you've done in the role of housing wealth in retirees' plans. Has the reverse-mortgage market improved to the extent that you would like to see and what additional changes would you like to see there? And I guess, a related question is, how will consumer awareness of this idea of housing wealth ever change or consumer opinions about it change?

Munnell: So, it's a really tough question. So, for most people, their housing, after their Social Security wealth is their single largest asset. It's the other way that they save for retirement--paying off that mortgage. So, home equity is really important, and the ways of taking it out are just selling your house and taking the money, getting a reverse mortgage or we could get these property-tax deferral programs bigger and better. That would be another mechanism. But the reverse mortgage, the product has become less attractive I think to people given that changes that were made, I think in 2017. I actually invested in a reverse-mortgage company for a while because I thought that this company was going to do well by doing good, but it's just a tough slog to explain this product to people. It also has a bad reputation, because there was some mis-selling early on.

So, I don't think that's going to be the answer for most people. So that brings you back to being the sort of I'm very enthusiastic about property-tax deferral. And it's much simpler, and it's cheaper, doesn't have to cost people all these upfront fees that make reverse mortgages look unattractive, and then actually trying to explain to people they can downsize. We just did some work to actually follow people over time to see if they tend to stay in their house long enough because you don't want to take out a reverse mortgage or borrow against your house if you're going to then move in five or 10 years. And it really looks like they're two big groups: one stay in the same house that they have in their 50s; and another big group, they move to a new house, but then they stay in that house. The problem is that some of these people then end up in a long-term care facility. And nobody knows in their 50s or 60s whether they're going to be one of those people for whom that's a necessity.

So, I think the key to a lot of this is to get some kind of program so that people are protected, can insure against long-term care costs. I think that will make them more willing to use their 401(k) money and more willing to use their equity in their home. But then that's a whole other complicated issue that is not clear how that's going to be solved--my reading of the industry is they are start pulling out of long-term care insurance, the insurance industry. And I think it might be a place where you need some sort of government program to play some role.

Ptak: Have you thought about what the appropriate policy response would be to long-term care needs? It sounds like it's a vexing, largely unaddressed problem. So, based on the research that you've done is, is there an appropriate policy response, in your opinion?

Munnell: So, I'm not an expert in this area. There was an effort to have some kind of long-term care insurance using a payroll tax, which may be part of it. I think it was not adequately funded, and it was rescinded. So, it needs to, I don't have one in my hip pocket that I can tell you. But I think that people--especially when they're going to have to make the decisions about how much money they take out of their accounts--really will have to feel like this space is covered to some extent. And the more I think about it, I think that, we are all going to get old, probably in the last year we all need some care, some help when we're frail. I don't think that's the big threat. I think the big threat is dementia of some sort. So that people are going to be potentially bankrupted by dementia, even on their own part or on the part of their spouse. And so, the insurance needs to be for these long, multiyear spans in a nursing home of some kind. And so, it's like what is it when you have a big minimum…

Benz: The elimination period?

Munnell: Big deductible.

Benz: Yeah.

Munnell: Big deductible insurance policy so that you protect the tales. You protect people against a huge financial expenditure.

Benz: That I believe is what Michael Kitces has argued in favor of that they need to extend those elimination periods, so you're not covered right away. You might not be covered for a year or even two. But then you're covered if you need seven years' worth of care, the policy would cover you for that.

Munnell: That's right. I think that is right.

Benz: OK. When you think about some of the most influential retirement research that has been done over the past decade, what are some things that you point to where you say that really moved the needle in terms of the discussion? Are there any, any specific pieces of research that you would point to?

Munnell: So I think all the economists worked on the defaults--Richard Thaler and people like that, David Laibson at Harvard--who actually got auto enrollment. They helped develop it in terms of practical option for 401(k) plans and actually, got into plan, got plan data and looked at experiments when people move from nonauto to auto. I think all of that was a huge contribution to making the 401(k) system work effectively.

Ptak: And what's in that that you still think that in your field of research really needs to be cracked, something that you think isn't especially important, but still vexing and largely unsolved issue where further research and study is very well warranted.

Munnell: So, if I could ever get my life organized so that I'm not putting out fires, I think I would like to really look close at the house, because, and I'd like to understand the psychological attachment to the house, how things could be framed in terms of talking to people about borrowing against their house, how to get past this notion that your duty is to leave your house to your child. And so I feel like there's a lot of money there that if we could approach this better in some way that we could help people a lot. I mean, I think the other areas I view is really big is, working longer, but I think that message has gotten out and really has changed some people's behavior. I think it has certainly changed the conversation.

Benz: Well, Alicia, you have been a great resource for us. Thank you so much for your time. We've covered a ton of ground. We very much appreciate you taking the time to be here.

Munnell: Oh, my pleasure. Nice to talk to you both.

Ptak: You too. Thanks so much.

Munnell: OK, take care.

Benz: Take care. Thanks.

Thanks for joining us on The Long View. If you liked what you heard, please subscribe to and rate The Long View from Morningstar on iTunes, Google Play, Spotify, or wherever you get your podcasts. You can follow us on Twitter @Christine_Benz.

Ptak: And @syouth1, which is S-Y-O-U-T-H and the number 1.

Benz: Finally, we'd love to get your feedback. If you have a comment or a guest idea, please email us at TheLongView@Morningstar.com. Until next time, thanks for joining us.

(Disclaimer: This recording is for informational purposes only and should not be considered investment advice. Opinions expressed are as of the date of recording. Such opinions are subject to change. The views and opinions of guests on this program are not necessarily those of Morningstar, Inc. and its affiliates. Morningstar and its affiliates are not affiliated with this guest or his or her business affiliates unless otherwise stated. Morningstar does not guarantee the accuracy, or the completeness of the data presented herein. Jeff Ptak is an employee of Morningstar Research Services LLC. Morningstar Research Services is a subsidiary of Morningstar, Inc. and is registered with and governed by the U.S. Securities and Exchange Commission. Morningstar Research Services shall not be responsible for any trading decisions, damages or other losses resulting from or related to the information, data analysis or opinions or their use. Past performance is not a guarantee of future results. All investments are subject to investment risk, including possible loss of principal. Individuals should seriously consider if an investment is suitable for them by referencing their own financial position, investment objectives and risk profile before making any investment decisions.)

(Disclaimer: This recording is for informational purposes only and should not be considered investment advice. Opinions expressed are as of the date of recording. Such opinions are subject to change. The views and opinions of guests on this program are not necessarily those of Morningstar, Inc. and its affiliates. Morningstar and its affiliates are not affiliated with this guest or his or her business affiliates unless otherwise stated. Morningstar does not guarantee the accuracy, or the completeness of the data presented herein. Jeff Ptak is an employee of Morningstar Research Services LLC. Morningstar Research Services is a subsidiary of Morningstar, Inc. and is registered with and governed by the U.S. Securities and Exchange Commission. Morningstar Research Services shall not be responsible for any trading decisions, damages or other losses resulting from or related to the information, data analysis or opinions or their use. Past performance is not a guarantee of future results. All investments are subject to investment risk, including possible loss of principal. Individuals should seriously consider if an investment is suitable for them by referencing their own financial position, investment objectives and risk profile before making any investment decisions.)