Roger Ferguson Calls for America to “Rethink, Repair, and Restart” its Retirement System

Excerpt from Roger Ferguson’s recent remarks at the Public Affairs Forum of the Federal Reserve Bank of Atlanta.

We need to rethink, repair, and restart America’s retirement system so that it provides opportunities for workers to achieve genuine retirement security.

We need:

  • A system that continues to recognize the shared responsibility of employers and employees to ensure financial security during retirement.
     
  • A system that provides income that can last a lifetime – perhaps throughout 20 to 30 years of retirement living.
     
  • A system that helps retirees meet their uninsured healthcare expenses, which loom as a large financial burden as people live longer.
     
  • And a system that will be sustainable even as the Baby Boomers head into retirement over the next two decades.

With 93 years’ experience providing retirement income, TIAA-CREF is playing a leading role in this discussion. Let me outline four elements that we believe are essential to building a sustainable, comprehensive retirement system for the 21st century.

The first element is giving all Americans opportunities to save adequately for retirement.

People should aim to replace at least 70 percent of their final salary in retirement. To meet that target, funding levels need to be at least 10-15 percent of a worker’s annual income, regardless of the type of plan they participate in. And it’s important to note that this 10-15 percent figure represents the combined contribution of both employers and employees.

Since few people are achieving these goals today, we must increase the level of savings. A basic step toward that goal is to ensure that workers have access to retirement plans. This is an area in which the public sector has excelled, as 99% of full-time employees in this sector have access to a retirement plan of some sort.i To approach these levels of participation in the private sector, employers should automatically enroll employees in workplace retirement plans.

The second element essential to a 21st century retirement system is giving people an appropriate range of investment options, as well as the advice and guidance to understand them.

Research indicates that 15-20 fund options should give plan participants the ability to diversify their investments and help reduce investment risk.ii More choices than that could be confusing and actually lead people to choose less-diversified investments.iii

We also know that the average worker – even a very well-educated worker – is often stumped when it comes to articulating a savings strategy and choosing funds that are aligned with that strategy.

Too often the decision-making process comes down to picking funds with the best performance over the past year or five years – which of course is no indication of future performance – or outsourcing the decision to a friend or relative who may have some financial expertise.

We believe that all workers should have access to informed advice about investing from someone who puts the worker’s best interest first.

As a nation, we also need to do a better job of promoting financial literacy – starting with young people and building through college and beyond. All Americans should have a basic foundation of knowledge about saving and investing.

The third core element of a retirement system for the 21st century is planning for long-term healthcare expenses.

The Employee Benefits Research Institute reports that without an employer-sponsored health plan, a couple retiring at age 65 today is projected to need between $200,000 and $800,000 to supplement Medicare and cover out-of-pocket healthcare expenses during retirement.iv

That is a staggering sum for most people. And it can quickly erode savings that were meant for other purposes. Workers need to start saving for long-term healthcare expenses today.

The fourth element of a 21st century retirement system is giving all Americans a guaranteed lifetime income option.v

The average monthly Social Security payment for retired workers was about $1,170 at the beginning of 2011.vi Yet the average monthly spending for people over 65 is just over $3,500.vii

A retirement system focused on financial security should address that gap by providing monthly payments throughout the life of a retiree. The payout mechanism, such as an annuity, can include the option to provide monthly income for a surviving spouse or dependent.

These four elements – ensuring adequate retirement funding by employers and employees, offering a range of options and objective advice that help to reduce investment risk, meeting retirement healthcare expenses, and providing guaranteed income options – should be at the root of our efforts to build a retirement system that helps all Americans save for a secure retirement.

One model that contains most of these features, and that can therefore inform our thinking, is the model commonly used in higher education.

While there are differences between plans, most feature mandatory participation.

Employees have access to an appropriate mix of investment options that help them to build savings.

Institutions contribute to employees’ retirement security.

And – most importantly – employees typically have access to either a defined benefit plan or an annuity that provides a level of guaranteed income in retirement.

This model is, on the whole, serving the academic community quite well.

Recent research from the TIAA-CREF Institute found that 80% of higher education employees described themselves as “somewhat confident” or “very confident” that they will have enough money to live comfortably in retirement.viii

Among all U.S. workers, just 54% report such confidence.ix

Higher education is clearly doing something right, and we ought to think about ways to emulate that success in other sectors.

i Employee Benefits Survey, Bureau of Labor Statistics, U.S. Department of Labor (http://www.bls.gov/ncs/ebs/benefits/2009/benefits_retirement.htm).

ii Diversification cannot eliminate the risk of investment losses

iii Crane, Roderick, Michael Heller, and Paul J. Yakoboski, “Defined Contribution Pension Plans in the Public Sector: A Best Practice Benchmark Analysis,” TIAA-CREF Institute, April 2008.

iv Employee Benefit Research Institute (EBRI), June 2009.

v Lifetime income is a guaranteed stream of income subject to the claims-paying ability of the issuing insurance company.

vi Source: www.ssa.gov.

vii Bureau of Labor Statistics 2009 Consumer Expenditure Survey. Average annual expenditures for individuals over 65 total $42,957.

viii “Retirement Confidence on Campus: The 2010 Higher Education Retirement Confidence Survey,” TIAA-CREF Institute, June 2010.

ix “Retirement Confidence on Campus: The 2010 Higher Education Retirement Confidence Survey,” TIAA-CREF Institute, June 2010.

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