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FUTURE OF PROSPERITY A POLITICO WORKING GROUP REPORT

SECURING RETIREMENT FOR NEW GENERATIONS Policy ideas to ensure Americans have enough to fund their later years

THIS REPORT WAS PRODUCED WITH THE SUPPORT OF PRUDENTIAL. THE VIEWS EXPRESSED DO NOT NECESSARILY REFLECT THOSE OF PRUDENTIAL.

FUTURE OF PROSPERITY: SECURING RETIREMENT

Securing Retirement for New Generations A POLITICO working group report

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American ideal of a happy, secure retirement is under threat as the economy changes and the financial foundations that supported previous generations erode. The decline of traditional pensions has increasingly shifted the retirement burden to personal savings, but stagnant wages and rising health care costs mean that it’s harder for Americans to build up a nest egg that can cover their costs through a longer lifespan. Social Security is on track to become insolvent in another decade or so, raising the possibility that even the marquee national safety-net program will have to reduce benefits to millions. As a result, older workers are postponing retirement, and businesses are feeling the effects in the form of reduced productivity. he

Washington created the incentives that have shaped retirement for nearly a century. Now, who is responsible for safeguarding the financial wellbeing of older Americans? What should be done, and what’s even possible politically? The answer is critical to our national future. Social Security was one of the great policy successes of the 20th century, but it was never intended as a full solution to the retirement puzzle. Solving it will get only more complicated for future generations, where more workers will have spent their careers without a long-term employer offering traditional benefits. To chart a realistic path forward, POLITICO

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convened a bipartisan group of 15 leading thinkers and policymakers to clarify the problem and identify solutions. Meeting under Chatham House rules to encourage candor, the group largely agreed on the scope of the problem and the need for a national rethinking of an issue that isn’t always on the front burner. When it comes to solutions, they identified a broad framework for improving the system—but also several red lines when it comes to what kinds of changes are politically possible. Although they come from

FUTURE OF PROSPERITY: SECURING RETIREMENT

different sectors and political perspectives, the group members reached broad agreement on four key problems and potential solutions. Those include:

An independent commission could help build political consensus. American retirement

hasn’t been comprehensively addressed for decades. One way to move forward would be for Congress to establish a high-profile independent commission. Though not a policy change in itself, a commission would bring needed attention to the issue, set an official baseline for the problem and launch the conversation on reforms, from small-scale adjustments to a wide-ranging revamp of the U.S. retirement system.

More Americans need access to retirement savings plans. The retirement system is still

highly dependent on employers, and far more dependent on the 401(k) than even its inventor envisioned. A simpler and portable account would give workers more consistent access to tax-advantaged savings and leave them less vulnerable to gaps caused by job changes and financial emergencies.

Requirements matter, but can’t be a “mandate.”

Experience has shown that Americans have trouble setting aside money for retirement outside of employer-sponsored retirement plans, and an extremely effective way to increase savings is to require that employers offer retirement plans to employees. However, there was broad agreement that a “mandate” to employers is politically toxic; even advocates acknowledged the political challenge of creating a requirement without calling it a mandate.

Social Security could provide political cover.

Any changes to the retirement system are more likely to get political support if they are undertaken as part of a revamp of Social Security, which enjoys broad support in American society from across the political spectrum. This POLITICO working group report summarizes the discussion and details the solutions the group arrived at, as well as some of the obstacles it identified. It’s part of a yearlong journalism series called the Future of Prosperity, exploring the long-term challenges facing

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Americans’ financial well-being. Note: Under the ground rules of the discussion, the list of participants is public and appears at the end of this document, but POLITICO is not attributing specific views and comments to individuals.

1. WHAT’S THE TROUBLE? Americans grow up with the expectation that if they work hard as adults, they’ll be able to enjoy the final decades of their lives in a comfortable retirement, free of the demands of the workplace, able to spend extra time on leisure, travel, family and friends. But a “golden years” retirement is possible only if you have enough money for it—and an increasing number of Americans don’t. Today, millions of Americans face declining standards of living in the final stage of life, and projections suggest that even middle-class retirees could find themselves living in poverty. Our retirement experts weren’t shy about the scale of the problem, with one projecting that as soon as 2025, as many as 30 million Americans, many of them originally middle class, will find themselves either poor or “near-poor.” “That’s a humanitarian crisis,” the participant said. “That’s an economic problem, and it’s also a political problem.” What happened? Retirement as most Americans have experienced it has its roots in the Great Depression, when the United States decided to urge older workers to retire, creating more jobs for younger adults, by providing a baseline level of old-age income through Social Security. In the decades since, Americans generally had three potential sources of income after leaving the workforce: Social Security, private pensions and personal savings. That triad—sometimes called the “three-legged stool” of retirement—is now in jeopardy. Social Security, which was never designed to be the sole source of income in retirement, provides only a fraction of a worker’s preretirement income, and even at that level it is at risk of exhausting its trust fund in the 2030s unless changes are made to its funding or benefits. Traditional pensions that guarantee a fixed

As many as 30 million retired Americans will be poor or near-poor by

2025 The median balance saved in retirement accounts is only

$25,000 Social Security is on track for insolvency after

2030

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monthly sum for life have largely disappeared for Americans younger than baby boomers. And personal savings, including in employersponsored 401(k) plans, have funds well short of what most Americans will need to maintain their standard of living after leaving the workforce. Our participants saw Americans falling into two basic groups, with two different issues: lack of access to retirement accounts, and undersaving. Roughly half of Americans have no access to retirement savings plans and have saved little or nothing toward retirement. The other half has socked away some money in retirement accounts—but even most of this group has saved far too little to maintain their preretirement standard of living. The median amount employees have stashed in 401(k) plans and Individual Retirement Accounts (IRAs) is just $25,000, and many risk falling into poverty when those savings run out. Meanwhile, traditional pensions are largely disappearing. As one participant pointed out, only a fraction of Americans, perhaps 30 percent, ever had access to a traditional pension—but those often provided the bedrock of retirement for many working-class and middle-class retirees. The result is that retirement in America is increasingly a “do-it-yourself” proposition and personal retirement savings are an ever more important part of the equation. That would be fine if Americans were saving more, but they are saving less. In fact, each generation of Americans seems to do worse at saving for retirement: baby boomers saved less than their parents, and Gen-X has fallen behind the boomers. Millennials, who have higher student debt burdens than their parents, are falling even further behind. “Younger generations are not building wealth as much as earlier generations,’’ one participant said, not because they’re spendthrifts, but because wages have been stagnant while education, housing and health care have been eating up a larger chunk of their earnings. And the number of years of retirement has been growing: “People are living longer, so we have more retirement to fund than we used to,” another participant said. Several participants noted that business managers are already seeing the retirement crisis

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impact their bottom line in the form of reduced productivity. That’s because workers who are financially stressed are less productive, and also because older workers are staying on the job longer because they need to accumulate more savings. Businesses “are seeing somewhere around 10 percent productivity lost,’’ one participant said. Another cited research that found that older workers staying on the job cost employers about $50,000 per employee per year in added costs and lost productivity. “The really nice thing about [pension] plans is that they told people when to quit,” said one participant. The financial pressures on the system are growing, and sooner or later will have to drive some kind of large-scale solution, participants said. One noted that the ratio of working-age Americans to retired Americans is going to fall dramatically, from about 5-to-1 today to 3-to-1 by 2030. And the more resources directed toward retirees, the less available for the generations coming behind them. If there’s any good news, it’s that the scale of the issue could eventually move Washington to action. As working-age people realize the real price of retirement—that they’re going to

“People are living longer, so we have more retirement to fund than we used to,” said one participant.

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have to pay higher taxes, or see more paycheck deductions, or work longer into their senior years—one participant said, “it could be the case that that will create the motivation for some sort of political negotiation.”

2. PRESSURE POINTS The working group identified several pressure points in the U.S. retirement system that offer challenges—and some opportunities—to address the crisis.

Stagnant wages are locking in lower incomes.

Americans have less and less to live on in retirement, in part because wages have not risen while other costs, particularly health care expenses, have increased dramatically. Stagnant wages for today’s retirees will linger for decades; since Social Security payouts are based on incomes in the years leading up to retirement, today’s retirees will lock in their lower wages for the rest of their lives in the form of lower Social Security checks. “Levels of inequality have skyrocketed, and that has meant that the American worker has less ability to save,” one participant said.

Higher Medicare premiums are draining retirement income. Medicare premiums are

rising faster than Social Security cost-of-living increases, meaning that in real terms, the value of Social Security income has been declining. “Medicare premiums have eaten everything up,” one participant said.

Health care costs are a drag on retirement—long before retirement. Providing health insurance

for employees is usually the top priority for employers and for their workers when it comes to benefits. And with the costs of health care rising faster than inflation (and wages), employers have less money and administrative capacity to think about providing retirement plans, which are generally a lower priority. They also have less money to provide as a match for employees’ 401(k) contributions. “Health care has squeezed a lot of oxygen out of the retirement piece” of employer benefits, said one participant.

Temporary, part-time and “gig” work pose a significant challenge. Since most retirement

plans are open only to permanent, full-time employees, the growth of contract, part-time and temporary workers means the number

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of Americans with access to an employersponsored plan is diminishing. “The gig piece is huge. Worker classification is huge,” said one participant. “We have to take a look at regulatory frameworks that were built in the 1970s for a very different workforce and [ask], ‘What is realistic today?’”

Even conscientious savers need help preventing “leakage.” When American workers do have

access to a 401(k) plan, that doesn’t mean the money will be there when they retire. In fact, they tend to take out as much as 40 percent of what they put in. Many cash out their accounts when they change jobs, or draw on the accounts during emergencies, or to buy a house. “Between 30 and 40 cents of every dollar that goes in comes back out again, and most of that is at the time that you change jobs,” one participant said.

Longevity is a problem. Longer lives are

a medical success story but an economic challenge. More and more Americans are living past 85, and by then, many if not most retirees have used up their personal savings. And uncertainty about lifespan means that retirees have trouble figuring out how much or how little of their savings to spend. “There’s a lot of issues here,” one participant said. “How do you make your money last a lifetime? What mix of strategies do you use? A strategic spend down?

More and more Americans are living past 85, and by then, many if not most retirees have used up their personal savings.

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How much do you annuitize? How much do you keep as a lump sum for emergencies?... As you get older, it’s harder and harder for many people to make these kinds of decisions.”

Women, especially single women, are particularly at risk of falling into poverty.

That’s in part because women get paid less than men during their work lives and disproportionately take time off from work to care for children or elderly family members. Because Social Security payments are based on a worker’s lifetime income, women’s Social Security benefits start out lower than men’s. “All of it ends up coming back and hitting you as you get into old age,” one participant said. By their 80s, a majority of single and widowed women are living in poverty, another said: “I don’t even tell people because it’s so depressing.”

The retirement crisis falls harder on minority communities. The net worth of nonwhites

remains significantly depressed compared with whites, particularly in terms of housing equity, which forms a significant part of the assets available to many Americans for retirement. Housing policies that restricted the availability of mortgages in nonwhite communities and charged them higher interest than whites are having knock-on effects on retirement to this day. White families pass down seven times as much wealth to their children as black families, one participant said, and “almost 40 percent of that is directly related to homeownership policies.” Predatory and discriminatory lending also disproportionately targets lowincome and minority communities, meaning that residents of those communities pay far more for common financial products, making it harder to build wealth throughout their lives. “We need to find some way to address those institutions or entities that are causing the drainage of resources out of those communities so that more money is available [for retirement],” another participant said.

Employers, particularly small employers, need radical simplification and protection from liability. Most employers that don’t offer

retirement plans are smaller employers that lack the time and expertise to deal with the overhead of running an investment program like a 401(k). But participants agreed that the

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number of employers who would be willing to offer a retirement plan for employees would increase if the plans were simplified and limited the employer’s responsibility to managing a payroll deduction and contracting with a third-party provider. “The plans are more complicated and more costly at the small [employer] end of the market than most people realize,” one participant said.

Simplification is also necessary for employees.

Participants agreed that many 401(k) plans are needlessly complex, forcing employees and retirees to make difficult decisions about investments and withdrawal rates. Many employees, daunted by the choices involved, never get started. Others with limited financial literacy could make poor investment choices. And even those who manage to save a lot during their working years may have little idea how much they can afford to draw down their savings during retirement; many may find themselves quickly outliving their assets. It’s “what I call ‘decision-making under uncertainty,’” one participant said. “How do you invest your money? How do you manage your savings when you change jobs, which for many workers happens multiple times over their career? How do you manage your money during an economic shock or health shock? These are all issues that individuals now have to negotiate.”

“Nudging” isn’t enough. Despite much

interest in recent years in behavioral economics, participants generally agreed that the retirement crisis can’t be fixed by tweaks and “nudges” designed to subtly spur workers to save more. While some ideas from behavioral economists are moving into the mainstream—including automatic enrollment in retirement plans and automatically escalating the percentage of savings over time—those “nudges” will likely have only marginal benefits, and will primarily help workers already inclined to participate in retirement plans. They won’t mean much for the vast swath of workers with temporary jobs, stagnant wages and no savings, participants said. “Nudging works in a small microclimate for people who have stable jobs and some financial future,” one participant said. “For the larger group, it’s not the humans’ heuristic problems, it’s actually the bad design” of the retirement system.

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of money saved for retirement “leaks” out during job changes, to buy homes or address emergencies.

The ratio of working-age to retired Americans will decline from 5-1 to 3-1 by

2030

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In short, many participants noted that there’s a basic mismatch in the U.S. retirement system between what Americans need to do and what they are able to do at certain stages of life. For instance, it’s important to start saving for retirement early in adulthood, but that’s when Americans’ incomes are lowest, their student debt burden is highest and their work lives may be most unstable. Later in life, there are important decisions that older Americans need to make in terms of deciding when to retire, when to start collecting Social Security and how to draw down their savings, but those complex calculations come at a time when cognitive abilities are often declining. And these decisions are harder and more consequential for Americans with the fewest resources. “Risk is not equally shared across our country,” said one participant. “We need to devise policies that recognize the fact that these aren’t equally shared risks, and the people who are most burdened ... have the least capacity to deal with them.”

3. WHAT’S NEXT? With a wholesale expansion of the social safety net politically unlikely at the moment, the experts in our working group focused on fixes to the current employer-sponsored, savingsdriven retirement system. They agreed that any reform will have two main goals: expanding access to retirement accounts, and increasing the savings rate. And they also agreed that policies that address the first goal and expand access to retirement accounts will largely help meet the second goal.

THE PRIVATE SECTOR There was broad consensus in the working group—though not total—that the most effective practical policy to meet both goals would be to find a way to require employers to provide workers with access to retirement savings plans. Research and experience have shown, many participants said, that without an employerbased savings plan based on payroll deductions, Americans are usually unable to save significant retirement funds on their own. One participant cited an analysis suggesting that employees who gain access to a retirement plan through their employers increase their savings by 50 percent.

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“Without the plan, they don’t save anything,” the participant said. But the group also identified a clear red line when it came to the politics: Any requirement to provide a retirement plan would go nowhere if it were seen as a “mandate.” In large part because of the contentious debate over the health insurance mandate in the Affordable Care Act, anything that sounds like a “mandate” in Washington is unlikely to get support from Republicans in Congress, or from the business community. “With the current type of legislators that are in office, I will believe that some sort of a mandate will happen at the point when I can put my hand on the ground and feel the deep cold coming up from hell,” one participant said. “The ACA mandate has tainted the water,’’ said another. Several suggested that, in effect, what Washington needs to do is impose a mandate while naming it something else, like a “universal” account. “I don’t think politically it’s going to be a winning strategy unless you can come up with a friendlier name,” one participant said. What kind of retirement account would be practical, and politically palatable, under such a law? Some thought access to a state-sponsored plan (in states that are setting up such plans)

One analysis showed that employees who gain access to a retirement plan through their employers increase their savings by 50 percent.

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could be a good option, particularly for smaller employers. Others suggested that large financialservices firms would be willing to step in with simpler plans designed for smaller employers, if Washington made the right tweaks to lift the regulatory burden. That would allow employers to offload much of the administration onto firms better able to manage it, leaving employers responsible only for the payroll deduction process. Yet another idea was to separate retirement accounts from employer sponsorship altogether, instead creating portable retirement accounts that follow the worker, not the job. That would be particularly beneficial for the growing number of temporary, contract and contingent workers in the economy. There was little consensus, however, on what such accounts would actually look like—“addon” accounts to Social Security, multipleemployer plans, a “single payer”-style federal program, or state-sponsored accounts were all mentioned as options. And then there is the problem that a true system of universal accounts would mean incorporating today’s 401(k)s, IRAs and maybe even college savings plans, like 529 accounts, all of which have entrenched constituencies inside and outside government. Whatever they look like, participants agreed,

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they should be simpler than most of the retirement accounts offered today, featuring standardized, low-cost investments that anyone could figure out. The simpler the account, the more workers are likely to become savers.

THE PUBLIC SECTOR As perhaps the most popular safety-net program in America, Social Security offers an attractive vehicle for reforms. And some participants suggested that Social Security’s pending funding crisis could provide a potential opening for a political solution. If, as part of a broader revamp of Social Security, lawmakers also required expanded access to retirement savings plans and other reforms, that might be politically more palatable, participants agreed. Even so, there was little consensus around the table on just what a Social Security revamp might look like. Participants disagreed significantly over whether Americans should be allowed to receive some or all of their Social Security benefits in a standalone or “sidecar” account that they control directly—a proposal favored by conservatives and opposed by liberals, including those in the group. Participants pointed to several ways that Social Security could be used to solve some of the

Any requirement to provide a retirement plan will go nowhere if it is seen as a “mandate.”

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more specific problems in the current retirement system, such as the disproportionate impacts on women and minorities as well as longevity risk. For women, some participants said that adjusting options for Social Security survivor benefits could help keep some older women from falling into poverty after the death of a spouse. Such changes include allowing the surviving spouse to keep a larger proportion of the couple’s original combined benefits. For disadvantaged minority groups, programs that address discriminatory housing and lending policies could help families build wealth faster. Lower barriers to creating retirement accounts— particularly mandatory minimum deposits of $500 or $1,000 that are too high for many lowerincome workers—could help more Americans get on the savings track. To address longevity risk, the problem of people outliving their benefits, participants generally agreed that some kind of “bump up” in Social Security benefits for retirees over 85 makes sense, although some thought it should be means-tested, or based on need rather than age. Another solution for longevity risk favored by some participants was converting some portion of 401(k) savings into a monthly annuity that would pay until death — a fix that would require changes to laws and regulations that make it difficult for financial firms to offer hybrid financial products of that sort. As a more practical and immediate solution for the “leakage” problem, participants agreed that the government should adopt new rules to make it easier for employees to transfer their accounts between employers so they remain set aside for retirement. At the same time, the government should increase incentives for workers to save in accounts other than retirement accounts, so they have other funds to draw on in case of emergencies. Finally, the one proposal that gained the most overall support from the group was that Congress should establish an independent commission to explore political pathways to shore up the retirement system, including addressing the longterm solvency of Social Security. There has not been a comprehensive government commission to look at the retirement system in

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a holistic way for about 40 years, they noted, a time when pensions were more prevalent, Social Security had a surplus and life expectancy was lower. But with a growing disconnect between the world the retirement system was created for and the world in which Americans are struggling, and largely failing, to save enough for retirement, a complete rethink of retirement is needed on a national level. Perhaps the biggest impact a commission could have would be to draw needed public attention to the retirement crisis. The truth is that ordinary Americans tend not to think about their retirement until they are too close to it to be able to do much about it. Employers tend to focus on benefits of more immediate concern to their employees, such as health care. And public officials are notoriously short term in their focus, rarely spending time and political capital on a policy problem that has been decades in the making and will play out over decades to come. In that light, the simple fact that a high-profile commission is created would have a lot of value in just launching a national conversation on the topic, participants concluded. “It would be very controversial,’’ one participant said of a potential commission. “But these are really serious challenges, and so we need something to jump-start the discussion in a more global way.’’ ■

Perhaps the biggest impact a commission could have would be to draw needed public attention to the retirement crisis.

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POLITICO working group on the Future of Retirement PARTICIPANTS Nevin Adams, chief content officer, American Retirement Association Scott Astrada, director of federal advocacy, Center for Responsible Lending Romina Boccia, deputy director, Thomas A. Roe Institute for Economic Policy Studies and Grover M. Hermann research fellow, Institute for Economic Freedom, The Heritage Foundation

Ida Rademacher, vice president of the Aspen Institute, executive director of the Aspen Institute Financial Security Program Jared Roscoe, senior banking counsel, office of Sen. Mark Warner

Former Sen. Kent Conrad, senior fellow, Bipartisan Policy Center; co-author, “Securing Our Financial Future.”

Aliya Wong, executive director, retirement policy, U.S. Chamber of Commerce

Theodore Daniels, founder and president, Society for Financial Education and Professional Development

POLITICO

Melissa Favreault, senior fellow, Income and Benefits Policy Center, Urban Institute Richard Fry, senior researcher, Pew Research Center Teresa Ghilarducci, Bernard L. and Irene Schwartz professor of economics and director of the Schwartz Center for Economic Policy Analysis, The New School; co-author, “Rescuing Retirement” Cindy Hounsell, president, Women’s Institute for a Secure Retirement

Maura Reynolds, senior editor, The Agenda—moderator Stephen Heuser, editor, The Agenda Ben White, chief economic correspondent Luiza Savage, editorial director, cross platform content

PRUDENTIAL* Stephen Pelletier, executive vice president and chief operating officer, U.S. businesses

Kendra Isaacson, senior pensions counsel, Senate Committee on Health, Education, Labor and Pensions for Sen. Patty Murray, ranking member

Andy Sullivan, senior vice president, head of workplace solutions

Charles Jeszeck, director of education, workforce and income security, U.S. Government Accountability Office   

This report was produced with the support of Prudential. The views expressed do not necessarily reflect those of Prudential.

Cover illustration by Pushart; Photos by John Shinkle

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David John, deputy director, Retirement Security Project, Brookings Institution; senior strategic policy adviser, AARP Public Policy Institute

*Sponsor