Can Americans Retire? (Part II)
by Tim Williams
In part one of my interview with National Institute on Retirement Security Director Diane Oakley, I mentioned that the Obama administration is endorsing an automatic IRA. The plan would mandate employers who do not already offer savings plans to provide a government-approved private alternative, with automatic enrollment.
This is in many ways similar to the Affordable Care Act, also proposed in part by the conservative Heritage Foundation, and is a compromise from a more government-involved and subsidized proposal from the Clinton era. It’s now mostly opposed by conservatives and industry groups.
Investment firms don’t want to offer plans to low-income workers, who they say will add to management costs without generating enough revenue.
Can this proposal succeed in an environment of obstruction? We discuss this question, the more modest federal myRA, the Rule of 72, younger workers’ view of retirement, and the problems of tying wealth to people’s homes — which Oakley’s mother has faced.
If an employee does have to have a defined contribution plan, what are the best practices for that to encourage both participation and sufficient participation?
I think, number one, having a plan available.
The next thing that can be very helpful, and this happens in almost every public plan, is automatic participation. In a public sector pension, the employee cannot opt out. It’s usually the law that they have to make contributions into the plan.
Another piece of it is making investments over time for a long period of time, and then finding cost-efficient ways to take that money out and to make sure that it lasts for your lifetime.
A pension will do that automatically, but in a 401(k) plan, you have to trade in your flexibility for those dollars for the guarantee of a lifetime income.
I can see a big attraction of pensions is that you don’t have to worry about all of that. I’m sure most people don’t want to.
If you went back 20 years, everybody thought the market was going to continue; the dot-com bubble hadn’t burst yet.
Everybody was thinking, I can get 15 to 20 percent on my money. Why would I want to put it in this plan where I might only get 7 or 8? Today, most people would die for 7 or 8, because if you take your money today and put it in a bank in a savings account, you get 0.1 percent interest.
Compound interest can be a total miracle. At 8 percent, your money will double every 9 years. At 0.1 percent, it’s only going to take you, how many? Seven hundred twenty years to double your money!
Most of us aren’t going to live 720 years to see those dollars double.
Today, in order to get that return, most young people probably have to take really substantial risk, having almost all of their money in equities. That means some years you might get a 10 to 15 percent return; other years, you might lose 23.
Is there any concern among younger workers about pension rules sometimes requiring five years of employment with the organization before workers are vested (can receive funds)?
There’s a difference between private and public pensions, and with pensions that have an employee contribution. Many private sector pensions do require employees to work at least five years to receive benefits. But in some 401(k) accounts, employers delay part or all of their contributions until 1–3 years of work. You could have the same thing there.
When you talk to younger workers, you see that those covered by defined benefit plans valued them much higher than defined contribution plan.
I wanted to talk a bit about federal initiatives, specifically the myRA, which was introduced on January. How is that going?
The president, in his State of the Union message, said he had asked the Treasury secretary to create a payroll savings plan. A retirement plan called the myRA, where your money could be invested in Treasury bills in the same way that federal government employees have an option to put their tax-deferred saving money into what they call the G Fund, the Thrift Savings Plan.
You’d actually get the same interest rate as what federal employees get when they put their retirement savings in the G Fund.
It would go in on an after-tax basis, so that it would be flexible enough if somebody needed to take out the money. They might be able to get some of their own money back without a penalty.
It will be an attractive vehicle. It’s not the most attractive vehicle. You’re not going to be getting a very high interest rate, because you’re going to get a Treasury bill rate.
The rate is going to be better than what you probably could get if you took that same money and invested it in a IRA at your bank. Especially for small amounts that probably will only go into a savings account or something like that — that 0.1 percent interest rate I was talking about, or lower.
Whereas the G fund, I think if you look at it currently, it’s somewhere around 2 percent, which is not quite a miracle, it’s 36 years.
There’s this rule of 72 that I’m using to come up with how long it takes your money to double. At 2 percent, it will only take you 36 years to see your money double.
You can go and get your first small amount of savings. You’ll get the discipline. You’ll have that money build up. You’ll have new money come into that plan, and if you’re a low-income employee, there actually is a special tax benefit that only applies to low-income individuals, called the saver’s credit.
Individuals can use that saver’s credit to get an extra payment sent to them from the Treasury when they do their taxes. If their income is low enough, if they do get a refund, that money can go right into the plan if they want to. They could use it to make a contribution the next year. Right now, it doesn’t go right into the plan, it just goes back to the individual, but it does help you being able to serve by giving you some more resources.
You said interest rates could be better in some IRAs. Is that an argument against participating? I think currently some IRAs have a $1,000 minimum, but the ceiling on the myRA is at $15,000. It will take a long time for low-wage workers to reach that before it must be rolled over to an IRA, where they can probably get a higher return to begin with.
Remember, it would take most low-wage workers a long time to even get to $1,000 of savings. It might take them three or four years to get to $1,000, before they could go and invest their money in an IRA at a mutual fund, and many of those funds probably have a higher minimum than $1,000. A lot of mutual funds, especially some of the best and with the lowest expenses, the way they keep their expenses down is they require you to have maybe $10,000 before you can actually go into that plan.
The myRA will be very low cost, will have the decently competitive interest rate, not the best there could be, but also no risk.
Is there a marketing plan for the program? How would workers find out about it?
I think Treasury is going to be looking for employers who want to be part of this launching the myRA. They’ll be coming out with something this year.
The Obama administration in the past has proposed a mandate for employers without retirement plans to offer some sort of IRA with automatic enrollment. How would that work?
If you can be automatically enrolled, that’s a great opportunity, and if young people can put away 3 percent of their pay, they’re going to be on their way. They’re starting it in Illinois. It’s a valuable thing, and they will continue to do that.
Some states have latched on to that idea like California. The state has passed legislation that is being implemented for an auto IRA of about 3 percent for any employee who is not offered a plan from their employer.
Does your organization support the federal proposal, or do you think it would jeopardize pensions?
We don’t take positions necessarily, but we do think that these type of savings initiatives are important, because there are these population sectors who are not being served by financial services organizations. In California, we got somebody to look at the median salary of people who don’t have them. It’s about $26,000. If you think about putting away just 3 percent of that, it’s a small amount that mutual funds will not take as regular contributions.
In California, where you’ve got 6.3 million people who would be eligible for this plan, the dollars in that program will amass pretty quickly to maybe approach $50 billion, $100 billion dollars in the next five to 10 years.
It seems like the federal auto IRA proposal was in part a conservative idea like the Affordable Care Act was. Do you think the conservatives will rally behind this at some point or is it not really on their agenda?
I don’t think conservatives have high on their agenda retirement security for individuals on the lower-income end. I think there’s a lot of concern from the financial services industry about retirement savings tax incentives currently.
It seems, at least at the moment, that Republicans are not quick to revisit a debate about cuts to Social Security. Do you think there could be a shift in, I don’t know, at least the talking points about Social Security?
You might have some very preliminary discussion on retirement security in this upcoming election, but I think the next presidential election we will see more discussions.
When you give people specific examples of where retirement needs to be reformed, there’s a lot of willingness to put more money into Social Security, because they understand the value. And I think there’s also concern about keeping the American dream of being able to live on your own when you retire.
I’m the first generation in my family where my grandmother was not living with me, not running out of money or having to take of kids. Is that where we’re going to go in the future?
We’ve got families that are more diverse [in structure] now, and part of my mother’s situation is, every one of her daughters is working full-time.
What would it take for Americans to say that this needs to be a priority?
I actually think that some recent surveys have shown that this is one of the top concerns for them. They’re not able to say that they’ll be able to be ready for retirement. The baby boomers, 10,000 of them every day are turning 65. They’re starting to live that situation.
We are already seeing millennials have concerns about retirement that are even above where the baby boomers are. I think it’s there. It’s just, are we asking the people the right questions?
There was a [Clinton-era] proposal called the USA Account, which combines automatic enrollment and some type of account that would be professionally managed and will provide you with a lifetime income. When we describe it like that to the American people, we get very significant positive response. They like that.
Housing is also a high concern that people have for retirement.
How important is the wealth that people have in their households or their homes to retirement? Especially after the recession, low-wage and minority workers may not have that wealth built up in their homes. Are they doubly in jeopardy for retirement?
In the past, we talked about Social Security. We talked about having an employer’s pension, and we talked about personal savings. Then your home was like the last bastion, and when all else failed, you might be able to monetize it in some way.
It could have been downsizing from a home in which you raise your kids into a smaller house. Sometimes it was moving from a high-cost area to a lower-cost area.
But that monetizing is not something that Americans openly embrace! I’ll give you the illustration of my mom.
My mom lived on her own for a long time, and she totally intended to continue to do that. She was in a nursing home, and we had to spend down her assets to take care of her. She had this calculation of, how long am I going to be able to live in my house? She was saving every penny to make sure she could live there as long as possible.
The house is also where you live, so it does give some flexibility if the house is paid for and you don’t have a lot of maintenance or unreasonable taxes on it. You might not need to replace as much money as you otherwise would have to replace with your income.
But what we’re also seeing today is more and more households go into retirement with mortgages. The idea of having a mortgage when you retire is hard for a lot of people to imagine.
So it’s important, and can make a big difference in whether or not you are prepared. But it’s sort of like, when are people are willing to use it and understanding the emotional piece: “Am I going to run out of my money and not even have a place to live?”
Tim Williams is a community moderator for the New York Times.