A Revolutionary Retirement Plan?

New York's New School of Social Research recently put out a blog comment, Teresa Ghilarducci’s Revolutionary Retirement Plan:

Americans do not have enough saved for retirement. In 2013, 28 percent of families had no retirement savings at all. Among those who do have some savings in their retirement accounts, the median balance for families nearing retirement is only $12,000.

In addition, the number of employers offering their workers retirement savings plans at work is declining. Between 1999 and 2011, the availability of employer-sponsored retirement plans in the United States fell from 61 percent to 53 percent. When employers do offer plans, they are more likely to be defined contribution plans in the form of a 401(k) than a traditional pension. These plans come with high risk, high fees, and large penalties for early withdrawals, all of which erode workers’ total savings.

These savings and coverage rates foretell a coming retirement crisis in the United States. Without enough retirement income, 16 million retirees will live in poverty or at near-poverty levels by 2022.

To prevent seniors from experiencing deprivation in their golden years, Teresa Ghilarducci, director of the Schwartz Center for Economic Policy Analysis and professor of economics at The New School for Social Research, has proposed a simple yet radical solution. The Retirement Savings Plan (RSP) she co-authored with Blackstone President Tony James proposes to create Guaranteed Retirement Accounts (GRAs). The proposal would require employees and employers to contribute 3 percent of a worker’s salary to an individually owned GRA. Employees and employers would contribute 1.5 percent each, and savings would be managed by professional portfolio managers. By prohibiting early withdrawals, GRAs would ensure that savings could be invested in long-term investments, which earn higher rates of return than short-term 401(k) investments.

Under a 401(k) plan, retirement savings are paid out in a lump sum, and retirees must determine how much money they should be using each year, leaving people vulnerable to outliving their savings. Under GRAs, when workers retire, their savings are paid out in an annuity, a guaranteed monthly payment for the rest of their lives, so that they don’t need to worry about budgeting correctly or outliving their retirement funds.

The plan is deficit neutral and will not cost the government additional funds. Rather, the plan calls for redirecting current tax deductions to better support retirement savings for those who need it most.

“Our ‘do-it-yourself’ retirement system is a failed experiment that has left Americans at risk of experiencing downward mobility in their golden years,” says Ghilarducci. “The GRA proposal is a no-cost solution to ensure that millions of Americans can retire after a lifetime of work without the risk of falling into poverty.”

Other nations have adopted similar plans, including Britain and Australia. The plans have seen varying measure of success, and time will tell if this can sway public opinion here in the United States. Ghilarducci’s plan is a solution that can prevent the impending crisis.

First, let me agree with professor Ghilarducci, the United States of pension poverty is experiencing a massive retirement crisis, one that will impact aggregate demand for decades to come (people retiring in droves will spend less as when they retire in poverty).

Second, she's absolutely right, the brutal truth on defined-contribution plans is they don't work and leave millions of people vulnerable to the vagaries of public markets. Moreover, the great 401(k) experiment has failed and it's high time Congress stops sucking up to Wall Street, nuking pensions and facilitating their mass looting, and addresses the ongoing retirement crisis with real long-term solutions.

Third, the demise of the Central States Pension Fund which I discussed earlier this week when I covered pensions and the Wall Street mob, should serve as a wake-up call to millions of Americans who naively think their workplace pensions are safe and managed properly.

Fourth, even traditional defined-benefit plans are at risk in the United States. The deflation tsunami will decimate all pensions, especially those that are chronically underfunded. Some states, like Michigan and Alaska, have given up on defined-benefit plans, closing them for "cheaper" defined-contribution plans that aren't backed by taxpayers (a dumb move that will ensure more pension poverty in these states).

So, I agree with Teresa Ghilarducci, there is a big problem but I fundamentally disagree with her solution to America's retirement crisis which she proposes in a paper she co-authored with Blackstone's Tony James.

You can read my thoughts here but basically any solution which is being peddled by Blackstone will benefit mostly Wall Street, not Main Street, ensuring the quiet screwing of America continues (and if you want the truth, even Fidelity slapped Blackstone this week, pulling out of its fund of hedge funds mutual fund, forcing its shutdown).

More specifically, I take issue with claims that this revolutionary retirement plan is "deficit neutral". Really? So people are going to be investing in products that are mostly based on the whims and fancies of public markets and when they retire, they will convert their savings into annuities which will lock them into ultra low rates for years? And this is deficit neutral? All this will do is ensure more pension poverty and higher social welfare costs down the road (raising the debt and deficit).

I think Tony James and Teresa Ghilarducci need to study Canada's Top Ten pensions more closely to understand the benefits of large, well-governed defined-benefit pensions.

What is my solution to America's great retirement crisis? I discussed my ideas in an older comment on Teamsters' pension fund:

Let be clear here, I don't like multiemployer pension plans because they are poorly governed which is why many risk insolvency unless comprehensive reforms are implemented. But the problem here is much bigger than multiemployer plans. U.S. retirement policy needs a drastic overhaul to properly cover all Americans, most of which have little or no savings whatsoever.

I've shared some of my thoughts on what needs to be done when I examined whether Social Security is on the fritz:

...politics aside, I'm definitely not for privatizing Social Security to offer individuals savings accounts. The United States of pension poverty has to face up to the brutal reality of defined-contribution plans, they simply don't work. Instead, U.S. policymakers need to understand the benefits of defined-benefit plans and get on to enhancing Social Security for all Americans.

One model Social Security can follow is that of the Canada Pension Plan whose assets are managed by the CPPIB. Of course, to do this properly, you need to get the governance right and have the assets managed at arms-length from the federal government. And the big problem with U.S. public pensions is they're incapable of getting the governance right.

So let the academics and actuaries debate on whether the assumptions underlying Social Security are right or wrong. I think a much bigger debate is how are they going to revamp Social Security to bolster the retirement security of millions of Americans. That's the real challenge that lies ahead.

Yes folks, it's high time the United States goes Dutch on pensions and follows the Canadian model of pension governance as well as implements a shared risk pension model to ensure the sustainability of defined-benefit plans.

A truly revolutionary retirement plan would enhance Social Security and have it managed by one or several large, well-governed public pension funds backed by the full faith and credit of the U.S. government. 

If U.S. policymakers stay the course, they will have a much bigger problem down the road. Already, massive inequality is wiping out the middle class and as thousands retire with little or no savings, it will only ensure that once deflation comes to America, it will be here for a very long time. And this means rates will stay low for years (never mind what Jamie Dimon states publicly, privately he's petrified of this deflation scenario).

On that note, I leave you with an older clip where Jeffrey Gundlach, CEO of DoubleLine Capital, discusses investor activism, interest rates, Apple's future, and high-yield bonds with Bloomberg's Tom Keene. Listen carefully to Gundlach, he provides great insights here.