We've been exploring the state of retirement in the United States on The Long View. Last week, we talked with progressive labor economist Teresa Ghilarducci. On this week's episode, we chatted with Andrew Biggs, resident scholar at the American Enterprise Institute. He is more sanguine about the state of retirement in the U.S., though he is also in favor of some reforms. Andrew is an expert on Social Security reform, state and local government pensions, and public sector pay and benefits. Before joining AEI, Biggs was the principal deputy commissioner of the Social Security Administration, where he oversaw the agency's policy research efforts. In 2005, as an associate director of the White House National Economic Council, he worked on Social Security reform. In 2001, he joined the staff of then-President George W. Bush's Commission to Strengthen Social Security. He holds a bachelor's degree from Queen's University Belfast in Northern Ireland, master's degrees from Cambridge University and the University of London, and a Ph.D. from the London School of Economics.
State of Retirement in the U.S.
"Social Security Replacement Rates and Other Benefit Measures: An In-Depth Analysis," Congressional Budget Office, cbo.gov, April 2019.
"How Do Children Affect the Need to Save for Retirement?" by Andrew Biggs, aei.org, Dec. 16, 2019.
"Two Decades Ago, Progressives Warned of a Retirement Crisis. It Didn't Happen," by Andrew Biggs, forbes.com, May 29, 2020.
"Opinion: Here's Some Good News for Parents Struggling to Save Enough for Retirement," by Andrew Biggs, marketwatch.com, Jan. 26, 2020.
"Improving the Measurement of Retirement Income of the Aged Population," by Irena Dushi and Brad Trenkamp, ssa.gov, January 2021.
"At Last, Some Action on Misleading Retirement Income Statistics," by Andrew Biggs, aei.org, April 29, 2021.
"Obama Appoints Social Security Critic to Fix Puerto Rico's Budget," by David Dayen, theintercept.com, Aug. 31, 2016.
"Social Security Benefits Aren't Earned If You Didn't Pay for Them," by Andrew Biggs, forbes.com, March 12, 2020.
"Americans Want to Own Their Retirement, not Expand Social Security," by Andrew Biggs, realclearmarkets.com, June 19, 2020.
"Factcheck: Do 40% of Retirees Rely on Social Security for Their Entire Income?" by Andrew Biggs, forbes.com, Jan. 27, 2020.
"PWBM Budget Contest: A Flat Benefit for Social Security," by Andrew Biggs, budgetmodel.wharton.upenn.edu, Jan. 26, 2021.
"Social Security Reform Can Boost the Economy--or Hold it Back," Andrew Biggs, Washingtonexaminer.com, March 26, 2021.
Retirement Savings and Decumulation
"How Generous Are Federal Employee Pensions?" by Andrew Biggs, aei.org, Sept. 30, 2011.
"Can Retirement Saving Increase Your Debt?" by Andrew Biggs, forbes.com, Jan. 8, 2018.
"How Hard Should We Push the Poor to Save for Retirement?" by Andrew Biggs, aei.org, May 6, 2019.
"Opinion: Stop Pushing Poor People to Save More for Retirement," by Andrew Biggs, marketwatch.com, Sept. 12, 2019.
"Factcheck: Will Half of Americans Over 55 Retire Poor?" by Andrew Biggs, forbes.com, Oct. 8, 2020.
"Follow the Facts: Employer-Based Retirement Savings Are Stronger Than Ever," by Andrew Biggs, forbes.com, Aug. 21. 2020.
"Opinion: Now That Annuities Can Be Part of Your 401(k), Here's How to Make Them More Palatable," by Andrew Biggs, marketwatch.com, Jan. 11, 2020.
Jeff Ptak: Hi, and welcome to The Long View. I'm Jeff Ptak, chief ratings officer for Morningstar Research Services.
Christine Benz: And I'm Christine Benz, director of personal finance for Morningstar.
Ptak: We've been discussing the retirement system in the U.S. on the podcast, and we wanted to offer a range of opinions on the topic. On last week's podcast, we talked with Teresa Ghilarducci, a scholar and labor economist, who believes that the U.S. retirement system is failing many Americans.
We've been exploring the state of retirement in the U.S. on The Long View. Last week, we talked with progressive labor economist Teresa Ghilarducci. On this week's episode, we chatted with Andrew Biggs, resident scholar at the American Enterprise Institute. He is more sanguine about the state of retirement in the U.S., though he is also in favor of some reforms. Andrew is an expert on Social Security reform, state and local government pensions, and public sector pay and benefits. Before joining AEI, Biggs was the principal deputy commissioner of the Social Security Administration, where he oversaw the agency's policy research efforts. In 2005, as an associate director of the White House National Economic Council, he worked on Social Security reform. In 2001, he joined the staff of then-President George W. Bush's Commission to Strengthen Social Security. He holds a bachelor's degree from Queen's University Belfast in Northern Ireland, master's degrees from Cambridge University and the University of London, and a Ph.D. from the London School of Economics.
Andrew, welcome to The Long View.
Andrew Biggs: Hey, thanks very much for having me.
Ptak: We are happy to have you. We've asked several of our guests to share their views about whether we are in a retirement crisis. Most recently, we talked to labor economist, Teresa Ghilarducci, who, as you know, very much believes we have a crisis. You are more sanguine about the state of retirement in the U.S. In fact, you've called it the phony retirement crisis. Can you talk about why?
Biggs: Oh, sure. I'm happy to. There's really two ways I can explain it. To start, if you'd asked me years ago, are Americans undersaving for retirement, I would have said, yes. I would have said the same thing you see in the newspapers today, the same thing that Teresa and others say. I read the stories about falling personal savings rates, retirement plan participation, all the behavioral economics stuff, all the rest. But my thinking started this--when I was at the Office of Policy at the Social Security Administration, I ran that. And when I was there, we ran what is the most sophisticated retirement income-projection model in existence. It's called MINT. And this has been developed since the late-1990s. Many million dollars of your taxpayers' resources have gone into this. A lot of cross-validation with other data. We bring in all these outside experts to look at it. And at the time, this is the early 2000s, this is when the first retirement-crisis studies came out. This is the Retirement Risk Index from the Center for Retirement Research. And I looked at it and I said, "Well, sounds plausible to me."
But I talked to the career Social Security employees who ran the agency's retirement model, and they told me, they just weren't getting the same results. They were not matching up. They weren't finding the same things. And in a recent paper, SSA provided me with their most recent projections from this, we'll call the micro simulation model, and it still doesn't show retirement crisis. It projects that the share of future retirees, say, with income replacement rates below 75% of their pre-retirement earnings, they project that's going to stay about the same in the future. They project the share of retirees living in poverty is going to decline. You could look at the Urban Institute, a big think tank. They have their own retirement income model. It presents very similar projections.
So, the best, most detailed computer simulations that exist don't show this. And I could go through some of the details of why these other studies are wrong. And if you want to do that, I'm happy to do it. But there's also a simpler way of thinking about it that I think maybe people will grasp a little bit better.
The first step is, look at today's retirees and say, is there a retirement crisis for them? And if you ask them, they will tell you there isn't. Gallup asks retirees about their financial situations. Eight in 10 Americans tell Gallup they have enough money not just to survive, but to "live comfortably." If you'd look at Census Bureau research, poverty in old age has dropped by one third since 1990, retirees' incomes have grown much faster than those of other workers pretty much across the income distributions. It's not just a matter of rich retirees. And I could go on with this, but there really isn't a crisis among today's retirees.
The next step is, you'd say, well, are today's workers saving less for retirement than in the past? And we have data on this. And the answer is unequivocally no; they are saving more. We worry today about retirement plan participation or coverage. But back at the peak of traditional pension participation, defined-benefit pension participation in the 1970s, less than 40% of private-sector workers had a retirement plan. Today, according to Social Security Administration research, over 60% are participating. Back in the 70s, total retirement plan contributions were less than 6% of total wages and salaries. Today, they are 9.6% of wages and salaries. That's a more than one-third increase in the amount that people are putting toward retirement. If you look in Federal Reserve data, total retirement plan assets today are 6 times higher than they were in the 1970s. Americans are saving more and working longer than in the past. So, just on this basic framework, if there's no retirement crisis today, it's tough to square that conclusion with: There will be retirement crisis in the future. I just don't see it.
Benz: You point to the fact that retirement contributions and balances are positive trends for the state of retirement in the U.S. But it's really bifurcated where higher-income workers are contributing more and holding most of the assets. So, the question is, is the system failing or at least not serving well lower-income workers, many of whom don't even have any sort of retirement plan to contribute to?
Biggs: Well, I think it's important for us to ask what is the system that we are referring to. And the system isn't just retirement plans like 401(k)s or traditional pensions. Our retirement system also includes Social Security. And I think the way the question is framed points toward a larger bias in the discussion of retirement planning. Most financial firms cater to well-off Americans. Most people read financial journals or go to financial planners, they are also well-off. And those are the folks who are going to rely heavily on personal savings in retirement. So, they're thinking very much about that.
But that is just not true at all for low- and middle-income Americans where Social Security plays a much bigger role. Americans have somewhere around $45 trillion in accrued Social Security benefits--that means benefits they have earned but not yet received. That's about as much as we have in private retirement plans. Moreover, Social Security's progressive benefit means that that $45 trillion dollars is tilted toward low-income people, just as private retirement savings is tilted toward high earners. The Congressional Budget Office's calculations, which I've done my own work on, they show that a low-earner, somebody who is in the bottom quarter of the earnings distribution, will receive Social Security benefits equal to around 85% of their pre-retirement earnings. That's right in line with what people think of as a target replacement rate for these folks.
So, these people are being perfectly rational and saving little or nothing for retirement. And yet, they are always, to be frank, being kind of chided by high earners and do-gooders for not saving the way high-income people do. The idea that not every person at every point in their life should be saving for retirement sounds crazy to many people who write about retirement. But it's really textbook economics, that both low-income people and also young workers, shouldn't be saving very much for retirement. So, we need to think about the total retirement system, which includes both private retirement savings and the Social Security program. And when you put them together, it is very tough to argue that low-income Americans are dramatically undersaving for retirement.
Ptak: You've argued that kids play a big role in retirement savings, specifically that households with kids don't need to save as much for retirement as childless individuals. What's the evidence for this and how much might it matter to our views of retirement savings adequacy?
Biggs: Well, you get a number of popular studies that conclude that Americans are dramatically undersaving for retirement. At the same time, academic studies--one done by academic economists, published in professional journals--they usually find the opposite that most Americans are in fact saving enough for retirement, and many are actually over-saving. And one, methodological difference between the academic studies and the popular studies is how to account for how children interact with the need to save for retirement. Any parent can tell you how much kids cost, and federal research finds that a middle-income couple with two kids will spend nearly one third of their income feeding, housing, clothing, and otherwise taking care of their kids. That means less money for the parents to spend on themselves.
Now, the standard view among both financial planners and economists is that people want to maintain in retirement the same standard of living that they had when they were working. Now, the insight here is that among households with the same pre-retirement earnings--you have two households, they were earning the same amount over their careers. Childless couples spent more on themselves in their working years than couples that had kids did. And I've shown using survey data that if you look at spending by households, the households with kids, their spending drops dramatically from the time kids start leaving home until they reach retirement, and it drops in precisely the categories you'd expect. Among childless households, spending just keeps rising through retirement age.
And what this means is, if you are doing these retirement-savings adequacy studies, you can't treat people with kids the same as people without kids. And when you distinguish them, there is a pretty standard formula that's like the Census Bureau uses for counting for how much of a household's income goes to their kids, the share of households deemed to have insufficient retirement savings drops dramatically. The Center for Retirement Research, they disagree with me on this issue. But they have shown that if you do this calculation, the retirement crisis effectively goes away. I've done my own work going back to 2009 that shows the same thing.
So, it's important to understand, first, that while some studies you read about in the newspaper claim Americans are dramatically undersaving, these other studies that are published in academic journals find differently and a lot of the differences thinking about how kids interact with it. And I think it's appropriate to do those controls for the amount of earnings that people spend on their kids. And when you do that, retirement-savings adequacy looks very different than what you might read about.
Benz: So, a practical follow-up question, though, is that people with kids do have a worst-case scenario fallback in their children possibly, and that their children could provide them with long-term care and so forth. Does that factor into your thinking at all on this?
Biggs: Well, I think, that sort of issue is important. And I think this goes more toward cost projections for long-term care, things like that. Currently, with things like long-term care, a lot of it is informal care given by spouses, by kids; other is formal care, often in a nursing home, usually paid for by Medicare. And I think we do need to account for the fact that going forward you're going to have more retirees who were never married, divorced, widowed, and those folks are not going to have as many people to fall back on. At the same time, though, if you look at how much Americans actually spend out of their own pockets on long-term care, it's really not that much. Long-term care is an issue. And in theory, you can see these extraordinary costs for long-term care. The reality, though, is that the government pays for most of it. A ton of it's through Medicaid, then you get some through Medicare, some through state and local government. So, I think, qualitatively your point is correct. We need to account for it. I don't think it is nearly big enough to undercut the argument about how children affect the overall need to save for retirement.
Ptak: Let's shift and talk about Social Security, which you've already referenced a few times. Social Security is facing a huge funding gap. How would you suggest that we improve its solvency?
Biggs: Well, often when I talk to, say, congressional offices, or back in 2016, I remember talking to a lot of presidential candidates about Social Security, and the usual way of doing it is, well, let's just keep doing what we're doing but tweak it slightly. If you're a Democrat, you say, "Let's just push up the tax rate a bit." Or if you're a Republican, you say, "Let's just keep the benefit formula, but scale it back in some way." And I tend to think that's the wrong way of going about it. We focus on the solvency and the trust fund for Social Security. What we forget, though, is Social Security is a government program like any other. And with any other government program, we think about how we can change it to make it work better for people.
And when I think about this, what I'm trying to recognize is the maybe controversial statement that the America of 2035 won't be the same as the America of 1935. When we invented Social Security back in 1935, it was really hard for ordinary Americans to save for retirement on their own. I mean, financial markets were less developed, we barely had mutual funds, much less the index funds or target-date funds that people use today. What we complain today about financial literacy, back then we had a literacy literacy problem. We had people were just not equipped to do a lot of retirement savings on their own. Today, is a different world. And I just think Social Security needs to adapt to that.
What I've argued for is a retirement system that's similar to what exists in the U.K. or Australia, New Zealand, and even to quite some extent, Canada, where the government has an important role, which is to protect against poverty and old age. And that means that Social Security needs to have a real true guarantee against old-age poverty, which it really doesn't currently have. But it also means that we should fully exploit personal savings where we can. There's no reason that middle- and high-income Americans should pay higher Social Security taxes today, so they can receive higher Social Security benefits in the future. The higher taxes today, that's a disincentive to work. It reduces labor supply. And the higher promise benefits in the future, that reduces personal savings, because people aren't going to save as much on their own if they know they are going to get higher benefits from Social Security. So, both of those hurt economic growth.
And I commissioned a survey question a year or so ago through the RAND Corporation. And I asked, “If you need to increase your retirement income, would you rather save more on your own and drawdown more from your IRA or 401(k), or would you rather pay more into Social Security and get more from Social Security?” And almost across the board, three quarters of Americans said they'd rather save more on their own. So, if we've got this solution, at least for middle- and upper-income households, which is better for the economy if they save more on their own, and is what they propose doing, so why not do it? So, while I'd immediately increase the minimum benefit for Social Security to guarantee against poverty, over time I would gradually scale back the maximum Social Security benefit. So, ultimately, you'd get a system which is kind of like New Zealand's where every retiree gets the same dollar benefit. It's a benefit that is guaranteed to keep everyone out of poverty. So, your poverty rate goes from 6% to 9% today, depending on how you measure it, down to 0%.
And so, the government's role is to really guarantee against poverty. But on top of that, we'd encourage and facilitate middle- and high-income workers to save more on their own. And a lot of people say, well, this sort of dramatic change is impossible. And I know our politics are dysfunctional. But think about the Australian retirement system. And these ratings on national retirement systems, I have some doubts about them, but they rank Australia very high. Australia pays, the government pays, 1% of GDP toward its retirement benefits. We pay about 5% of GDP toward Social Security, so 5 times as much. Australia is able to do that because they ensure that everybody who is working is participating in a retirement plan. So, this is possible to do without bankrupting ourselves, without screwing up the economy. We just need to show some kind of creativity on how we go about it.
Benz: One of the most convincing arguments I've heard about why we should maintain something like the status quo for higher-income workers where they put more in and they get to take more out, is that everyone who pays into it receives an eventual benefit that's large enough to be meaningful for them and that gives them a vested interest in maintaining and protecting the program. How do you respond to that?
Biggs: Well, this is an argument that actually goes back to the 1930s when Social Security was started. And it's summarized in a phrase: a program for the poor is a poor program. Meaning, if you have a program that's focused on low-income people, say, a means-tested program that people who aren't going to participate in the plan—middle- and high-income Americans--won't support it. Now, I think this argument is--if you look at what we spend our money on today, is factually incorrect. I mean, if you look at the entitlement program that has grown the most, that is expanding, that's Medicaid. And that is a means-tested program that many middle- and high-income Americans will never participate in, yet they have supported expanding. So, I think, empirically, this argument just isn't correct. They are making a claim about how middle- and high-income Americans will think about programs. I think the claim is false.
But I also think it is kind of undemocratic and insulting to people. The insulting part is it says, well, we have to disguise the redistribution that goes on in Social Security, because if middle- and high-earners knew it's going on, they wouldn't support it. That's saying we think these people are not willing to support their fellow Americans, which again, I think is incorrect. But it's kind of ascribing some selfishness. But I just think it's also undemocratic. It's saying if we didn't fool them with this benefit formula that they can't understand, they wouldn't support it. Well, look, at some point you got to say, if Americans would or wouldn't support something, we want our political system to respond to that instead of having 100 years of entitlement policy based on this premise made to fool them.
So, I just think it's really not right. You will hear a lot of progressives make this argument. But if you look at progressive Social Security reform plans, sure, they don't cut benefits for high earners, but they massively increase taxes on high earners. So, if you are somebody earning more than the current maximum taxable salary, which is $137,000, what they are going to phase in is essentially you'd pay the 12.4% Social Security payroll tax on that, on any earnings above that. So, effectively speaking, it's a 12-percentage-point increase in the marginal tax rate that high earners would pay.
Now, whether you think that's good or bad policy, if you think high earners aren't going to respond to that and how they think about the system, you are just assuming they are bad at math, that all they care about is their benefits; they don't care about their taxes. I worked in the Bush White House when we thought about Social Security reform. And one of the insights we had, which I think was correct, is that high-income people care more about their Social Security taxes, than about their Social Security benefits. So, to the degree possible, hold the line on their taxes, scale down their benefits. This argument you are proposing, I think, just takes the opposite point of view. But I do think high earners care more about their taxes than their benefits. So, again, why not accommodate that to make the system work?
Ptak: You were previously in favor of privatizing Social Security, but you aren't actively advocating for that at this time. Is it that you've decided it isn't a good idea or that you don't view it as politically tenable?
Biggs: Well, that's a that's a good and an interesting question. I've been involved with Social Security reforms since the late-1990s. At that point, the idea of privatizing Social Security was very, very active. It culminated in President Bush's efforts in 2005 to add voluntary personal accounts to Social Security. I was working in the Bush White House then. I think, though, the question maybe overstates my radicalism back then or it understates my radicalism today. Back then, I favored adding a significant, personal account, personal savings component to Social Security, and I still do. I also favor, though, a strong minimum benefit to protect people against poverty, something like what you have in Australia. And today, it may be set up a little bit differently, but I still favor a strong role for personal savings and a strong role for government protecting against poverty.
The personal account built into Social Security, where I think they are no longer tenable, partly there's the politics--President Bush could not get personal accounts through a congress controlled by Republicans. So, the idea that you are going to get it through the congress controlled by Democrats who have shifted significantly to the left on Social Security since that time--it's just not going to happen. But there's also a practical issue that back through the ‘90s and early 2000s, Social Security was running these payroll-tax surpluses. They were collecting more in taxes than they paid out in benefits. And these amounts were credited to the Social Security Trust Fund, which is kind of an accounting entry. But in reality, the money was spent by the federal government on whatever they spend their money on.
The idea of personal accounts is you could take that Social Security surplus, put it in the account so we know it's actually being saved for Social Security in the future. That means we can't spend that Social Security surplus today, but it also means in the future we’re going to have some real assets to help pay for Social Security benefits. Now, I think that was a good idea and other people disagreed. The point is, that ship has sailed in the sense that Social Security, since 2009, has no longer been running surpluses. It is now running payroll-tax deficits--either drawing down the Trust Fund; they are not collecting as much as they need to pay benefits.
And so, if you want to have accounts as part of some larger retirement solution, they really just have to be built outside of Social Security. I think the finances tell you that and I think just the politics tell you that. But I still believe that the government should do what the government does best, which is protecting against poverty. Individuals and private markets should do what they do best. Government has a place, but government has to know its place. And so, I think that's reasonably consistent. I have changed views on a number of things, and I think as new information presents itself, you change your views on those things. I change my views on the idea of a retirement crisis. But I think there is some consistency there about having government play its role, private sector, individuals playing their role and trying to put them together into something that works for everyone.
Benz: Going back to the point about Social Security needing to protect people against poverty, you've proposed that Social Security be adjusted to provide a minimum benefit to all new retirees equal to the single, over-65 poverty threshold. What issues with Social Security would such an adjustment address, issues that are there now?
Biggs: Well, right now, there is no minimum benefit for Social Security. Your eligibility is based on having at least 10 years of covered earnings. If your earnings are low, yes, Social Security is progressive. You get a better deal for the amount you pay in. But there is no minimum benefit that says, we are to keep you out of poverty in old age. If, Social Security doesn't do it, then you have to rely on what's called Supplemental Security Income, SSI. That's a means-tested welfare benefit. If you're on SSI, it effectively means you can't work, you can have no savings at all. It's just not, I think, the best way to go about it.
So, when I thought about this, I said, Look, it's not expensive to protect Americans against poverty in old age. If you pay that flat guaranteed benefit, Social Security would be solvent forever. The issue really comes not in how low earners would be treated. This would raise benefits for about the bottom third of retirees and would effectively eliminate poverty in old age. So, they are not going to have any problems with it. The issue is going to be how do we think about middle- and high-income people? And I think the way you handle that is that you transition over time. When I started thinking about Social Security reform, after the failure of Bush's reforms in 2005, which I think were just way overly complicated, had no particularly defining narrative to them. The way I stepped back and thought about it is, I said, “If we were inventing Social Security today, for people not even entering the workforce, looking at the realities of our economy today, what we think things would be like in the future, what would that system look like?” And the answer I came to is, “You would have a true government guarantee against poverty, but for savings above that, people would do it on their own.”
So, I had this clear narrative of what I thought would make sense to people. And the idea is that for somebody entering into the workforce today, who hasn't earned any Social Security benefits, they aren’t owed anything by the program, we can change the program for that person. We can say, “Going forward, you are going to have this minimum benefit, you are going to be saving more on your own in a personal account, be it an IRA, 401(k), or some new vehicle, and that's going to combine to give you a decent income in retirement.” So, the reductions in these maximum benefits is transitioned to a single flat benefit for everybody--that has to happen over time, so that you're not taking away benefits people have already earned. What you are saying is that going forward on some incremental basis, we are going to be changing the way we think about this system. And I just frankly think that a mature society, a mature government can think about how we change this stuff. The U.K. has done this, Australia, New Zealand, Canada, they've changed how they think about this stuff. We just need to grow up as members of Congress or presidents and be willing to think differently about these things.
Benz: How about for workers who are not covered by Social Security, aren't paying into Social Security, and aren't covered by a pension? Would you envision them being covered in some fashion? Or what happens with them?
Biggs: Would you be thinking about state and local government employees or…?
Benz: Well, or just people unfortunately working out of the system who are getting paid cash for their work or whatever it might be who may indeed be poor.
Biggs: Yeah, those folks would currently rely on SSI. To be frank, though, the woman who comes every few weeks and cleans my home, she is self-employed, to be honest, never paid into Social Security. Now, she is older; she is looking at getting an SSI. And what that means, though, is somebody like that has to really think about maintaining their bank balance at some level--if my savings go above some amount, my benefits get cut--it's a very complicated thing that screws up all the incentives to work and save that we like people to have.
So, the way I view this minimum benefit is a truly universal minimum benefit. There are no vesting requirements, no earnings requirement. So, the minimum benefit takes the place of the redistributive aspect of Social Security, but it also fully replaces the Supplemental Security Income program for older people. So, it plays two roles together, but it does it in an integrated way. And it says, “You are not going to retire into poverty. If you want to earn more above that, you want to keep working in retirement and save, we're not going to reduce your benefit because of that, we're not going to means-test it the SSI works today. And if you're a middle- or higher-income person, you've got to be saving more on your own. So, we're going to have to think about how we automatically enroll you in a plan so that you've got those opportunities to do it.” For self-employed people, the issue then is, how do we make retirement savings vehicles accessible and easy to use for them in the same way that if you were a private-sector employee with a 401(k) that's becoming easier to do that, and that's an implementation issue.
Ptak: Maybe we will turn to retirement savings. To help ensure that these workers save sufficiently for retirement to make up for cutbacks in Social Security for higher-income people, you are in favor of automatically enrolling them into their company retirement plan or into a 401(k)-style government-sponsored plan. What would the latter plan look like? Would it be like a Thrift Savings Plan for the masses?
Biggs: This is going back a few years ago--Senator Rubio proposed opening up the Thrift Savings Plan. That's the federal government's 401(k) for federal employees--opening that up or expanding it to provide a savings opportunity for folks who aren't offered a retirement plan at work. It means people who are in a job that doesn't provide a 401(k), or it means self-employed people as well.
One thing I really like about the Thrift Savings Plan is the simplicity and the low cost that you were offered, maybe five or six funds, they're all index funds, so incredibly low administrative costs. The default is a target-date fund that automatically shifts from stocks to bonds as you get closer to retirement. It's just a very easy, low-cost way to save for retirement. And so, I think, opening something like that up… I think what the coverage gap that people talk about is a lot smaller than people claim, but nevertheless, we should provide opportunities to save for everyone. And so, I think opening up the Thrift Savings Plan or expanding it in some way that can provide access to people make sense.
Benz: From a practical standpoint, I wonder is such an idea viable given the entrenched interests of all these financial-services firms who can bid on 401(k) plans here and there. They have a vested interest in us continuing to have this very piecemeal system that we have where a lot of firms do have a shot at running at least a piece of the assets. So, does that worry you, from a practical standpoint, it might be really difficult to achieve?
Biggs: It does. It's made easier if the new plan, the Thrift Savings Plan, or whatever they call it, is targeted to low earners. There's not a lot of margin in there for financial-services firms. And as I've said, I favor the private sector playing a very strong role in retirement savings, probably stronger than it's playing today. At the same time, though, I do think a lot of people with their 401(k)s are really not getting the value that they should be getting.
I'll give you an example. I'm a member of the federal government's Financial Oversight Board for Puerto Rico. I was brought in there because their pension systems are all bankrupt, these traditional government pensions. We had to set up new systems. And we've shifted everybody to a defined-contribution plan like the 401(k). And we explicitly modeled this on the TSP, because we wanted a small number of funds, very low administrative costs. And we hired in a contractor who had people from the TSP, the pitch sounded great. When they actually come in with the plan set up, it's not five index funds people are offered, it's 25 funds, where the average person has no idea how one fund differs from the other in terms of investment strategies. They have very little idea what the fees are. Overall, the fees are a lot higher than what TSP would charge.
So, I don't want to sound like Bernie Sanders or something, but this is where financial firms make money. They don't make money by charging you TSP levels of fees. They make money charging the higher fees that many people in 401(k)s have. So, I think there would be some pushback. And I'm not against people having options. But I do think that it is important that the investment options people are given in a 401(k) are really shown to add value. You don't need 10 different stock mutual funds for the usual kind of person saving for retirement. So, I think there will be some pushback, and the idea is how do you get buy-in from them?
I think a new or expanded Thrift Savings Plan to give universal access to retirement accounts, the federal government shouldn't be managing that money. They should bid it out to people so the private firms will have a shot at that money. At the same time, though, I do have concerns that they are not always getting the value that they could be getting from their retirement plans. So, it's not an easy issue, I'll say that.
Ptak: While we are on the topic of your position on the Financial Oversight and Management Board for Puerto Rico, has that given you any insight to the issues that financially troubled states like Illinois are confronting. As residents of Illinois, we are a bit afraid to hear your answer on this, but…
Biggs: Well, yeah, it does. The background is, back in 2016, Puerto Rico announced it was no longer going to be able to service its debt. And Puerto Rico has not paid any government debt since then. There's no bankruptcy for states. Puerto Rico is a territory of the United States. There's no bankruptcy provision for Puerto Rico. So, back in 2016, the federal government passed a law, it's called PROMESA, which means "promise." And that set up both bankruptcy-type protections for the government of Puerto Rico, so you don't have this mad scramble of creditors trying to seize government buildings or whatever, but it also set up an oversight board to try to help Puerto Rico get through this bankruptcy and try to help manage its finances better. Puerto Rico is a frighteningly dysfunctional place on the government side and the economic side. Residents of Illinois, you can feel better that Puerto Rico is far more dysfunctional than you are.
But one lesson I learned from that is, it is bad to go bankrupt. If you remember back to the Great Recession, there's these claims: oh, we have hundreds of local governments going bankrupt; people are saying we need to set up bankruptcy provisions for states, and maybe, eventually, we will. I think Illinois faces some difficult situations. At the same time, though, I think there's an overestimation of how bankruptcy simplifies things. The oversight board that I'm on has proposed modest reductions in benefits for people who are in these bankrupt Puerto Rico government pensions, modest reductions. Five years into it, we still don't have agreement on that, the government is fighting it, even though we've targeted these reductions, so that they only affect those getting the higher benefits. It's a political issue.
And so, if you are trying to figure out which creditors get paid, when you think about this stuff in the simple sense, you say, well, the government owes money to people, and here's how much money they get. The reality is, there's usually all sorts of different creditors who are fighting with each other for a position because everybody wants to get paid first--it’s a very, very difficult thing to work your way through. So, when I think about the public-sector pensions, Illinois, New Jersey, Connecticut, all these states that are really having trouble, Kentucky is one. My advice would be, to the degree that your pension has the capability of pushing you into bankruptcy--a place like Illinois, if their state pensions go under, the state goes bankrupt. If that's a possibility, fix the pensions. Isolate on your problem and try to fix that problem. If the whole place goes bankrupt, don't think that's going to make your lives easier. It is very, very economically disruptive. But a lot of places really have a tough time getting on top of their pension problems. And where Illinois will be 10 years down the road, I really couldn't tell you.
Benz: I want to switch over to talk about retirement decumulation a little bit. It seems like if there's one area where there's broad agreement on one aspect of retirement planning, it's that people really need help figuring out how to drawdown their assets in retirement. So, people who have assets have trouble figuring out how to draw them down so they don't run out early. Do you see problems in this area too? And if so, what do you think are the key ones? And what are some potential solutions?
Biggs: Well, I can go at it from different angles. I'm an economist, and the standard literature on economics is that, ideally, you would just take all your savings--everything from 401(k)s, IRAs, personal savings--at retirement age, you would buy an annuity, and that would provide you a steady income throughout your retirement. And the rationale for this is that on your own it is very difficult to hedge against longevity risk. Even if your life expectancy is 85, you might survive to 70, you might survive to 100. That's a risk that's difficult for people to handle on their own. Collectively through an annuity we can do it.
So, I see the merit in it. The question is, though is, how important is annuitization? So, that view is your ECON 101 view, and you'll hear it all the time. This is sort of the ECON 201 point of view, the more sophisticated view is, given that people have Social Security, which is already an inflation-indexed annuity, how important is additional annuitization? How important is annuitization at the margin? And this gets to be kind of a weird thing, where on the one hand, you'll see these claims that Americans are overly dependent on Social Security in retirement, and factually, I think those claims are wrong. But if somebody is getting 80% of their income from an annuity already via Social Security, do they really need to annuitize the rest? I think probably not. If they want to, fine, but people also want to have some liquidity for healthcare issues, for various other stuff.
So, if you’re a very, very high-income person with tons of savings, you are not going to run out of income anyway, no matter how long you live. So, the question is, who are the folks in the middle for whom buying an annuity makes sense, the folks who are rich enough that they're not totally dependent on Social Security, but poor enough that they can't hedge the longevity risk on their own? To be honest, you find the same thing in issues of should I save for long-term care? The poor will be on Medicaid, the rich don't care who's in the middle. And so, I think facilitating it makes sense.
Where my issue comes with private annuities is with the complexity. I think it'd be great if private plans offer just straight life annuities, maybe with a survivor's benefit. You trade in your account balance; you get something that looks a little bit like your Social Security benefit. Where I am much more skeptical is when the benefits get much more complicated. Well, you're going to have it with a period certain, some guaranteed minimum benefit and all that. And the complexity of annuities will make it harder for retirees to comparison shop. And the way you keep the price low is by comparison shopping. So, I think it's good that SECURE Act has made it easier to offer annuities. I think it's also important though that the plain-vanilla annuity that looks like Social Security is offered to everyone, so that people can compare prices for that product and know what they are getting. A lot of people who look at retirement-savings issues, they look at something like annuitization, they say, it's kind of a no brainer. But it's like when you scratch the surface on these things, it gets more complicated. So, I'm not against it, but we also want to think about what are the costs of potentially annuities that are complex with high administrative costs versus the benefits given people already have a big annuity via Social Security?
Ptak: One proposal under consideration as a part of what's being called SECURE Act 2.0 would raise the age for required minimum distributions to age 75. Does that make sense to you?
Biggs: Well, let me start with one point that I think about with required minimum distributions. Say, if you talk to Teresa Ghilarducci, she will claim that even high-income Americans are at risk of insufficient retirement savings. So, if you look at studies of National Institute for Retirement Security, which is a front for the defined-benefit pensions industry, they will also claim, 85% of Americans are undersaving for retirement.
Now, when you look at that, you say, how does that comport with the fact that we have to force people to drawdown their IRAs, that they don't want to save the amount they have saved in a retirement account, that we have to force them to do it? If Americans were really undersaving for retirement, the way these folks claim, we wouldn't have to force these guys. They would be drawing these accounts down early in retirement if they didn't have enough money. So, just a basic point here that there is an inconsistency in terms of how we think about retirement here. But when we just think of public policy, I don't think it's a first-order major decision on par with how we fix Social Security or something like that.
People want to increase the age because it allows them to shelter income longer, shelter their assets longer from taxes. My own view is these are tax-preferenced savings the government gave you for a purpose. We need to find some way of making sure these are taxed. Now, I don't care whether it's taxed at age 70, age 75, or taxed at the time of death, but it's got to be taxed because we gave you a tax preference for it. So, as long as you tax it at the time of death, say, if you die with an IRA balance, that has to be subject to income taxes before you pass it off, then it doesn't matter that much to me. Because in a sense, the government is going to get its money one way or the other. But I just am not sure this is a major, major factor in retirement-income policy. If given the choice, I'd probably oppose it. I just don't think it's a first-order policy decision.
Benz: The fact that such a large percentage of workers lack access to retirement plans has given rise to these automatic IRAs that are being administered at the state level. What are your views on the pros and cons of these plans versus a larger federally administered plan like a Thrift Savings Plan for the masses?
Biggs: I've argued for a federally administered retirement savings plan available to everyone. The idea is that we should just try to fill the retirement savings gaps where they do exist. But when we think about these state auto-IRA plans, two things come up to me. First is that the retirement-coverage gap that these plans were sold to address was pretty dramatically oversold. The folks who were pushing these plans relied on data culled from the Current Population Survey. It's the Census Bureau's household survey. And they claimed that we have huge numbers of people who are not offered retirement plan at work. And at the time, I said to these folks, if you use other data, National Compensation Survey from the Bureau of Labor Statistics, that's an employer-side survey. It shows much, much higher coverage. When Social Security matched people's answers to surveys when they're asked, do you have a retirement plan at work, to their tax records that actually showed, are you participating in a retirement plan? They found there's tons of people who are participating in a retirement plan or who were offered a retirement plan who claimed they aren't.
So, one thing I said is, you are overstating the need. And the Oregon saves auto-IRA retirement plan done by the State of Oregon, is a great illustration of that. At the time they were pushing this plan, they claimed there's somewhere around 500,000 workers in Oregon, who are not offered a retirement plan at work and so, we have to set up OregonSaves for them. Now, the plan has been running for a few years. And you look at the number of workers who are signed up, it's about 100,000 workers. Now, I'm not against offering them retirement plans; that's good for them. But I think we should say that this thing was oversold. The data used are not that great. The number of people being served by these plans is a lot smaller than we originally thought. And I just think that's helpful to know that a lot of times the numbers that are being presented may not reflect reality.
But there's actually a second part of these state auto-IRA plans. I remember I wrote about this in The Washington Post a few years ago. And the issue is the auto IRAs, the target audience there is low-income workers. If you're a middle- or a high-income worker, very likely, either you or your spouse is offered a 401(k) at work and so you can save for retirement that way. And as I've sort of argued before, there's very little evidence those low earners really do need to save more for retirement because they are getting a high replacement rate from Social Security. But a second issue is, a lot of low-income workers today in the U.S. rely on a means-tested government program. It might be Medicaid, might be Food Stamps, might be TANF, might be a home heat and electrical subsidies. A lot of these things have means-tests built into them. And what this means is, as they start saving, they can disqualify themselves for the government benefits they otherwise would have received.
A big issue here is Medicaid. Particularly, once people reach retirement. I think probably about 20% of Americans are on Medicaid, qualify for Medicaid benefits in retirement. And if you look, you'll see some of these studies--AARP and some these actuarial firms--they will talk about how much state governments can save on Medicaid for retirees by signing people up for one of these auto-IRA plans. And what happens is, people build up savings through their life in the auto-IRA plan. When they get to retirement, the government says, “You are no longer eligible for Medicaid. You have to spend down your account, paying for your healthcare in retirement, and then, if you eventually run out, we will then qualify you for Medicaid again.”
And if this were something that conservatives or republicans would come up with as a way to make those freeloaders pay for their own healthcare, people would condemn it. And yet, that is exactly what is going on with these plans. And the folks will, if pressed, admit that’s what's happening--that a good percentage of the amount that low-income Americans contribute to these plans is effectively taxed away via lower benefits from means-tested government programs. And I just don't know if there's not a strong rationale that they need to save more for retirement, and we are going to tax away 25% of their contributions by reducing their means-tested benefits either today or in the future, it's just something that people should know about and think carefully about.
A couple years ago, Richard Thaler, who is the Nobel Prize-winning economist, famous for behavioral economics, he said, “These auto-IRA plans are no brainers. There's no reason to oppose it.” And yet, if you scratch the surface, you say, there's not a huge need for these guys to save more, and you are going to tax away probably 20% of their contributions via lower government benefits, well, that's a reason why he might not want to do it. And so, we just need to think more carefully about this stuff. And a lot of these states have moved very quickly on these auto-IRA plans. And if we did it through the federal government, maybe we could think more about these issues--how much do people need to save, and are we going to be punished via means-tests if we do it? And I think a federal response could hopefully be more comprehensive and more careful in how it thinks about this stuff.
Ptak: Well, Andrew, this has been a really enlightening discussion. Thanks so much for your time and perspectives. We've enjoyed chatting with you.
Biggs: Oh, I'm happy to be with you. I enjoyed it as well.
Benz: Thank you so much.
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Benz: And @Christine_Benz.
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