New Report on Maryland's Retirement Outlook

Today, my SCEPA research team joined me in releasing a study, "Are Maryland Workers Ready for Retirement," documenting a downward trend in both employer sponsorship of retirement plans and employee participation rates in Maryland from 1995 to 2012, making it increasingly difficult for workers to prepare for retirement.

In 2010, 49% of Maryland's workers – 1.25 million residents – were not participating in an employer-provided retirement plan. The lack of access has immediate implications for those nearing retirement: 41% of households headed by someone near retirement age (55-64 years old) will have to subsist almost entirely on Social Security income or will not be able to retire at all due to negligible savings.

SCEPA's research attributes the downward trend in workers' financial security in retirement to three factors:

1. A drop in employers' sponsorship of retirement plans for their workers. From 2000 to 2010, the availability of employer-sponsored retirement plans in Maryland declined by eight percentage points, from 67% to 59%.

2. A shift away from traditional pensions, which are mandatory, defined benefit pension (DB) plans, to 401(k)-type defined contribution (DC) plans. Only 36% of workers aged 25-44 have a DB plan as their primary employer-sponsored retirement plan, compared to 43% of workers aged 45-54 and 53% of those aged 55-64. Based on financial data from the U.S. Census Bureau, the report concludes that those with DB plans are more likely to maintain a middle class lifestyle throughout retirement, whereas those with only DC plans will need to consider selling their homes to obtain adequate retirement income.

3. A lack of participation in voluntary defined contribution plans. Of the 59% of workers who had access to a retirement plan at work, 14% did not participate, either due to personal choice or structural rules that exclude part-time workers, those with under a year of service, or those under 25.

The report broke down the trend by age, race, and industry:

AGE: Workers between 25 and 44 had the largest drop in sponsorship - 13% - among all age groups surveyed, suggesting this downward trend will continue as the population ages.

RACE: Hispanic workers lost the most ground with a 20% decline in sponsorship rates, more than double the decline of 9% experienced by White and Black Non-Hispanic workers.

INDUSTRY: Traditionally, large employers offer more benefits. However, firms with 500 to 999 employees showed the biggest proportional drop in sponsorship of 16%. They also had the largest absolute decline, dropping from 75% to 63%.

SCEPA recently testified at a hearing in the Maryland House of Delegates regarding legislation sponsored by Delegate Tom Hucker that would increase access to a retirement savings plans by giving workers the option of opening an individual Guaranteed Retirement Account (GRA) through the existing Maryland State Retirement and Pension System. A similar bill, sponsored by Senator Jim Rosapepe, would establish a Maryland Private Sector Employees Pension Plan.

The Guaranteed Retirement Account (GRA) is based on Ghilarducci's STATE GRA plan, which was recently enacted in California. The proposal takes advantage of existing financial infrastructure in the state to give private sector workers access to the best financial managers and the lowest fees. The accounts would be separate from public sector retirement funds and come at no cost to taxpayers—workers would pay administrative fees. Since these are individual retirement savings accounts, there is no liability to the state. Workers take out what they and their employer put in, plus the returns they earn. Private capital markets offer expensive retirement accounts with high fees to lower income workers because the sums invested are low. By pooling the money from many private sector workers, the Maryland State Retirement and Pension System can invest in longer-term opportunities with higher rates of return and charge lower fees.

Industry Report Debunked

Blowing Smoke at the Retirement Crisis
This blog was written by Teresa Ghilarducci and Joelle Saad-Lessler and originally published by the Huffington Post on December 21, 2012.  

The lobbying group for the mutual fund companies surprised Americans with a report that declares all is well with their retirement income security. The Investment Company Institute's (ICI) December report, "The Success of the U.S. Retirement System," asserts that the retirement system adequately prepares Americans for a comfortable retirement.

We know that private groups often bend the truth closer to their interests, and ICI is paid to make 401ks and IRAs look good. But the degree that ICI distorts the truth in this report defies convention and common sense.

So let's take a closer look at the assertions made in ICI's report and figure out how they tortured the data until it gave them the findings they wanted.

First, ICI goes so far as to claim that the switch from defined benefit (DB) type pension plans to defined contribution (DC) type plans leaves workers better prepared for retirement. However, workers are better off if their employer shoulders the risk and guarantees a pension for life in a DB plan, rather than putting their savings in a DC account that is subject to the gyrations of the market. They are also better off if their employer contributes towards their retirement, if they can pay lower fees, and if their money is professionally managed -- all of which are attributes of DB plans and absent in DC plans.

Second, they compare the poverty rate among older Americans in 2011 to what it was in 1966. Notice their choice of time period. Most of the improvements in poverty accrued from 1966 through the early 1980s, before defined contribution plans proliferated. In fact, if the economists at ICI really wanted to prove that defined contribution plans leave retirees better off than defined benefit plans, why not compare the poverty rates for those two types of retirees?

Third, they use survey data that finds that younger households save for priorities such as education and housing, and only start saving for retirement later in life. They claim this is adequate based on simulations where a married couple household earning $87,000 begins saving at age 37 using a 401k-type private account and makes "moderate" contributions. According to their simulations, this household can expect to replace 93 percent of its pre-retirement consumable income in retirement. However, they assume employees will contribute 6 percent of their income (which they sustain until age 65), with a 3 percent employer match rate. With a median employee contribution rate of 2-3 percent, these simulations are unrealistic. This is especially true considering that close to half the workforce does not have access to any type of retirement account at work, and for those that do, more and more of their employers are dropping their match.

Fourth, ICI reports that 81 percent of near-retiree households have pension savings. However, they fail to mention the puny amounts accumulated. According to their numbers, median retirement assets for households earning $30,000-$54,999 were only $4,300, while households earning $55,000-$79,999 had a meager $28,000. It is a heroic overstatement to consider these sums an indication of a success story.

We and other retirement economists have been doing our best to alert Americans to the inadequacies of the U.S. retirement system to avert a retirement crisis. We are trying to fix a broken system while ICI is busy blowing smoke to divert attention from the problem. No one gains from maintaining the current system, except the investment companies that make a profit on the high fees they charge unsuspecting workers trying to save enough to escape the clutches of poverty in retirement.

Shame on you, ICI.

Retirement Tax Breaks: The Need for Reform

The New York Times today unveiled a thoughtful series on the deficit, Debt Reckoning: The Fiscal Deadline in Washington. In "Study Questions Tax Breaks' Effect on Retirement Savings," economic policy reporter Annie Lowrey identifies the lopsided and ineffective tax breaks for retirement accounts as a major contributor:

"Every year, the federal government spends more than $110 billion on tax deductions to encourage Americans to save more for retirement. A new study suggests such provisions may have little effect on the amount Americans save." That's because they go to people who least need the help!

We agree that these tax breaks are ineffective in raising retirement savings and benefit the highest earning tax payers (read SCEPA's analysis of retirement tax expenditures). But instead of eliminating them, we should rearrange retirement tax deductions into a tax credit. This would allow every American to set aside money in a retirement account of his/her own. If we cut the retirement tax expenditure and merely use it to reduce the government debt, we will still face an overwhelming retirement income debt that will result in a retirement crisis (the gap between what Americans need for an adequate retirement and what they have is close to $6 trillion, according to Anthony Webb at Boston College's retirement Research Center).

America's debt crisis has forced Congress to re-evaluate and possibly reform the tax code. They should use this opportunity to restructure the tax code to solve the upcoming retirement crisis.

For further investigation into this topic, below is video of a forward-thinking event hosted by SCEPA and the New America Foundation in 2009 that asked academics and lobbyists to defend and critique three major tax breaks – those for retirement, housing and employee health care. You can also read Lauren Schmitz's analysis of the costs of these tax expenditures at the state level.

Reform at the State Level: Report on State GRA's

With the recent passage of California legislation that creates retirement accounts for private workers, states are taking action to expand retirement security. I am working closely with state elected officials to support similar efforts across the country. Below is a summary of a new report on my state plan for reform, known as State GRA's.

STATE GUARANTEEDRETIREMENT ACCOUNTS: A Low-Cost, Secure Solution toAmerica's Retirement Crisis

The share of workers without any retirement plan at work has risen dramatically over the past decade. The percentage of workers whose employer did not sponsor any type of retirement plan rose from 39 percent to 47 percent—a 21 percent increase. This alarming trend is a call to action for state and local policymakers who want to prevent old age hardship by ensuring all workers can invest adequately, efficiently, and safely for their own retirement.

We propose states offer all workers a voluntary, low-fee, low-risk, State Guaranteed Retirement Account (State GRA) to help boost savings for retirement. State GRAs are individual accounts where benefits at retirement are based solely on contributions and returns.

THE STATE GRA'S MAJOR FEATURES ARE:

Consistent contributions: as in a 401(k)-type plan, workers and/or their employers would contribute at least 3 percent of pay into their individual State GRA. Contributions could be channeled through the already-existing payroll deduction system, reducing administrative burden and minimizing costs.

Pooled investments: all individual account assets would be invested together in one large pool, with an emphasis on low-risk, long-term gains. Pooling takes advantage of economies of scale and minimizes financial risks.

Guaranteed returns: each account would be guaranteed to earn a return of at least 3 percent, or about 1 percent above inflation, protecting funds from the volatility of the stock market. Because funds are invested in longer-term assets as one large pool, the risk and costs associated with insuring the minimum guarantee would be negligible, and could be backed by private insurance contracts without posing any risk to the state or employers.

Portable accounts: Individual State GRAs would be portable; the account would automatically move with a worker from job to job.

Lifelong retirement income: at retirement, workers would convert all or part of their State GRA balance into an annuity—a guaranteed stream of income for life—to ensure that they do not outlive their savings.

Independent administration: a newly created independent board of trustees would oversee the plans' operations. The board would assume all fiduciary responsibility for the fund's investment decisions and administration.

Public investment management: costs could be minimized by using the already-existing public pension infrastructure to invest the funds. State pension funds operate on a not-for-profit basis and have highly skilled, professional investment managers and administrators that are charged with overseeing and investing more than $3.1 trillion in retirement savings. Assets in State GRAs would be kept in a separate investment pool from public pension fund assets.

California Governor Signs Reform Bill into Law

I'm happy to announce that California Governor Jerry Brown signed the California Secure Choice Retirement Savings Trust, SB 1234, into law. The Act will expand access to retirement savings plans to the 6.3 million private sector workers who currently have do not have access to a retirement plan through their employer. The law creates the first retirement savings plan for private-sector employees administered by the state.

Statements of support for the law from State Senator Kevin de Leon, who co-sponsored the bill, and the National Conference on Public Employee Retirement Systems (NCPERS) are available online. Articles from the New York Times, which recently came out in support of the law, the Sacramento Bee, and 89.3 KPCC Southern California Public Radio also cover this landmark legislation.

The California Secure Choice Retirement Savings Program will provide a low-fee, low-risk savings vehicle that would be a win-win for employers and employees in the state. Employers will not have to worry about fiduciary or administrative duties; they will have to do nothing more than send a small percentage of an employee’s paycheck via payroll deduction into the new program, unless the employees opt out. Employees will have an efficient way of saving for retirement through the workplace.  The new savings program would achieve economies of scale that would be passed on to employees in the form of lower fees without adding to the state’s pension obligations. The state must conduct a feasibility study before implementing its plan.

When half of the workforce has no retirement plan, it is more important than ever that we come up with innovative solutions – and the states are at the forefront of this fight. I hope they will be an incubator for a comprehensive national solution.  Guaranteed Retirement Accounts served as a model for the California legislation.

On September 14^th, the Pension Rights Center, SCEPA, and Dēmos, a New York-based advocacy nonprofit, hosted a forum with state officials to discuss proposals to expand pension coverage for private sector workers at the state level. Titled “Retirement Security for All: A Forum for State Action,” the event included officials from California, Connecticut, New York, North Carolina, Pennsylvania, and Rhode Island. With an emphasis on collaborative reform efforts, the forum was an acknowledgement of the increasingly urgent need to address a lack of retirement security.

Earlier this year, Massachusetts became the first state in the nation to pass a state-administered retirement plan for the private sector. Its plan covers employees at nonprofit organizations, while California’s plan would cover any eligible private-sector worker. Other states and New York City are considering similar arrangements.

The Retirement Savings Drain: Hidden and Excessive Costs of 401(k)s

Demos, a nonprofit advocacy group and a SCEPA partner on retirement security, published a report "The Retirement Savings Drain: Hidden and Excessive Costs of 401(k)s." Written by Policy Analyst and New School PhD student Robbie Hiltonsmith, the report reveals the excessively high fees and costs associated with 401(k) retirement plans that are hidden from plan holders. Hiltonsmith finds that the average two-member household will lose over $150,000 over their lifetime from their retirement savings to pay these fees - without their knowledge. More than 40 media sources and columns have covered the report, including an exclusive with Consumer Reports and pieces inReuters and the New York Post, among others. The media coverage has hinted toward other possibilities for retirement income security such as Guaranteed Retirement Accounts(GRAs). "What we need is a low cost set-it-and forget-it option," Hiltonsmith says. "You get your four percent return, the balances don't go up and down like a yo-yo and at retirement you get all or part of it as an annuity."

On June 20, 2012, Hiltonsmith appeared on Fox Business Network's Willis Report to discuss the dangers of hidden 401(k) fees. He says, "someone's going to be retiring off these 401ks but it's not going to be the ones saving."

California Senate Approves Bill Creating GRAs

On May 30, 2012, the California State Senate passed bill SB1234. The legislation would create a statewide retirement program for private workers, targeting those who are not covered by a retirement plan at work. The proposal is based on my State GRA plan, and is now in the hands of the California Assembly.

The bill's sponsor, Sen. Kevin de Leon, D-Los Angeles, said before the vote, "We have an opportunity to pull together this very fragmented population, pool their resources together and hopefully we can compound with a solid interest over the course of many horizons and have something for them left during their retirement."

CBS MoneyWatch: Bill Creates State Retirement for Private Workers

Sacramento Bee: California Senate Votes for Private Retiree Plan

Read more here:http://www.sacbee.com/2012/05/31/4527625/california-senate-votes-for-private.html#storylink=cpy

NYC Comptroller Announces Support for NYC Retirement Accounts

Today I joined with New York City Comptroller John C. Liu to announce a new pension plan for the city. NYC Personal Retirement Accounts (PRAs) will help provide retirement coverage for the nearly two million workers in New York City without access to retirement benefits through their employers.

The NYC PRA proposal is based on my State GRA plan that is now being considered by the California state legislature. The plan would pool employee and employer contributions into retirement funds that would be managed and invested by the Bureau of Asset Management (BAM), a unit of the New York City Comptroller's Office. BAM is responsible for overseeing the investments of New York City's five employee pension funds.

A recent report by SCEPA and the Comptroller's Office, "Are New Yorkers Ready for Retirement?," found that more than one-third of New York City households near retirement age will have to subsist almost entirely on Social Security income because they have less than $10,000 in liquid assets.

"Our city is already experiencing the early stages of a burgeoning retirement crisis. Reports indicate that the number of elderly people in New York City's homeless shelters shot up 55 percent over the last ten years. Half of that increase occurred in the last two years alone," said New York City Comptroller John C. Liu. "If we don't help people save for retirement during their working years, the later strain on the city's social services will be overwhelming," Comptroller Liu added. "We are not, nor do we want to be, a city that lets our retirees go hungry and homeless. Teresa's idea for New York City Personal Retirement Accounts will help workers attain a dignified retirement," he said.

NYC PRAs would supplement Social Security—which currently averages $1,200 per month—and significantly boost retirement income for participants. NYC PRAs would be portable and employees could opt-out of the program at any time. Self-employed workers and freelancers, a notable portion of the New York City workforce, would also be allowed to participate.

The proposal grants legal indemnity for fiduciary responsibility to participating employers. Benefits would be insured by the federal Pension Benefit Guaranty Corporation, which covers traditional pension plans currently in place in the private sector.

While NYC PRAs do not require any taxpayer funds, they could potentially reduce the burden on social services for seniors who lack retirement income and deliver significant governmental budgetary savings.

FACTS: NYC Personal Retirement Accounts

THE CHALLENGE

Because benefits from Social Security average only about $1,200 per month, many American workers rely on employer-sponsored retirement plans to supplement their income in their senior years. These retirement plans have played a vital role in reducing the risk of lowered standards of living and poverty during retirement—but recent research has shown that employers are becoming less likely to offer them.

A January 2012 report by the New York City Comptroller's Office and the Schwartz Center for Economic Policy Analysis found that between 2000 and 2009, the percentage of employers in New York City sponsoring a retirement plan for any of their employees fell by 8 percentage points, from 48% to 40%. As a result, a growing group of New Yorkers is at risk of facing significant economic hardship in retirement. Currently, more than one-third (36%) of households in which the head is near retirement age (55-64 years old) will have to subsist almost entirely—and more than 50% primarily—on Social Security income, or will not be able to retire at all due to having liquid assets of less than $10,000.

In workplaces where employers still offer retirement benefits, plans are most commonly defined contribution (DC) plans, where each worker has an individual account such as a 401(k). Many DC plans charge high fees that eat away at returns, require workers to choose from a complicated menu of investment options, and are vulnerable to painful losses in bear markets. Since most retirees do not convert their lump-sum DC savings into annuities, they also risk prematurely exhausting their assets.

THE SOLUTION

Nearly two million private sector workers in New York City do not have access to a retirement plan through their employer. For workplaces where no retirement plan currently exists, New York City Personal Retirement Accounts (NYC PRA) would pool employee and employer contributions into professionally-managed retirement funds, significantly boosting retirement income for participating workers.

WHAT THE NYC PRA OFFERS PRIVATE SECTOR EMPLOYEES:

• Full portability.
• Low fees due to economies of scale.
• Higher returns from professionally managed investments.
• Reduced risk of outliving retirement savings by providing a lifetime annuity.
• A significant supplement to Social Security. In some cases, employees would experience a more than 50% increase in retirement income.
• Guaranteed employer match.
• Automatic enrollment with the ability to opt-out at any time.
• Self-employed workers would be allowed to participate.

WHAT THE NYC PRA OFFERS EMPLOYERS:

• The ability to offer retirement benefits to their workers at a low cost.
• A choice between offering their own employer-sponsored retirement plan, such as a defined benefit or a 401(k) plan, and enrolling employees in the NYC PRA.
• Legal indemnity from fiduciary responsibility and benefits insured by the Pension Benefit Guaranty Corporation.

WHAT THE NYC PRA OFFERS TAXPAYERS:

• Retirement benefits without reliance on taxpayer dollars.
• Potential government budgetary savings by lowering the burden on social service agencies to provide for seniors who lack retirement income.

Tax Expenditures Die Hard

Eduardo Porter summarizes his point in today's Economic Scene column in the New York Times when he states, "Tax expenditures die hard."  As an economist, I have long called for reform, working to raise the issue during the many deficit commission and budget negotiations since the 2008 recession took over the nation's headlines. As Porter correctly notes, a little sunshine on tax expenditures could be a game-changer in terms of who gets what from Washington.

Porter echoes my argument that tax expenditures are both inefficient and regressive through his analysis of the lopsided effects of $1.1 trillion in tax breaks that are designed to promote social policy - like housing, medical insurance and retirement savings- but operate through the back door of the budget. Because these tax breaks – or foregone tax revenue – never see the light of day in a budget hearing or as part of the annual appropriations process in the U.S. Congress, it often goes unnoticed that they don't work.

In April of 2007, SCEPA co-hosted "Tax Expenditures and Social Policy: Are We Getting Our Money's Worth?" with the New American Foundation. The event focused on three of the largest tax expenditures in the U.S. budget: the health care premium exclusion, the home mortgage interest deduction, and the retirement plan exclusion. SCEPA next went directly to Capitol Hill, holding a briefing for lawmakers, their staff and advocates in October of 2010. David Walker, former Comptroller General of the U.S., called for the need to implement statutory budget controls that address tax preferences, and and Eric Toder of the Urban Institute presented data supporting the fact that the well-off are more likely to benefit.

Retirement savings tax breaks are particularly lopsided. Rather than increasing retirement plan coverage and savings rates, most of these subsidies go to high earners who already have adequate retirement savings and can simply shift savings to tax-favored accounts. A 2005 GAO report cites research showing that no more than 9% of savings under the IRA tax expenditure are new savings engendered by the program. Taxpayers in the highest-earning 20% claim nearly 80% of the total benefits of entitlement programs for retirement accounts. If the total sum of these tax breaks were turned into tax credits, every taxpayer would receive $600 per year.

This behind-the-scenes tradition trickles down to the states. With little fanfare or acknowledgment, many states pass through these tax breaks. In Connecticut, New York and California, a credit would yield an extra $53, $158, $145, respectively. This means that on top of a federal tax credit, taxpayers in New York could receive as much as $758 per year to contribute to their retirement account. This may not sound like much, but it would be seed money for the workers who need it most: those that have little to no retirement savings.