Roger Ferguson: Let’s Develop a More Sustainable, Comprehensive Retirement System
As part of the Forum on Contemporary Issues in Society (FOCIS) symposium at Wayne State University in Detroit on Sept. 16, TIAA-CREF President and CEO Roger Ferguson discussed the new realities of retirement.
He asserted that the American retirement system is on shaky ground, and it’s time to make it more sustainable. After presenting several challenges, he discussed possible solutions for what ails our retirement system.
The Winds of Change
“People are living longer than ever,” said Ferguson. Americans 85 and older are our nation’s fastest-growing age group.1 More importantly, Baby Boomers began turning 65 this year; for the next 20 years, more than 80 million Boomers will enter retirement. These retirees will be healthier, better informed, technology-savvy and more diverse than any previous generation.
Consequently, the challenge has shifted from planning for retirement to planning for “longevity.” A longer life span means that people may spend more time in retirement than they did in their working years.
An Unstable Retirement System
“As we struggle to recover from the worst economic crisis we've seen since the Great Depression, it’s no wonder Americans feel insecure about their prospects for financial well-being,” said Ferguson. The old three-legged stool analogy for funding retirement – comprising pensions, Social Security and personal savings – appears wobbly.
In the private sector, only 33 percent of workers had a traditional pension plan in 2008, compared with 80 percent of workers 30 years ago.2 The 401(k) plan has become the dominant way to save in the private sector, but they were created to supplement pensions, not serve as standalone offerings.
Pension plans still dominate the public sector, but state and local governments are struggling to meet their funding obligations.3 Including healthcare costs, unfunded pension obligations could be topping the $3 trillion mark. This puts enormous strain on budgets – and taxpayers.
A fundamental problem with the new model of funding retirement is that it places the responsibility and risks on the worker, instead of the employer. Yet many workers lack the financial knowledge to make the often-complex decisions that now fall on their shoulders. This situation, combined with the fact that many eligible workers either don’t participate in the plans or don’t save enough, often means that retirement savings fall short.
A 21st Century Solution
Our nation’s retirement system should “offer flexibility and individual choice, yet still provide genuine security to individual savers,” Ferguson said. TIAA-CREF believes that saving for retirement should be a shared responsibility of employers and employees, and that America’s retirement system should include these elements:
• Provide income to last a lifetime.
• Help retirees with their uninsured healthcare expenses.
• Tailor plans to the individual.
• Make plans sustainable.
• Provide financial education.
The TIAA-CREF Institute recently surveyed a range of experts on the key elements of a good 401(k) or other type of defined contribution plan.4 The consensus was that these plans should:
• Automatically enroll workers.
• Advise workers to save at least 10 percent of salary, between their own and their employers’ contributions.
• Give participants five to 10 investment choices.
• Make target-date funds (funds geared toward a target retirement age) the default investment option.
• Give the option to annuitize savings.
• Offer personalized advice.
• Regularly provide projections of how savings will translate into income in retirement.
What Should You Do?
“The core principle is to save, save, save,” said Ferguson. “It’s never too early – or too late – to start.” Other steps for ensuring a successful retirement include:
• Develop a long-term strategy based on your personal goals and situation as well as your comfort level with investment risk;
• Invest in a diverse mix of investment types, such as stocks, bonds, real estate, and guaranteed investments.
• Educate yourself about finance, and get advice from a certified professional who puts your interests first.
• Start saving for long-term healthcare expenses.
• Consider translating some of your savings into an investment that will provide you with a guaranteed lifetime income stream.
• Don’t let market volatility get to you. As long as you have a long-term investment strategy, and your portfolio is diversified and reflects your risk tolerance, stay the course.
Most of all, Ferguson urged, we should encourage a concerted effort to repair our retirement system. “The result must be a comprehensive and sustainable system that is focused on financial well-being and retirement security, not simply asset accumulation,” he said. It should combine best practices, be affordable for employers, and give employees access to income and financial advice.
“Such a system would go a long way to putting our nation’s retirement system back on a firm foundation.”
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1 U.S. Census Bureau Current Population Reports: Population Projections of the U.S. by Age, Sex, Race, and Hispanic Origin, 1993 to 2050.
2 EBRI Databook on Employee Benefits, Chapter 10: Aggregate Trends in Defined Benefit and Defined Contribution Retirement Plan Sponsorship, Participation, and Vesting, updated December 2009.
3 “Pension Funding and Policy Challenges Loom for U.S. States,” Standard & Poor’s Global Credit Portal, RatingsDirect. July 8, 2010.
4 Rethinking Defined Contribution Retirement Plan Design: A Survey of Experts, TIAA-CREF Institute, August 2011.