Speech by Karen Friedman to the American Council on Consumer Interests (April 15, 2011)

Speech by Karen Friedman to the American Council on Consumer Interests (April 15, 2011)


Hello, I’m Karen Friedman, the Executive Vice President and Policy Director of the Pension Rights Center.  It’s fabulous to be speaking to the American Council of Consumer Interests, because we are fellow travelers on the road to making this country safer and better for consumers.

The Pension Rights Center is the only consumer rights group that works exclusively to protect the retirement rights of workers, retirees, and their families.  You out there are the academics who are studying the field, and we are the advocates who are using your research and that of others to try to, well, to put it modestly…change the world.

Recently, the Center celebrated its 35th anniversary with an event at which we honored an array of retirement security superheroes – including Congressman George Miller, Senator Tom Harkin, and Senator Chuck Grassley – and at which the original consumer advocate, Ralph Nader, spoke.

I delivered the opening remarks, wearing a cape and a mask.  Although it was meant to be funny, I’ll confess something to you:  I harbor a secret fantasy that, one day, I really will turn into a superhero.  I want to be a cross between Wonder Woman and Superwoman, where I can use my super bracelets and my super strength and, of course, my super intellect to solve the world’s problems.  Perhaps I’ll accidentally get these super powers by eating chicken today at the Capitol Hyatt.  Stranger things have happened.

But sadly, rather than being Wonder Woman I fear I have become, in recent months, a little bit more like that crazy character – Howard Beale – from the 1976 movie Network, who screams, “I’m mad as hell and I’m not going to take it anymore!”

You see, I’m mad about everything right now – particularly the current Congress, which is ripping apart the government.  Today, I promise I will keep my private rants to myself, but I am focusing my professional outrage on our nation’s huge retirement crisis – a crisis that must be addressed.

While none of us in this room may be superhuman, I firmly believe that, if we all work together and combine our human powers of creativity, visionary thinking, academic research, and persuasion, we can solve the retirement problem for future generations.

So, let’s put on our capes and our thinking caps and let’s start the exercise!

Today, I’m going to discuss the retirement income problem, talk about why we don’t think incremental approaches are going to be sufficient to address the crisis, and discuss the Pension Rights Center’s efforts to work to design comprehensive solutions for the future.  As you’ll hear later, we started a new campaign with labor unions, think tanks, and consumer and retiree groups called Retirement USA to work towards a new universal, secure, and adequate retirement system on top of Social Security.  And I will talk about our principles and also proposals that meet our principles.  So hold tight!

Let’s start with the problem.  I’m sure you all are aware of the statistics:

  • Fifty percent of the private workforce is not covered by any kind of pensions or savings plan.  That figure has been pretty consistent for the past 50 years.
  • Companies are freezing, terminating and otherwise cutting back their defined benefit plans, replacing these secure, guaranteed plans with 401(k)-type plans.  Back in 1980, one out of two workers participated in defined benefit plans.  Now that figure is closer to one in five.
  • And 401(k) plans – viewed a decade ago as the Holy Grail of retirement – have failed millions of workers.  Even before the stock market crash, half of all households with 401(k) plans and other retirement savings plans had less then $45,000 in their accounts.  For those approaching retirement, the median account balance was just about $98,000 – not much to retire on.

While policymakers have been focused – or shall I say obsessed – with addressing the federal deficit, we think they need to focus on another kind of deficit – what we’re calling the Retirement Income Deficit, which is the gap between what people have saved as of today and what they should have saved by today to meet their basic retirement needs.

Last year, the Center for Retirement Research at Boston College, at Retirement USA’s request, calculated the magnitude of this Retirement Income Deficit as a whopping $6.6 trillion.  To put that in perspective, that’s more than four times the size of the federal deficit in 2009.

To arrive at this RID number, the Center for Retirement Research used the same conservative methodology that it uses to calculate its National Retirement Risk Index.  They only looked at households in their peak earning years, between 32 and 64 years old, and they assumed that people would continue to earn pensions, that they would contribute to 401(k)s at current rates, and that there will be no reduction in Social Security benefits.  They also factored in the value of home equity for retirement income.

$6.6 trillion is an explosively huge number, any way you slice it.

But it’s too easy sometimes to just look at numbers and statistics and forget about the folks behind the numbers.  That’s why the Pension Rights Center and our Retirement USA partners started a story bank on our website to document how this retirement income deficit affects people personally.

We heard from folks like Shareen Miller, a personal health care assistant in Virgina, who is making $12 an hour without health care, pensions, or vacation.  She and her husband have about $100,000 saved in his 401(k) account, and she worries that the entire balance could be wiped out by one health crisis.

Or Karen O’Quinn, who got laid off from corporate America, her husband lost his job, and they lost their house.  They don’t have a dime saved for retirement, and she laments, “I don’t know how I’m going to make it.”

Or David Muse, a sound technician who puts it bluntly, “I will be forced to work until I either fall apart, my health totally crumbles, or I die.  For me there is no retirement.”

Millions of Americans have similar stories and concerns and our story bank has grown over time.

The promise of a secure retirement is central to the American Dream, and American workers have a deeply held passion for that promise.  In a poll done jointly by Time magazine and the Rockefeller Foundation, a majority of people said they would rather have a job with a guaranteed pension than a job with health care benefits (not surprisingly, people overwhelmingly preferred having a job with both a guaranteed pension and health care over getting more money in wages).

In a recent poll done by a major life insurance company, mid-career workers said that their fear of not having enough money for retirement was greater even than their fear of death.

So given all this, how is Congress addressing this issue?  Is it being retiree-friendly?  Working to allay people’s concerns about these issues?

Well…I’d say not.  Unfortunately, it’s just the opposite.  I’d say there’s an all-out assault on retirees – and future retirees.

The first recent assault was by President Obama’s Fiscal Commission, when it announced a proposal last year to cut Social Security – including reductions in inflation protections, increases in the retirement age and reductions in the benefit formula.  These cuts would, if enacted, decimate today’s pre-schoolers by cutting their Social Security by as much 41 percent.  So much for safe-guarding future generations.

While this proposal failed to get the votes it needed for fast-track approval, it is likely to be revived as Congress looks for cost-cutting measures.  This, despite the fact that the Commission’s recommendations would do nothing to save Social Security or reduce the deficit.

As you all know, Social Security is the economic lifeline that millions of Americans rely on to survive, with two-thirds of American retirees relying on Social Security for half of their income, and one-fifth for almost of it.  Despite the reports of doom and gloom, Social Security, without a single change, can pay 100 percent of benefits for the next three decades.  And there are ways of putting Social Security onto a sound fiscal footing far into the future without cuts.

Assault number two:  Congressman Paul Ryan, in his “Pathway to Prosperity” budget proposal, aims to privatize and voucherize Medicare which, according to economist Paul Krugman, will not save money but will only serve to deny coverage to those most in need.

And then there is the assault on public plans.  Although federal and state workers are probably the last bastion of the workforce that can be assured of retiring with adequate and guaranteed income, we keep hearing that public pensions are bankrupting the states.

The reality, however, is quite different.  The vast majority of state and local pension plans are not in crisis and are as well, or better funded, than typical corporate pension plans.  The average pension for public-sector employees – teachers, firefighters, police officers – amounts to only about $22,000 year — and in some states, public sector workers don’t get Social Security.  Only a tiny fraction of retirees in the public sector get six-figure pensions.  Yet policymakers choose to focus on these outliers and hold them up as representative of all public employees, scapegoating an entire system.  And despite complaints from some quarters that there is too much federal intervention on virtually every other issue, when it comes to public plans – where Congress has never been involved – some Congressional members are suddenly chomping at the bit to regulate!


From our perspective, the attacks on Social Security, Medicare and public plans are part of an ideological assault on the whole idea of collective social institutions and shared risk.  Those who ultimately wish to privatize Social Security and voucherize Medicare also want to turn guaranteed pension plans into individual accounts.  This is just one more step in tearing apart the fabric of our social institutions in favor of a so-called ownership society.

The Pension Rights Center believes there has to be a counterweight to the do-it-yourself savings society, where all the risks and responsibilities have been shifted on to individuals.  We see Retirement USA as a way to shift the debate.

Retirement USA’s mega message is:  It’s not Social Security that’s the problem; it’s not public plans that are the problem.  The problem is that the private retirement system is failing, and we need retirement security for all.

Now that’s not to say that the Pension Rights Center has thrown in the towel on the existing system.  No, we are working on both the short-term and the long-term.

In the short-term, the Center is committed to pushing the current system as far as it will go.  In that regard, we have worked to protect 401(k)s by pushing for transparency in fee disclosure and, most recently, by urging that those who give investment advice must work solely in the interests of retirement plan participants.  And we convened the Conversation on Coverage, a seven-year common-ground dialogue with labor and business groups, among others, to develop new approaches to increasing today’s work force’s rate of participation in retirement plans.

However, simply plugging holes in today’s patchwork system is not going to solve the growing retirement crisis in this country.  We have to be practical in protecting today’s workers and yet visionary in developing better solutions for the future.

On this note, there are many in Washington who tell us that we need to face reality and develop modest solutions within today’s retirement system.  After all, we are not likely to reverse trends on defined benefit plans, and we might as well recognize that 401(k) plans are here to stay.  The accepted wisdom among some progressives and some conservatives is that all we have to do to fix the nation’s retirement problems is make 401(k) plans look more like defined benefit plans – by adding automatic enrollment, auto escalation and auto annuitization – and this will be sufficient.

It won’t.  Yes, automatic enrollment will improve participation rates.  And yes, using insights into human behavior will help us design plans that will encourage participants to take at least some of their benefits as annuities.  But these types of incremental improvements to our system make up only a modest – and inadequate – response to basic structural deficiencies of 401(k) plans.

Consider these facts:

  • 401(k) plans were never designed to be retirement plans.  They were originally set up to allow executives – particularly those in banking – to defer taxes on all or a portion of their year-end bonuses.  The modern 401(k) plan did not come into being until regulations were passed during the Reagan Administration, which gave them the green light.
  • While 401(k)s can work well as supplemental savings plans, they do not work as a primary retirement vehicle for most Americans.
  • 401(k)s, unlike defined benefit plans, put all the risks and responsibilities on individuals, who have to have to decide whether to participate, decide how much to contribute, decide where to invest their money, resist the temptation to use plan assets before retirement, and then figure out how to make their money last in retirement.  That’s a lot to put on individuals in a stagnant economy, when they are worrying about keeping a job, paying for escalating health expenses, paying for the house, and paying for their kids’ education.
  • And here’s another point to consider:  tax-favored retirement plans cost taxpayers more than $130 billion in lost revenue in 2009.  As you probably know, more than 70 percent of tax breaks go to households in the highest income quintile – those who need the least help in saving.  A provocative question and one that is being considered even by this pro-tax-cut Congress is, is this an efficient use of taxpayer money?

Let’s go through automatic features and look at the pros and cons of each approach.

Sure, automatic enrollment in 401(k) plans – where individuals’ money is automatically deposited into a retirement savings account unless they opt out – will increase participation for many, by virtue of simple inertia (this is something that behavioral economists – such as many of you – have already figured out).  And we think that is an important step forward.  However, we have not seen data (and perhaps you all have it) that shows the long-term impact of this practice.  Once people are in, will they stay in?  And if they need the money, we fear that they will take it out and then be hit with the 10 percent penalty tax, which will hurt lower-income workers the most.

Already, reports abound of how leakage from 401(k) has increased due to the economic collapse. A 2010 Fidelity report showed an increase in both 401(k) loans and hardship withdrawals in 2009 – and they reported that 2009 saw the highest incidence of loans in 10 years.  And many of these loans will never be paid back.  According to Fidelity, folks are taking out the money to prevent foreclosure, to pay for college, and to purchase a home.  I’m sure that, with stagnant wages and a dismal job market, many more people are using this money to cover immediate costs.  So while auto enrollment may be good for getting money in, how do we get people to keep it in?

Also, while changes in the law made it easier and more efficient to for companies to offer auto enrollment, many employers still do not use this practice.  Even if they do, this only helps individuals in that plan and does not make participation universal by a long shot. President Obama has proposed a universal auto IRA to try to bridge the coverage gap between those who have employer plans and those who don’t.  While we applaud the administration’s efforts in addressing this issue, we would say that this proposal is insufficient for providing all, or even most, American workers with a secure and adequate pension.

Also the issue of where to invest the money is supposed to be addressed by offering safe-harbor default investments that are professionally managed and in which the money is automatically invested in age-appropriate investment portfolios.  Even with these defaults, we worry that high fees will eat away at account balances.  And of course, some people will pass up the default investments and make costly errors in their investment allocations.

And there’s the question of adequacy.  We are skeptical that even those 401(k) plans that have automatic escalation features – which generally start with three-percent contributions and increase to six percent – will result in income adequacy for most retirees, particularly those in the lower income rungs or even middle-class workers.

A study by the Center for Retirement Research suggests that there may be a correlation between employers dropping or reducing their 401(k) match, once they adopt automatic enrollment because more people are participating and higher enrollment means higher costs.

As for making money last, even for those who have done everything right, that’s another big challenge.  Some talk about “automatic annuitization,” but this raises a can of worms.  Do individuals trust giving their retirement savings to an insurance company, given the recent financial melt-down?  And should they give all of it or some of it?  Products offered by insurance companies have hidden fees and can be confusing to understand.  We would love to see any research you have done on these questions, and there are a range of other issues I can discuss in the Q&A.

So, while making 401(k)s look more like DB plans sounds good, it is hardly a panacea.  These proposals will help some people save more, but none of these approaches will result in universality, security, or adequacy.

That’s why we started Retirement USA with the AFL-CIO, the Economic Policy Institute, the National Committee to Preserve Social Security and Medicare, and the Service Employees International Union.

We decided it was high time to start a national discussion on the need to develop a better retirement system to supplement Social Security.  After studying systems in other countries and proposals and programs here in the United States, Retirement USA developed 12 principles for a new retirement system.  These principles borrow from the best parts of defined benefit pension plans and 401(k) savings plans, and include some additional features.  And I am pleased to report that 23 other progressive organizations have signed on in support of Retirement USA’s principles, including Public Citizen and the National Consumers League.

We have three overarching principles that we believe should guide the reshaping of our pension system for future generations of workers.  These are 

  1. Universal Coverage. Every worker should be covered by a retirement plan. A new retirement system that supplements Social Security should include all workers unless they already are in plans that provide equally secure and adequate benefits. 
  2. Secure Retirement. Retirement shouldn’t be a gamble. Workers should be able to count on a steady lifetime stream of retirement income to supplement Social Security. 
  3. Adequate Income. Everyone should be able to have an adequate retirement income after a lifetime of work.  The average worker should have sufficient income, together with Social Security, to maintain a reasonable standard of living in retirement.

Other principles include 

  • Shared Responsibility.  Retirement should be the shared responsibility of employers, employees and the government. 
  • Required Contributions.  Employers and employees should be required to contribute a specified percentage of pay, and the government should subsidize the contributions of lower-income workers.
  • Pooled Assets.  Contributions to the system should be pooled and professionally managed to minimize costs and financial risks.
  • Payouts Only at Retirement.  No withdrawals or loans should be permitted before retirement, except for permanent disability.
  • Lifetime Payouts.  Benefits should be paid out over the lifetime of retirees and any surviving spouses, domestic partners, and former spouses.
  • Portable Benefits.  Benefits should be portable when workers change jobs.
  • Voluntary SavingsAdditional voluntary contributions should be permitted, with reasonable limits for tax-favored contributions.
  • Efficient and Transparent Administration.  The system should be administered by a governmental agency or by private, non-profit institutions that are efficient, transparent, and governed by boards of trustees that include employer, employee, and retiree representatives.
  • Effective Oversight. Oversight of the new system should be by a single government regulator dedicated solely to promoting retirement security.

Two years ago, Retirement USA issued a call for proposals for a new system, and we received 25 that meet some or all of our principles.  Six of these were featured at a conference we held in October 2009 that featured the Labor Secretary and the heads of all the major labor unions.

Certainly an expanded Social Security program meets all of the core Retirement USA principles other than “adequacy.”  All of the organizations participating in Retirement USA believe that if there were the political will to do so, expanding Social Security so that it could provide an adequate level of income would be the most efficient and effective way of strengthening workers’ retirement security.

But we recognize that our tradition of providing retirement security in America has been a mix of public and private systems.  For that reason, our principles focus on features that we believe must be part of a new private system to supplement Social Security.

Here are an array of interesting proposals and existing programs that meet many or all of our principles (longer descriptions are available):

  • TIAA-CREF:  TIAA, the plan set up by Andrew Carnegie for college teachers, is portable, is employer-paid, uses pooled investments, and generally pays benefits out as lifetime annuities.
  • Guaranteed Retirement Accounts (GRA):  Developed by Teresa Ghilarducci and the Economic Policy Institute, the GRA proposal mandates a five percent of earnings contribution split between workers and employers, with the employee’s share reduced by a refundable tax credit to cover the cost of the contribution for lower-income workers.  The plan would guarantee a minimum three percent annual return adjusted for inflation, and the amount would be paid out as an annuity.
  • The ERISA Industry Committee, the primary business association representing big corporate plans, has proposed the Guaranteed Benefit Plan, in which workplace contributions would be pooled; the principal would be guaranteed and independent  administrators would administer these plans and benefits would be payable only at retirement as annuities. Of course this would voluntary not mandatory.
  • We also examined systems in other countries. A growing number of companies in the Netherlands are adopting what they call Collective Defined Contribution Plans in which contributions are pooled, professionally invested, and paid out only at retirement as inflation-adjusted annuities.  The unique feature of these plans is that the employees and retirees collectively share the risk of investment loss and the costs of longevity gains.
  • In the Australian Superannuation System, all employers contribute nine percent of their employees’ pay to a financial intermediary, which can be either a for-profit or non-profit institution, which invest and administer the funds. As in the Netherlands and most other countries with private retirement plans, the boards of trustees of the institutions include both employees and employers.

What differentiates most of the systems described above from proposals to modify existing 401(k) plans or IRAs is that the former require contributions to be pooled and paid out only at retirement in the form of lifetime payments.  These systems eliminate or minimize the amount of investment and mortality risk shouldered by individual workers.  They also all try in some way to achieve a measure of adequacy.

While the Pension Rights Center is still committed to improving the current system, the evidence is clear that workers need more than just more patches on our already-patchwork retirement system.

It is time to recognize that tinkering around the edges is not enough.  We need a system that shares risks and responsibilities.  We need a system that takes the best of 401(k) plans – portability and simplicity – and combines that with the best of traditional pension plans – security and lifetime payments.

We would love to work with you and I look forward to hearing your questions and comments.  Now I am going to have lunch to see if I really can turn into a superhero.

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