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David John: Improving the Retirement System

The retirement expert and author discusses expanding retirement-savings opportunities for low- and middle-income workers, the benefits of employer-sponsored emergency funds, and the challenges of decumulation.

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Our guest on the podcast today is David John. David is a senior strategic policy advisor at the AARP Public Policy Institute, where he works on pension and retirement savings issues. He also serves as deputy director of the Retirement Security Project at the Brookings Institution. RSP focuses on improving retirement savings in the United States, especially among moderate and low-income workers. Before joining AARP, David was a senior research fellow at the Heritage Foundation. He also has extensive public policy experience working for a money center bank, a law firm, a credit union trade association, and four members of the House of Representatives. David has written and spoken extensively about the importance of reforming the nation's retirement programs. He is co-author with J. Mark Iwry of the Automatic IRA, a small business retirement savings program for firms that do not sponsor any other form of retirement savings or pension plan. In addition, David is one of four co-editors of the 2009 book Automatic: Changing the Way America Saves. David holds an ABJ in journalism, an M.A. in economics, and an MBA in finance—all from the University of Georgia.


Automatic: Changing the Way America Saves, by William G. Gale, J. Mark Iwry, David C. John, and Lina Walker

Retirement Landscape

"How to Make Retirement Saving Easier for Millions of Americans," by Renu Zaretsky,, Oct. 6, 2021.

"Small Retirement Accounts: Issues and Options," by David C. John, J. Mark Iwry, Christopher Pulliam, and William G. Gale,, September 2021.

"Cashing Out: The Systemic Impact of Withdrawing Savings Before Retirement," Savings Preservation Working Group,, Oct. 29, 2019.

"How Auto IRAs Could Soon Improve Retirement for Millions of Americans," by David C. John and J. Mark Iwry,, Oct. 20, 2021.

"The Current State of U.S. Workplace Retirement Plan Coverage," by John Sabelhaus,, March 2022.

"How Can the Retirement System Help More People Afford Retirement?" by William G. Gale, David C. John, and J. Mark Iwry,, Aug. 3, 2021.

"Nontraditional Workers Face Multiple Barriers to Saving for Retirement," by Alison Shelton and John Scott,, Nov. 9, 2021.

"How to Take Portfolio Withdrawals in a Market Downturn," by Adam Shell,, March 25, 2022.

"State Auto-IRAs Continue to Complement Private Market for Retirement Plans," by Theron Guzoto, Mark Hines, and Alison Shelton,, July 25, 2022.

"The Automatic IRA at 15: Helping Americans Build Retirement Security," by J. Mark Iwry and David C. John,, Feb. 12, 2021.

Emergency Savings

"Brigitte Madrian: 'Inertia Can Actually Be a Helpful Thing,'" The Long View podcast,, April 22, 2020.

"Building Emergency Savings Through Employer-Sponsored Rainy-Day Savings Accounts," by John Beshears, James J. Choi, Mark Iwry, David C. John, David Laibson, and Brigitte C. Madrian,, 2020.

"Saving at Work for a Rainy Day: Results From a National Survey of Employees,", Dec. 4, 2018.

Retirement Decumulation

"When Income Is the Outcome: Reducing Regulatory Obstacles to Annuities in 401(k) Plans," by J. Mark Iwry, William Gale, David John, and Victoria Johnson,, July 2019.

"The SECURE Act: A Good Start but Far More Is Needed," by J. Mark Iwry, David C. John, and William G. Gale,, Jan. 8, 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 and retirement planning at Morningstar.

Ptak: Our guest on the podcast today is David John. David is a senior strategic policy advisor at the AARP Public Policy Institute, where he works on pension and retirement savings issues. He also serves as deputy director of the Retirement Security Project at the Brookings Institution. RSP focuses on improving retirement savings in the United States, especially among moderate and low-income workers. Before joining AARP, David was a senior research fellow at the Heritage Foundation. He also has extensive public policy experience working for a money center bank, a law firm, a credit union trade association, and four members of the House of Representatives. David has written and spoken extensively about the importance of reforming the nation's retirement programs. He is co-author with J. Mark Iwry of the Automatic IRA, a small-business retirement savings program for firms that do not sponsor any other form of retirement savings or pension plan. In addition, David is one of four co-editors of the 2009 book Automatic: Changing the Way America Saves. David holds an ABJ in journalism, an MA in economics, and an MBA in finance—all from the University of Georgia.

David, welcome to The Long View.

David John: Thank you. Thanks for having me.

Ptak: It's our pleasure. Thanks again for joining us. Before we get into discussing specific policy prescriptions, we'd like to put a general question to you that we've asked our other guests from the policy realm. Do we have a retirement crisis on our hands in the U.S., or will we have one eventually if we don't today?

John: I tend to avoid the word crisis because it implies something that has to be fixed and can be fixed immediately. But we definitely have a problem that is only going to get worse. We are at the point right now where we are roughly at the last generation of retirees who has had any sort of a substantial amount of traditional pensions. And that means more and more people are going to be depending on both Social Security on one hand and what they've saved on the other. And helping them to save the most possible, and then the key question, of course, is how to convert that into useful retirement income.

Benz: You referenced the fact that we've had this steady ebbing away of pensions. They're exceptionally rare in the private sector today, and personal savings haven't made up for the fact that they've gone away. So, should retirement savings contributions be mandatory, either from the employer or the employee to address that issue?

John: I think that automatic enrollment fits the bill better than anything else. To have it set up so that we can—or an individual—can focus and make their own decisions is both more acceptable to the individuals and fits the needs more than anything else. What we do need, however, is to make sure that all employers enable their employees to save for retirement. And I think that's going to be the key political and other issue that we're going to have to deal with from now on.

Ptak: Nudges like automatically enrolling 401(k) participants appears to be one of the great success stories of the retirement savings landscape. Do you think existing allowable nudges go far enough, or should more be permitted?

John: I think what we've got at the moment seemed to work very well, but the question is, as you pointed out, the extent. There is going to be a nudge to help people continue to save, and I think one of the key important ones going forward is going to be re-enrollment nudges on a regular basis for those who have opted out. The other one that's coming, which I think is as essential as auto-enrollment is going to be, is some sort of a nudge, some sort of an automatic choice on retirement to help people figure out how to use their retirement savings.

Benz: You mentioned re-enrollment. Can you describe what that means?

John: It means simply that if an individual decides that they're not going to participate in the retirement plan today that they get asked again, and auto-enrolled again, say, every two years or even every year until they decide that they do want to participate. That way, someone who is facing some sort of a financial problem at the time that they were first approached still has the opportunity to participate and to build retirement security.

Ptak: One big question is whether the current system of employer-provided retirement savings plans even makes sense, given that employees often jump around so much. Does it make more sense to disentangle retirement savings from any one specific employer so that retirement savings are automatically portable?

John: Yes, actually, it does make sense to some extent. We don't want to completely decouple the two but having a retirement account that moves with you automatically and easily from employer to employer actually solves a tremendous number of problems having to do with losing accounts or being cashed out at the wrong time and having to start over in your new job. We still want the employer to be involved, and that involves things like setting up payroll deduction and even being involved initially in trying to determine investments and things along that line. But the real key is that when you move to a new employer, you provide them with Social Security number and bank account number for direct deposit of your paycheck, but also a number or a way to find it for your retirement account so that your retirement contributions automatically continue to build up and you don't face portability issues.

Benz: I wanted to ask about the whole liquidation issue, people cashing out entirely at the time they leave an employer. How big a problem is that?

John: It's a huge problem, actually, and it's especially a problem when you're starting out. Typically, an individual leaves their jobs or moves from job to job more often when they're starting their career than later on. And if you're cashed out often—because, frankly, it's the easiest option for the HR person that's dealing with the fact that you're leaving—the odds are, A) that you're going to spend that money on something else; B) that you're going to have some sort of an increased tax liability that you weren't expecting because you've taken the money out earlier; and C) that you've essentially reduced your retirement savings to zero. And as I said before, you have to start over again.

Ptak: I suppose one policy choice is to make things more portable in the ways that you're suggesting. Another policy choice is to nationalize so that some of these types of situations that arise, like you're talking about, don't really come up. You hop from one employer to the next and it stays in a nationalized plan akin to something like the thrift savings plan. Do you think that's a suboptimal approach?

John: I think it doesn't make a whole lot of sense given the fact that we have an incredibly advanced financial industry at that point. And this financial industry is really at the leading edge of innovation across the world. If we had a governmental system, one system, we're much more likely to find ourselves locked into something that stays the same for the next several decades or something along that line. I think we're actually all better off with the competition and what that does with fees and the like, and also the fact that we develop much better and more effective types of retirement investment options.

Benz: What about the idea of simply unifying the contribution limit on IRAs and 401(k)s, so if you don't have a company retirement plan, or maybe it's not very good, you would be free to put it all into an IRA instead? Could something like that work? The automatic contribution piece would be something we would need to solve for. But what do you think of that idea?

John: I see that fairly often, and I also see it from entities that are pushing payroll-deduction IRAs that I don't necessarily mean in the state programs. The one question that you have here is that as it is structured now with a payroll-deduction IRA as the base in the states that are implementing that at the moment, you don't have quite the same incentive for an employer to move to a different and better type of retirement plan as their company prospers. If everything can stay in an IRA, and an IRA at the moment cannot accept employer contributions, you really remove that stairstep process. Mark Iwry and I developed the Automatic IRA about 16 years ago, and our goal at that point was that smaller companies would be able to take advantage of a very simple easy structure without the pressure to make matching contributions. And then, as the company prospered and the owner wanted to share some of the profits in a matching contribution, and/or to keep the best employees from moving to another company, they would move up to something like a 401(k) or some similar entity. It might be a multiple-employer plan or something like that. But having the two differentiated helps. And I was just looking at the median contribution to a 401(k) this morning, and it's somewhere around $3,500. So, increasing the amount, the cap, really only benefits those at higher income levels, and those are the people who most likely have access to a 401(k) anyway. So, I don't think that's going to have as much effect as the other ways to improve the retirement system.

Ptak: We're interested in talking somewhere about ways to promote retirement savings for low-income workers. Before we did that, I did want to ask you about what's a hot button, which is whether ESG should be allowed in a 401(k) lineup. What do you think?

John: That's the great question. And I think that the answer, as with so many other public policy questions, is a firm and uncompromising, "it depends." Essentially, it depends on what ESG means in a particular investment environment and to what extent ESG factors affect the financial return. The first goal has to be to help somebody build a significant amount of retirement assets, especially since so many people are going to be depending on those as their sole supplement to Social Security. But by and large, we do face an environmental crisis, and we have seen a significant number of even regulators looking now and recognizing that a company's ESG profile actually deals with long-term risk for that investment. So, to the extent that an ESG investment is structured in a way that provides decent returns and the like, yes, it's definitely an option and it should be there. Whether it's the default investment option is something we're going to have to decide as we go along.

Benz: Going back to the Automatic IRA, which you co-created as an avenue to save for people who don't have access to a company-provided retirement savings plan. Can you talk about that group of workers who do not have access to a company-provided plan? How large a group is it and maybe you can discuss the general demographic contours of that group?

John: Absolutely. And this is a real key issue for us. For instance, we just had numbers done for us by the world expert actually on those numbers, John Sabelhaus, who used to be with the Federal Reserve Board. And in the U.S., basically, we've got something around 57 million people, and that's about 48% of the workforce, who don't have a retirement plan at work that's neither defined-contribution retirement savings plan or a defined-benefit traditional pension. We find, in general, that there are five groups who are underrepresented, and these five groups overlap. So, if you're younger, if you're a lower-income, if you are a person of color, a woman, or you work for a small business, the odds are that you don't have a retirement savings plan at work. And just a couple of numbers there.

So, for instance, someone who is Hispanic, 64% don't have a retirement plan. If you're black, it's 53%; white is 42%. Less than high school education, 76% don't have a retirement plan. If you just have a high school degree, it's 58%. Men and women are about the same actually, although women, it's 49% to 46%. And the smaller your employer, the odds are that you don't have a retirement plan. So, 78% for the smallest employers with under 10. And even though, however, when you get to 1,000 employees, and most of those are actually some form of franchise, you still have about 34%. The lower income, and these are the people who are going to need it the most, 79% if you make 18,000 or less, 65% if you're under 31,000, and so on. So, this is a serious problem, and it's a serious problem in that the people who don't have a retirement plan, or are least likely to have a retirement plan, are also the ones who are least likely to have some other type of financial asset that could be used for a secure retirement.

Ptak: That addresses the supply, the availability and quality of retirement options. What about the demand? What have we learned about that among those underserved groups if they are presented with, let's say, a reasonably high-quality retirement savings option through the employer types that you described, or in the circumstances you described? What have we learned about their propensity to actually contribute to participate?

John: That actually is a key question, and it's one that we see far too many people just looking at lower-income individuals and saying, well, of course, they can't afford to save. And the fact is we have data showing that, yes, they can, and yes, they want to. So, if we look in a 401(k) program with automatic enrollment, we find that a lower-income individual is almost the same participation rate as those of higher-income groups. If we look at the Automatic IRA programs that are going on in the four states where they're operating at the most, we find even there that typically about 65%, 66% of those who are automatically enrolled decide to stay in the program and continue to save. We've also seen during the COVID crisis that while a fairly large number, certainly not a majority, of individuals who had Automatic IRA accounts in the states chose to make withdrawals. The vast majority of them continued their payroll deduction. So, what they were doing was to use their retirement assets to meet an immediate financial need, but then they continued to build up their assets in the future.

We have data from The Pew Charitable Trusts and various others—for instance, we have an AARP paper that looked at this—when an individual has and uses emergency savings, this case a deduction from a Roth IRA, which is allowed, the household balance sheet actually is much stronger, and this implies that they will have a much better opportunity and ability to save for retirement in future years.

Benz: I wanted to ask about that, David, because you've written about the value of embedding that emergency savings option into a retirement planner side by side with the retirement plan. That's something that we also discussed with Brigitte Madrian at length on a previous podcast. So, let's discuss the key benefits of those types of rainy-day funds that are meant to defray emergency expenses and the connection with retirement savings, which you just addressed a little bit.

John: We find that, on average, an individual, or a household actually, is likely to have some sort of a financial emergency on a relatively regular basis. We don't mean every year, although some fairly substantial number of people have two in the space of a year. And we find that somewhere in the neighborhood of 55%, 56% of individuals find these financial emergencies, and by this I mean something like an unexpected healthcare expense, a car that breaks down where you desperately needed to get to work. As we had in my neighborhood a few years ago, a storm that rips up your roof or something like that, can have a real terrible effect on a household balance sheet. But when people have some sort of an asset, typically an emergency savings account, and we actually urge that people have a specific amount for emergencies that is separate from your general savings, and of course, from your retirement savings. If you have that and you can use that to meet even a substantial part of that financial emergency, that the household balance sheet, as I just said, it remains much stronger and you're much less likely to find that the cost of borrowing or of cutting back on other things hurts your day-to-day financial activities. And as you go forward then, the recovery process is much faster and essentially you are in a position where you can continue to grow, you can continue to save, you can continue to build your family's financial security. So, it really is something that is an essential safety valve, if you will, and it also, as far as we can tell—and the data is sometimes a little hard to find at this point because this is all fairly new—but it also reduces the number of people who need to pull money out of their 401(k)s or their retirement savings accounts and allows those balances just to continue to grow.

Ptak: When these options are made available, what's the uptake been like based on what we can tell? And then, relatedly, tax incentives, and for those who maybe are availed of this option, are there potential tax incentives that can serve as an inducement for them to participate or no?

John: Those are the two key questions that we need to deal with going forward. The easy one is the tax incentive. There is none at this point. If an employer contributes money to a short-term savings account, an emergency savings account, and you want these accounts to be in a liquid form, whether that's in a bank account, a credit union account, or even a payroll card if you have one that has reasonable fees, something that you can use immediately, the employer contribution is counted as income and taxed as such in the period in which the contribution is made. So, if an employer made, say, a 5% contribution to your emergency savings account in August, your taxable income for August just went up by that amount.

The key question that we have to deal with is enrollment. In the U.S., it is questionable whether automatic enrollment is allowed into an emergency savings account, and most of the programs that exist at this point require an individual to sign up. And we see much the same problem as we did with retirement accounts before automatic features came into play after the act of 2006, and that people have the idea, yes, this is something I want. So, for instance, in an AARP's national survey we found about 70% of people who were asked said, “Yes, I need to have an automatic savings account and I want to have an automatic savings account.” However, because of the difficulty of signing up or the fact that people just never get around to it, probably only about 10% of those individuals actually do sign up. So, this is an underutilized factor.

We just saw an experiment in the United Kingdom where they actually were allowed to use automatic enrollment with a series of employers who primarily employed hourly workers and lower-income workers. And the participation rate went up 50 percentage points—in other words, from about 2% of workers to about 52% of workers, and the amount saved in the average account went from about GBP 30 to about GBP 130. That doesn't sound a lot like a lot, but this was a fairly short study. So, they didn't have a tremendous amount of time to build up those savings. And of course, this is the group of lower-income workers. Basically, they were contributing only a fairly small amount. But what this shows is that if the U.S. allows automatic enrollment into an emergency savings account as well as a retirement savings account, literally millions and millions of people could have this kind of security.

Benz: With ideas like this rainy-day fund idea, we can't help but wonder if they'll enjoy the greatest adoption among employers that are treating their employees pretty well on other fronts, offering good-quality, affordable healthcare, good-quality 401(k)s and so forth. So, do you share that concern that such programs might not be available to the people who need them most, like, to the hourly workers you were just talking about?

John: I always worry about whether programs are going to reach the hourly workers, because these, as we've said, are the people who really need this kind of financial support more than others.

The one thing that I think is helping at the moment, and this is a temporary phenomenon, is the fact that there are so many jobs that are going unfilled. So, even in our area of West Virginia, jobs that used to pay $7 or $8 an hour are now paying $15 to $18 an hour. And employers are going to find and are finding, from what we've been able to see, that adding a benefit like emergency savings, even if they don't offer other types of benefits, can help them to attract and keep the workers they need. But when it comes right down to it, yes, this is a benefit like retirement savings that needs to be available to employers at very low cost and very simple burdens on the employer to implement. The easier and the cheaper that we can make this for employers to offer, the more likely it is to reach the audience who really needs this.

Ptak: A separate but related issue is that the retirement plan landscape is pretty bifurcated. Large employers often field high-quality plans with very low costs. And small employer plans, by contrast, are often not great. How could better policy address that?

John: You're absolutely right. We do have this divide and actually I'd even add the third divide there—or because it's the second divide into the third part—is that you then also have the significant number of people who don't have any plan at all. I think the answer to these is somewhat similar to what we've been discussing with emergency savings plans—that the competitive pressures are making better retirement plans available at a lower cost to employers. One of those is the pooled-employer plan, or also known as multiple-employer plans, which is like a group-rate health insurance type of retirement plan that a number of employers can offer. But part of it is going to be tax incentives for employers. Part of it is going to be an eased regulatory burden for employers while still absolutely protecting the employees. We don't want to remove all consumer protections as a way to accomplish this. And part of it is going to be actually the long-term effects of, say, a required offering through a state program.

One of the things that we've seen data from, and The Pew program has done a fantastic job of starting to assemble this, is that if a state requires a company to participate in a retirement plan either the state-facilitated Auto IRA plan or another plan. A significant number of employers look at this and decide that maybe after the experience they've had with the state program or otherwise that they start to move up to a 401(k) or to some other type of pooled-employer plan or something along that line.

First off, is getting people involved and getting employers involved. And then, as we move forward, hopefully we can find a way so that the added benefits that larger employers have can spread down to smaller employers. In the long run, we do need a much more detailed, a much more effective and encouraging retirement program to be available to as many workers as possible, because that really is going to help deal with what was the first question that we discussed, as to whether there is going to be a crisis or not. The better the employer plan, the better the outlook for the future.

Benz: We wanted to delve into the Automatic IRA, which you helped introduce more than 16 years ago, along with other researchers at Brookings and the Heritage Foundation. Can you discuss the goals of the Automatic IRA and also how they work?

John: This was a case where Mark Iwry—who at the time was at Brookings, and I was at Heritage—and I were invited to be jointly on panels with the idea that we would provide entertainment by fighting and disagreeing with each other. Instead, we found that we agreed on far more than we disagreed, and we sat down at backstage at an EBRI event and developed the Automatic IRA. The Automatic IRA is a payroll-deduction IRA, something that people have always known about, combined with automatic enrollment. Hence the name. And the goal is to have as simple a program as possible. It was originally a national program, but it's now being implemented mainly in states. The state contracts with a private sector recordkeeper and a private sector investment manager, or a couple private sector investment managers, and by doing that they get the service at the lowest possible level as far as costs go. It is a very simple program. When the program is required of employers and, depending on the state, it's either required of all employers or perhaps employers with more than five employees or the like.

The hard decisions have already been made. So, the employer doesn't have the liability for choosing investments and making those kinds of decisions, and the employer also doesn't have the compliance requirements because those are also handled by the states. All the employer has to do is to hand their employees' information that the state provides and let the employees know that unless they say they don't want to participate that they will be enrolled in the program. The contribution level is usually about 5% to 6% of income and that goes into typically a target-date fund. Because this is a payroll-deduction Roth IRA, the tax benefits are at retirement. So, you pay taxes on the amount that you contribute going in. But that means in the case of a financial emergency, that you can withdraw those contributions at any point without any sort of a tax penalty. Any investment growth is treated separately in that case.

Our goals were, as I say, to make it as simple and easy for employers and employees. And we actually had a major financial company who did a poll of employers for this very early on. And typically, when the program was described to a small-business employer, the immediate reaction was to throw up their hands and start to emote along the lines of, “Oh my gosh, you already require me to do this, this and this, and now you want me to do that, that, and that, I'm already getting angry, et cetera.” But the pollster said that much to his shock, the more that the program was described to the employer, the happier the employer got. And we have seen an Oregon, California, Illinois, and now Connecticut and very soon, Maryland, that employers typically find that they're actually pretty happy with this process, that it doesn't cost them anything to implement for the vast majority of them and for others, it's more along the lines of a few expenses and office supplies.

From both Mark and my point of view, the goal was to make it easier for more people to save, and in particular, for lower-income people to save. From Heritages' point of view, and we had some interesting discussions internally—Heritage, by the way, is a conservative think tank—the goal was to enable people to build their own retirement security through their own efforts, which is a very traditional conservative value. And the Auto IRA seems to have met all of those goals to date.

Ptak: The original idea was for the Automatic IRA to be a national plan, but that's stalled out in Congress. One could argue that where we are today, though, with states and municipalities fielding separate plans, maybe that's less efficient than it should be and results in higher-than-necessary fees going to the financial-services sector to administer these separate plans. Do you share that concern? Or do you think they get somewhat overblown?

John: I think it's somewhat overblown at this point. Yes, the plan was to have the Auto IRA implemented nationally, and going into 2009, we had bipartisan support in both the House and the Senate, and we had the support of the Obama administration. And we had the support of the McCain campaign during that presidential campaign. Unfortunately, the terms of the debates changed rather radically due to the healthcare proposal that came out of the Obama administration, and we have not really been able to move forward with that.

In the states' issues, for the most part, the programs that are actually being implemented are very similar. There are mostly Automatic IRAs. There is mostly a requirement. Most small businesses, the cost is minimal compared with some of the other options, especially the option at this point of implementing a small-business 401(k). However, it will get better. And we have two factors that we think are going to be interesting. First off is that it is starting to look like some states, especially the smaller states, which would have obviously smaller populations being served there, may join together with larger states to offer a joint program, and this would help to keep fees somewhat lower there. The other option is that as more and more states start looking into this, and we have foreign operation and we have 10 states that are implementing programs at the moment, that increasingly this is going to become obvious that this is a workable solution. And the more states that implemented successfully and uncontroversially, the more likely it is that Congress is going to start to look at this once again as a national program.

So, I don't really regard this as a problem. We don't have the kind of design differences from state to state that would be a problem. We do still need to address the question of a business that uses an Auto IRA and has the operations in multiple states—some of which may be covered by an Auto IRA and some of which may not be—precisely who has to participate and who doesn't, and I think that's something that's also being handled so far on the state level. So, we shall see going forward, but the goal is still the national program. The goal is to make sure that every American has the opportunity to save for retirement regardless of where they're working, and both as far as business and geographic location.

Benz: Wanted to get your thoughts on retirement decumulation, for people who are retired and drawing upon their portfolios. There seems to be a big gap in our current system, the fact that we hand people their money upon retirement and basically tell them to go figure it out—that there aren't good nudges and guardrails to ensure against a disastrous outcome of some kind. So, what are the best ideas to address that, in your view, to help people along the way figure out how to spend from their assets in retirement?

John: This is the worldwide problem. We are seeing this question being addressed in every single country that has a defined contribution system at this point, for very good reasons. The first focus was on building an accumulation system. But now, we are reaching the point where we are starting to see a significant number of people retiring and using those savings. And we are seeing solutions being discussed in every country. Australia, for instance, is in the process of implementing a retirement income program that superannuation programs will be required to offer to their membership.

As far as the U.S. goes, the worst possible option that you can have, to some extent, is to be automatically enrolled, automatically invested, automatically chosen or urged to save a specific amount and now, having absolutely no experience managing investments to be handed your lump sum for retirement benefits and say, “OK, go ahead, only you know how to manage this.” That's a prescription for disaster. And we see that when people retire, they break into two different groups. On one hand, we have a smaller group who looks at this money and says, “Wow, I'm rich. I can basically go afford to spend it on just about anything I want because I'll never be able to use that much money,” and they spend too quickly. And then, the flip side, which is actually the larger group, is that they look at this lump sum regardless of how big it is, and say, “Oh my gosh, this is all we’ll ever have,” which is not correct. “And there will be some sort of a terrible financial crisis and if we spend any of this or much of this, depending on the person, we will not be able to handle that crisis.” So, they basically have a retirement life that has less income than they should have. So, we do need desperately an automatic option that is flexible and easy to understand to help people move from the psychological question of savings and a lump sum to using this money and seeing it as a stream of income.

Probably the one that Mark Iwry, Bill Gale, and I addressed in a Brookings paper, which was one option, was to have people automatically enrolled in what's essentially a phased withdrawal program. And in this case, the retirement savings would be moved into a professionally managed investment fund where hopefully it would continue to grow throughout their retirement, and the retirement program would send them a monthly income based on the annual performance of the pool of assets. So, essentially, they would be guaranteed that they would receive a monthly income, but that monthly income could vary from year to year. The value of this is that it is a default on one hand, so it's something that helps to move them psychologically from seeing the lump sum to seeing the income stream, but also is very flexible, so at any point they could decide, I'm going to pull out a certain amount of my money and buy an annuity to guarantee that I have income to cover my expenses and I don't have to worry about the investment returns of my pool. Or if they have a terrible health diagnosis, they could decide a different way to use their retirement income. But that's only one option.

Another option is for people to be encouraged or helped to determine, based on their Social Security benefits as a set amount, how much additional guaranteed income they need to meet their basic expenses and then have a separate pool for emergency savings and the like. There are a lot of different ways that we can do this. There is a great deal of innovation going on at this point, which is very encouraging. But one thing that I think is a mistake is to focus solely on existing investment products like annuities and the sort, rather than encouraging the kinds of innovations that we should see. This is especially true now that we've moved into an inflationary environment, which changes the picture long term.

Ptak: You mentioned Social Security, and we want to pick your brain about that. But you also mentioned annuities just now, and we're curious, the Secure Act, as you know, made way for more plan sponsors to offer annuities in the 401(k)-plan context. Do you think that's a good idea and should the types of allowable annuities have been more narrowly defined?

John: Yes, actually, they should have been. When it comes right down to it, the big problems with including an annuity during the retirement savings period before you retire is portability on one hand. What happens if you have worked for employer X for 15 years and you've accumulated 15 years' worth of an annuity and you now change jobs to someone who has a different provider or a different retirement plan? Do you find yourself with slices of annuities, small slices of annuities that could be expensive, or do you find yourself having a fairly large surrender fee to liquidate that annuity part and move it to your new employer's plan? Those are problems that need to be dealt with. Already there are some providers who actually have an investment that mimics the purchase of an annuity, but the actual purchase isn't made until retirement.

The other question is, to what extent the annuity provides significant retirement income? This is especially true for lower-income individuals. The U.K. had a requirement up until several years ago where 75% of your retirement savings had to be annuitized by the time you reached age 75, and in practice that meant that most people annuitized when they retired. Unfortunately, because this was a universal requirement, this meant that some people were receiving annuity payments of $25 or $50 a month when it would have been far more effective for them not to have annuitized to have access to a lump sum. So, the Secure Act made it much easier for employers to add annuities to a retirement savings program.

But the devil is in the details and how those are implemented, how you deal with questions of portability, suitability based on income level or other purposes and things like that. We did hear stories during the U.K. requirements of individuals who annuitized and then finally almost immediately came up with a terminal diagnosis for cancer or something like that. And at that point then, because most of the annuity products tended to be single pay, that meant that most of their retirement savings were not available for their family to use going forward.

Benz: Wanted to ask about Social Security, which you referenced, David. Many younger workers and even older workers approaching retirement age are dismissive of Social Security because the Trust Fund is set to run out of money in 2034 unless Congress takes steps to shore it up. Are they being overly pessimistic, in your view?

John: Yes, very definitely so. Even without the Trust Fund, Social Security can pay somewhere in the neighborhood of 75% of the benefits just from its cash flow. And years ago, I talked to a very conservative public trustee of Social Security, and he pointed out that if Congress can find the money to pay the last year of the Trust Fund, therefore, to pay full Social Security benefits, they can also find roughly the same amount of money the following year when the Trust Fund is exhausted to continue to pay full benefits. I worked on Capitol Hill for 13 years. And during, especially my last stint on the Hill, which started in 1995, Social Security was an issue. And the number and vehemence of phone calls that came in from people who are concerned about receiving their full Social Security benefits cannot be underestimated. The real pressure is there. If necessary, Congress could change the structure of the Trust Fund fairly simply. I don't anticipate that they do that other than a major Social Security reform. But these benefits, especially for people who are approaching retirement or even in their 40s at this point are very, very unlikely to ever be changed downward. Maybe for the various highest income, but even in that case, that would be very unpopular. This is a commitment that our society has made to retirees. And I don't see any way, practically or politically, that that commitment won't be honored.

Ptak: Notwithstanding that, it probably is the case that there are opportunities to make some adjustments that could fortify the program, and it maybe isn't a single adjustment perhaps; it's a mosaic of different adjustments. So, are there any in particular that you would favor?

John: I'm going to duck that for the simple reason that one of the things from studying Social Security for many years that I learned is that the various parts of Social Security interact. So, hypothetically, if you're modeling something, you could say, well, what we need to do is raise taxes to X and do something else with the retirement age, and therefore, on paper this seems to solve the problem. But the reality is that the different parts of Social Security, and this includes the tax rate, it includes retirement age, it includes the benefit structure, basically the structure is such that they lower your income, the higher the proportion of your pre-retirement income will be replaced by Social Security. They all interact in a very complex way. So, when you actually look at how a pattern or a group of reforms work together, you sometimes find yourself very surprised with the result. So, I'm not going to predict what would work and what would not. I just will simply say that this is a much more complex problem than it appears on paper and a much more complex problem than what you see in most of the popular press at this point.

Ptak: Well, David, this has been a very enlightening discussion. Thanks so much for sharing your time and perspectives with us. We really appreciate it.

John: Certainly, this has been fun. Thanks for having me.

Benz: Thanks so much, David.

Ptak: Thanks for joining us on The Long View. If you could, please take a minute to subscribe to and rate the podcast on Apple, Spotify, or wherever you get your podcasts.

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Benz: And @Christine_Benz.

Ptak: George Castady is our engineer for the podcast and Kari Greczek produces the show notes each week.

Finally, we'd love to get your feedback. If you have a comment or a guest idea, please email us at 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 decision.)

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