Roger Ferguson looks at the current retirement landscape, discusses how it has changed over time, and details some of the challenges we now face as a nation in funding retirement. September, 2012.
Transcript:
>> Susan: I'm Susan Collins, the Joan and Sanford Weill
Dean here at the Gerald R School -- Gerald R. Ford School
of Public Policy and I'm delighted to have you with us
this afternoon. On behalf of the Ford School community,
it's a real pleasure to welcome you for another in our
series of distinguished lectures, the policy talks at the
Ford School. This afternoon we are very honored and very
pleased to have with us Dr. Roger Ferguson who is
President and Chief Executive Officer of TIAA-CREF.
You'll find a biography in your program, and I'm not going
to give all of the details, but I think as you take a look
at it, you will be very struck like I have been by just
how varied his career has been. He has reached the
highest levels in an incredibly wide range of policy areas
and just to highlight a few, he has served as Vice Chair
at the Federal Reserve Board of Governors. He is a member
of President Obama's counsel on jobs and competitiveness.
He's a lawyer by training and at one time was a partner at
McKinsey & Company. He's shaped policy from the private
as well as nonprofit sectors as Head of Financial Services
for Swiss Re. And on the board of a number of nonprofits
and, of course, now in his current role as CEO of a
Fortune 100 provider of retirement services. I first met
Roger when he was a Ph.D. student in Economics at Harvard
and I was an undergraduate economics major. And he was a
very thoughtful and supportive colleague then and has been
ever since. And so I, and many others in the profession,
are very grateful to him for that. This past year he
co-chaired a National Academy of Sciences panel on which I
was a member. That panel was convened by the United
States Congress to examine some of the same issues that he
will focus on in his remarks this afternoon. What are the
long-term economic implications of an aging population?
Can our government maintain current levels of publicly
funded support for older people? What are the trends in
retirement ages and the prospects for people working
longer? And what are the levels of personnel savings
today that are necessary in order to maintain current
living standards in retirement for a range of economic
scenarios? These are very important and challenging
questions. The panel actually released its findings just
two days ago and you might have seen some of the press
coverage from the briefing that Roger and his co-chair
gave. Again it's very important information for all of us
to understand and grapple with. And so we're so pleased
today to be able to welcome Dr. Ferguson to share his
views about it. He's been very generous already with his
time today meeting with students and faculty as well as
delivering this public lecture. And he's graciously
agreed to take questions after his remarks. And so from
the audience just before 5:00 o'clock we will be
collecting cards. And so we invite you to write questions
that you might have and we will pick them up a little bit
later in the afternoon. Professor John Ciorciari of the
Ford School faculty will help to select questions from the
cards or from Twitter. We invite questions from Twitter
as well as -- and along with one of our graduate students
Dawn Lynn Kaiser who will be actually asking the questions
this afternoon. And so with that it is my honor and great
pleasure to invite Dr. Ferguson to the podium.
^M00:03:30
[ Applause ]
^M00:03:37
>> Dr. Ferguson: Thank you very much for that kind
introduction. And let me be the first to say that it's
really a pleasure for me to be here at the Ford School. I
want to thank Susan Collins for inviting me. I want to
take a moment and recognize a couple of friends in the
audience. Marina Whitman and her husband Bob are back
there. So I want to say hello to you and nice to see all
of you. And it's really a pleasure for me to be here in
part because my linkage to the school goes back to the
original dean, Ned Gramlich, who served with me on the
Board of Governors at the Federal Reserve and I counted as
a friend for many, many years. And finally and most
importantly I must say being an MR is important because
you get to go to Comet Coffee which is an important stop
in America as all of you know. So it is a pleasure for me
to be here and I will say that one of the great things
about the Ford School is that in educating tomorrow's
leaders and also conducting research, this school embodies
a hope for a better tomorrow and we're counting on all of
you to help us get through some of the pressing problems
that I'm going to be describing and we'll talk about in
the Q and A session. So today I want to take a look at
one of the more profound challenges that we are facing as
a nation and that's the issue of retirement, or more
accurately, how to insure safe and secure retirement for
everyone in America in the 21st century. At a time when
we have both great demographic and economic changes and
challenges, retirement is an issue that's sort of natural
for TIAA-CREF, as many of you may know, because we are the
leading provider of retirement services in the higher ed
space and the nonprofit space in general. And, in fact,
we were founded over 94 years ago to provide safe and
secure retirement for college professors. Another great
reason for me to be here -- another honor for me in being
here is that, in fact, the University of Michigan was the
first school to sign up with TIAA-CREF back in 1919. And
so we have a special relationship with this institution.
So how have things evolved for us? Well, today we serve
3.7 million people nationwide, not just in the academy but
also in research, medical, and cultural communities. We
now do more than just retirement, even though that's our
core, and overall our mission to provide financial
security and well-being is unchanged. So we've watched
with alarm as retirement has become a source of increasing
angst across our nation. Americans confidence about
achieving a comfortable retirement has hit record lows in
the faces of factors such as a 2008 financial crisis, the
shift from defined benefit or DB, plans to define
contribution or DC plans, the aging of the population, the
explosion of healthcare costs. And all that adds up to
some uncertainty about the future of Social Security,
Medicare and Medicaid. And then many of us recognize that
the personal savings rate for many Americans and for
America overall has been abysmally low for some time. So
it therefore concerns us that most workers -- for most
workers retirement has become much more of a
do-it-yourself activity. Even as far too many of our
citizens lack financial literacy skills to make the sound
decisions about savings and investment and retirement that
they're being called upon to make. So we at TIAA-CREF
have been speaking out about the need for a new retirement
system, one that fits the realities of the 21st century.
We've also worked to highlight the needs for greater
financial literacy. But clearly there's much more work to
be done. So let me quote just a few statistics. Just
14 percent of Americans said that they're, quote, very
confident that they will have enough money for a
comfortable retirement. That's in the most recent
Employee Benefits Research Institute Study on Retirement
Readiness. That same study indicated that 60 percent of
Americans say they have less than $25,000 -- less than
$25,000 in retirement savings. And then according to a
recent Gallup survey, 66 percent of Americans said that
their top financial concern is not having enough money for
retirement. The need for actions only become clearer
based on the work that Susan Collins and I and many others
did as part of our National Academy of Sciences study.
And as she indicated we just released that study on
Tuesday and I'll talk about that a bit more in a minute
but it underscores the urgency of responding to the
challenges of retirement that we're talking about. So
what I'd like to do in my talk today is look at three or
four different things. First, I want to talk about the
issues, the broad macro issues that underlay the
retirement landscape. I'm going to talk a little bit
about the potential solutions that might emerge over time,
and then obviously I want to open up and leave plenty of
time for questions and answers. So let me talk first
about the issues that underlie any discussion about
retirement and that is the issue of the aging of the
American population. So the committee that Susan
referenced was founded or started in 2010 to look at that
issue and the macroeconomic effects of an aging
population. And the goal was to provide factual
foundation as policy makers, particularly in Congress,
think about and debate issues such as deficit reduction,
Medicare, and Social Security. The starting point for the
study and obviously one of the major kicking off points
for any discussion on retirement is the demographic shift
that's now underway in which Americans age 65 or older
make up an increasingly large percentage of the
population. In fact, people 85 and above are now the
fastest growing segment of America. And this is the
result of two trends. First being the rise in the average
life expectancy in the U.S. Today men can expect to live
to be 76, women to 81. Fifty years ago, the life
expectancy was just 67 for men and 73 for women. The
second trend that doesn't get much discussed is the
declining fertility rate. Today there are 2.1 births per
woman compared to 3.7 births for woman in 1957 at the
height of the baby boom. So together these two trends are
what's driving our aging population. It's not just about
the baby boom generation. Although the entry of baby
boomers into retirement has certainly shined a spotlight
on this phenomenon. It's more than the baby boomers
though. It's also the other cohorts that are smaller just
as the largest baby boom population moves towards
retirement. The second big story is that aging and the
aging population is not just an American story. By
mid-century, many developing nations will catch up to the
developed world in terms of old age dependency ratio.
That's the number of elderly people as a share of the
working age population. That's remarkable considering
that when I was in graduate school and Susan was an
undergraduate, countries like China, South Korea, and
Mexico were struggling just to feed their own people. And
now as all of you know and particularly in China because
of the one child policy, they have a rapidly aging
population as well. The upshot of all of this is that
there are fewer and fewer people working and they're
supporting more and more people who are getting to an age
that we consider retirement age. And that's obviously a
recipe for big fiscal challenges. So our committee looked
at what these trends, both in the U.S. and globally, will
mean for the U.S. economy in the future. And obviously in
the U.S. economy the real challenge is the threat to
health and stability of Social Security, Medicare, and
Medicaid. Together the cost of these three programs
currently amounts to roughly 40 percent of all federal
spending and 10 percent of the nation's GEP. And we're
already well aware of some of the challenges that the
system is undergoing. Just a few months ago, the trustees
of Social Security projected that the combined trust funds
will be exhausted by 2033, three years sooner than
projected just last year. They also reported that the
ratio of workers paying taxes for Social Security
benefit -- beneficiary will hit 2.8 workers per
beneficiary this year. That's down from 3.4 workers per
beneficiary in 2000 so 12 years ago. So our report seeks
to clarify the issues that are relevant to policy makers
and to suggest some potential options that they may want
to consider. And we do believe, and there's some positive
news here that sound policies can, in fact, mitigate the
negative effects that we're going to be confronting here.
And that those policies don't have to be a combination of
four different policy levers if you will. One is the
major structural changes to Social Security, Medicare, and
Medicaid. Secondly, a higher savings rate during working
years. Third, the possibility for many of us of longer
working lives. And fourth, the need to find greater
revenue which frankly means having to raise taxes in order
to pay for some of this. The other thing that we focused
on is that individual workers must be better prepared for
retirement by planning ahead and by adapting their saving
and spending habits. So we therefore emphasize something
that's unusual in this kind of report which is the need to
take action sooner rather than later. The longer our
nation delays in making needed changes, the larger will be
what we call the liability, the legacy liability that will
be passed on to future generations. And the larger the
increase we'll need to make in terms of taxes on the
future workers. And frankly if we don't act soon, the
larger the reduction of benefits will be called for for
future retirees. So it's imperative that we act now.
We'll have more options and the cost of acting will be
lower now than if we delay. Our report also emphasizes
that financial literacy has become on evener more crucial
issue in light of these challenges. We note that people
who are not financial literate will have a much tougher
time preparing themselves for the financially secure
retirement that everyone wants, particularly in an
environment in which there's so much uncertainty about
Social Security, Medicare, and Medicaid and which
Americans have greater responsibility for their
retirements. But sadly our nation is seriously
under-informed when it comes to financial literacy. A
research by two professors, Annamaria Lusardi [assumed
spelling] who was at Dartmouth, I think is now moved to
George Washington University; and Olivia Mitchell of the
University of Pennsylvania both of whom, by the way, are
fellows at the TIAA-CREF University, our research group.
So Annamaria Lusardi and Olivia Mitchell have shown just
how unprepared many Americans are to make sound savings
and investment choices. In their study of people over 50,
only one third of respondents were able to correctly
answer three basic questions having to do with interest
rates, the effects of inflation, and the concept of risk
diversification. My company obviously cares deeply about
financial literacy because research has shown that
financial literacy has a profoundly important effect on
achieving retirement security. People with a high degree
of financial literacy are more likely to plan for
retirement. And then in turn those who plan for
retirement are more likely to have better outcomes.
Planning for retirement is a powerful predictor of wealth
accumulation. In fact, people plan for retirement have
more than double the wealth of people who do not plan.
And conversely people with lower financial literacy tend
to borrow more, they accumulate less wealth, and they tend
to select financial products with higher fees. Folks with
less financial literacy also less likely to invest in
stocks, they're more likely to experience difficulty with
debt including bankruptcy, and they're less likely to know
the terms of their mortgages and other loans that they may
have outstanding. So the lack of financial literacy is
certainly a broad issue in America. But when it's viewed
through the prism of race, the effects are even greatly
magnified. Minorities along with women and the least
affluent have some of the lowest financial literacy rates
in the country. So it's not surprising when it comes to
saving for retirement that studies have found serious gaps
in the preparedness of African-Americans and Hispanic
workers. And the older problem is likely to become worse.
There's a recent survey from the financial industry
regulatory authority or FINRA that found that young
Americans were less likely to be financially capable than
older Americans. And the latest jumpstart coalition
survey of high school seniors showed that the financial
literacy of high school students has fallen to the lowest
level ever. Now that's hardly surprising since 26 states
have no financial literacy requirements at all in their
K-12 education systems. And only four states mandate that
students take a personal finance class in high school. I
will say in this score there's some potentially
encouraging information. The National Conference of State
Legislators reported that this year seven states have
enacted legislature or passed resolutions promoting
financial literacy. And in 28 states such measures have
either been introduced or are pending consideration. So
it's heartening that the nation is starting to turn to
this crisis of financial literacy and obviously I hope
that our NAS study will help drive that further. So let
me now turn to some of the changes that we are
confronting -- or challenges we're confronting in funding
retirement and how that's combined with the demographic
and economic issues I've just talked about. All of you
probably know that once upon a time we talked about a
three legged stool as an analogy for understanding
retirement systems. The three legs were pensions, Social
Security, and personal savings. And today all three legs
are a little wobbly. Pensions have become a thing of the
past for most Americans in the private sector. And the
public sector headlines clearly indicate that states and
municipalities are confronting a crisis of epic
proportions in unfunded pension liabilities. As I
mentioned already, Social Security is in trouble as the
trustees have attested. And it will soon begin paying out
more than it takes in. And the U.S. personal savings rate
has been completely inadequate for many years now. Even
back -- even dropping to negative numbers back when I was
on the Federal Reserve. So given the scenario it should
be no surprise that Americans are less confident than ever
about their ability to afford a comfortable retirement.
People are also expecting to work longer and longer. A
recent survey found that 37 percent of people said they
expected to work past 65 and that's tripled the percentage
of 20 years ago. So how did we get to this point of such
uncertainty about the three legged stool? Well, first
we've seen the demise of traditional pension plans in the
private sector over the past 30 years. These traditional
pensions are known as DB or defined benefit plans. And in
the old days you'd work for a company for many years,
maybe for life and when you retired along with the gold
watch, you'd get a monthly retirement check. Importantly
the size of the check that you would receive under a DB
plan had nothing to do with investment returns and may
have had nothing to do with your salary. It -- rather it
was based on service and age and every once in a while
also earnings. As recently as 30 years ago, 84 percent of
private sector workers had access to this kind of DB plan.
As of 2008 only 33 percent so from 84 down to 33 percent
in the private sector have access to a DB plan of that
type. Today what's happened is the defined contribution
plan, particularly the 401K, has become the primary means
of saving for retirement in the private sector. But the
401K and other DC plans don't guarantee workers a specific
retirement check amount. Rather as all of you know, they
are vehicles that enable employees to save for their own
retirement and in many cases employers contribute as well.
But the kind of retirement check that a worker ends up
with depends on the combination of contributions made and
investment returns earned during their working lives.
Importantly and people forget this because things have
changed so much but 401Ks were never intended to play the
role that they do today. They were never intended to be
the core retirement system. They were meant to be a
supplemental retirement system to top off traditional DB
plans. And that's the fundamental problem with the new
model. Whereas once employers shouldered the
responsibility and risks of funding retirement, today it's
the workers who must bear that burden. And workers who in
many cases as I've indicated have no formal education or
training in investing or have no financial literacy and
they're called upon to make these very important
decisions. Moreover, there's ample evidence that a 401K
based model in the private sector really is not doing the
job in other ways. Many eligible workers don't
participate, many employers and employees don't contribute
enough, many employees don't implement an appropriate
asset allocation. And finally and most troublesome, many
employees do not hold on to their retirement savings.
Instead they crack into their retirement nest egg to fund
living expenses. So in light of all these kinds of
challenges, it is not surprising that McKinsey & Company,
the consulting firm, found that the average American
couple will be some $250,000 short of what they need to
retire securely. Another problem with the current model
is that people tend to get up -- get caught up in the size
of their account balances without really thinking about or
having much knowledge about the income flow that will be
required in retirement. In fact, and this is hard for
many people to get -- to gather because of increased
longevity, many folks will need to fund retirement that
can stretch 20 or 30 or maybe even 40 years. So the
challenge that people are facing is managing longevity.
And managing longevity in which many of us will be living
with chronic illnesses. So in this new model, people need
to see their savings not just as a pot of money but have
to understand what the income stream is that's going to be
associated with that pot of money. So clearly the current
model needs reform. But to be quite balanced in this,
there are some positive aspects of a 401K model. First,
it's an individualized system. So that's something that
people really care about and enjoy. Secondly, a 401K
system is more aligned with the way people work these days
because individuals move around from job to job and do not
work for a lifetime in one place. Nevertheless these
fundamental problems do remain. So that's the private
sector. So far not so good. Let's look to the public
sector and I would say they're facing some equally
challenging issues in the amount of retirement. Their
defined benefit plans do remain the dominant model with
nearly 80 percent of employees having this type of plan.
But all of you know from reading the headlines it's states
and municipalities are struggling with large gaps between
promised retirement benefits and current assets. And it's
been estimated that the unfunded liabilities in state and
local pension systems have reached an astounding
4 trillion dollars. And now many government entities have
been working on this and have been making changes in their
plans and over the past two years, 39 states have enacted
some form of revision including things like requiring
employees to contribute more, tightening eligibility
rules, and modifying how benefits are calculated. So it's
clear that in the public sector we need to bring some
approaches that will bring greater clarity and cost
certainly to employers while also bringing greater
retirement security to workers. So you can imagine that
we at TIAA-CREF recognizing these challenges spent a lot
of time thinking about these issues and trying to figure
out what it would take to create a retirement system for
the 21st century. So what would a retirement system for
the 21st century look like? First, it would continue to
recognize that helping employees achieve financial
security in retirement is a shared responsibility between
employers and employees. So the risk shifting that's
going on would end up in a middle place with both
employers and employees having a responsibility.
Secondly, retirement system for the 21st century would
provide an income that could last a lifetime as I've
indicated 20, 30, maybe 40 years in retirement. I haven't
talked much about it, but such a system would help
employees to deal with healthcare expenses which loom as a
very large financial burden as people live longer and as I
said with chronic illnesses. The fourth element of a
retirement system for the 21st century would be that it
would not really be one size fits all given the
demographic and other challenges and changes in society.
Such a system would have to be sustainable dealing with
baby boomers, the 80 million of us who are going to be
retiring over the next several decades. And importantly
it would include a strong dose of education and
communication and advice recognizing that most people
bearing a greater responsibility and not having enough
financial literacy are going to need some assistance in
making these tough decisions. One model that's working
well and therefore can, I believe, form national thinking
and certainly form our thinking is the one that works in
higher education, I believe, and wouldn't surprise you I
suspect being that as CO at TIAA-CREF we are the leading
provider of that kind of service. And there are a number
of things that I think stand out for the system that we
have in higher ed that might be appropriate as a national
level. First, most of them feature mandatory
participation, and so an automatic enrollment might be a
feature of a retirement system for the 21st century.
Secondly, employees must have the right mix of investment
options that can help them build the kind of saving that
they need. And the mix of options needs to be optimally
decided, not too many choices, not too few choices. A
third thing that we've seen is in the academic sector as
you know the notion of preparing for retirement still is a
joint responsibility with employees and institutions both
contributing. And finally employees typically have access
to either a DB plan or an annuity option that provides a
level of guaranteed income in retirement. And then of
course the important issue of education and advice is an
important part of what we provide in our model. And we
believe that the model is working and, in fact, our
participants tell us that. In a recent survey by the
TIAA-CREF Institute, we found that 75 percent of higher ed
workers are confident that they will have enough money to
live comfortably in retirement. And that compares with
just 49 percent of all U.S. workers so 75 percent versus
49 percent. So it's clear that one of the most pressing
issues then is to move people into a system that provides
for lifetime income. And that's essentially making
availability -- available financial security for
everybody. This is a particularly important issue now if
I can think about one other segment and then wrap up here.
^M00:27:46 This is the issue of financial security for
lifetime is quite important for everybody but it's
particularly important for women. And that is because
women often end up with a nest egg that is half the size
of that of a man of the same age and occupation. And
that's for a couple reasons. One, is women still earn
about 77 to 81 cents for every dollar that a man may make.
And they often spend an average of 10 to 12 years out of
the workforce caring for children or elderly parents. And
yet women as I've already said also live longer than men,
and therefore, they'll have to support themselves through
a long retirement with what might be a smaller nest egg.
And so the bottom line for both sexes is how do we insure
that people's primary savings vehicle is a DC plan can
convert their savings into an adequate and secure income
that lasts as long as they do. And here the answer will
not surprise you is annuitization. There's a recent
report by the government accountability office last year
that encouraged annuitization as an important means for
addressing the issue of a lifetime income. And in that
scenario people who are retiring purchase -- take part of
their savings to purchase an annuity to deal with their
basic lifetime income for the rest of their lives. But
the report noted that while annuitization is probably a
smart choice for many Americans, just 6 percent of those
in a defined contribution plan chose or purchased an
annuity at retirement. The other thing that this report
noted is that many people took Social Security benefits
before the full retirement age, therefore passing up the
opportunity for higher benefit levels and additional
lifetime income. So the report found a big disconnect,
this GI report between what experts recommend and what
people do. Because experts recommend that retirees
convert a portion of their savings into an income annuity
to cover necessary expenses and they recommended that
people have an annuity instead of a life lump sum
withdrawal. And experts also recommended that you delay
taking Social Security until reaching at least full
retirement age and in some cases continue to work and save
past full retirement age. So they're clearly some
important implications that the GAL study has found is
that while experts have a sense of what folks should do,
very few of our citizens outside of the higher ed space
are doing it. So let me close now by just summarizing all
the things that I've said here. First, talked about the
aging population and recognition of that as a global
problem. That clearly presents a number of macroeconomic
challenges to our nation, particularly for programs like
Social Security, Medicare, and Medicaid. But I also said
that policy options do exist and implementing those policy
options sooner rather than later can start to at least
mitigate, not reverse, but at least mitigate some of the
negative effects. Or put it another way, the longer we
delay, the higher the ultimate cost is going to be. The
second thing that I've said is that this demographic shift
of aging baby boomers combined with the recession have
really combined to shine a very bright spotlight on this
retirement issue and on the need to build financial
security that lasts a lifetime. And indicated that
obviously the issue of financial literacy is a very
important part of this given the new requirements of
individuals to bear some of the responsibilities. We have
to increase financial literacy. And then finally I
pointed out that there are some solutions, if you will, in
building or outlining what a financial secure retirement
system would look like for the 21st century. So let me
stop now by thanking you again for your attention. Thank
you for allowing me the opportunity to speak in this
wonderful school, and I look forward to being able to
answer as many questions as we can in the time that's
allotted. So thank you all very much and I'll turn it
over to our moderators. Thank you.
^M00:31:43
[ Applause ]
^M00:31:51
[ Pause ]
^M00:32:05
>> Dawn Lynn: Thank you very much for your lecture. We
do have questions from the audience and if you still have
additional ones, please raise your hand and they'll be
collected. My name is Dawn Lynn Kaiser [assumed
spelling]. I'm a second year Masters of Public Policy
student here at the Ford School. And Mr. Ferguson, our
first question, what suggestions do you have regarding
education programs geared towards planning for retirement?
How early should this education begin and should it be a
part of the federal education policy?
>> Dr. Ferguson: That's a great question and I think
first it should begin as soon as possible if you will.
Folks when they get their first job I think should start
to be educated on these issues. Obviously I've also
indicated the importance of general financial literacy in
K-12 in high school. But if we could have a system in
which there is first mandatory enrollment and then
associated with that education at the very, very
beginning, I think that's helpful. And the education I
think should be around a couple of things. One is a
generally sense of figuring out what one's risk tolerance
is. Two, figuring out there are some benchmarks around
how much one might want to save and invest. The third is
the importance of diversification because a lot of
individuals as we've discovered haven't understood the
value of diversification. And then the fourth is starting
to educate everybody on what a life cycle might look like
because I think many people underestimate how long they
may well live in something that we might call retirement
and therefore tend to think they're going to save too
little. And then the fifth thing -- or they tend to save
too little. And then the fifth thing obviously is the
importance of thinking about not just building this big
nest egg but what it means for lifetime income. I do
believe that it should be built into national policy. I
will tell you from my experience at the Fed where we did
make financial literacy one of the priorities, it is very,
very difficult even if it's a priority of a big and
important financial federal agency, to figure out how to
actually make it come to life. And I think as I've
thought about it part of the challenge is that so much of
education policy is actually developed at state and local
level. And so what happens there I think is as important
as what's happening at the federal level.
>> Dawn Lynn: Thank you. Our next question, is the
social security age destined to rise with life expectancy
and should it?
>> Dr. Ferguson: Well, gee thanks for asking the easy
questions. [laughter] The ones that are not at all
controversial. I would say honestly I do believe over
time the social security age is destined to rise with life
expectancy and with the ability of people to work. In
fact, I think all of you probably know there was a
commission from many years ago that already put us on the
path towards a gradual increase in retirement age but I
think we're going to have to take another look at that.
Now the other thing that's important to say is while that
may be true for many folks there still are a number of
people in American society for which delaying retirement
is almost physically possible. And one of the things that
happens, you know, all of us who do these sort of jobs
that require a lot of intellect but not much in the way of
physical activity. You know, the moving of the mouse is
not for many of us heavy work. We ignore that even on our
campuses and certainly in many parts of America there are
a bunch of people for whom delay in retirement is really
not an option. And so we have to figure out how to be
sensitive to both sides of this; right. Because folks who
influence policy makers tend to be those that sell, sure,
you know, I intend to and therefore all of us can work a
little longer. True for a lot of Americans. Society has
changed over time but I do worry that those of us who do
sort of white collar jobs or get folks who do other kinds
of white collar jobs or blue collar jobs or pink collar
jobs or they're called so I always hasten to add that I
think social security retirement age is going to have to
increase. How that works for everybody I think is going
to be one of the challenges that we have to work through.
>> Dawn Lynn: Thank you. Our next question, what are
your thoughts about the encore career idea new meaning
for -- meaningful work often part-time for older adults?
What policy changes would support more encore careers?
>> Dr. Ferguson: I think the so-called encore career or
the second act or whatever it's called is pivotal frankly.
I think it creates a great value for the individuals
involved or has a possibility of doing that. There are a
number of things that I think stand in the way of that.
In some cases depending on how you work and where you
work, if you retire can you then come back as a consultant
or in a part-time role. There's a question of policy that
affects some institutions. But I think bigger than that
is really, you know, there's not a business model yet
that's evolved for having both full-time workers at a
certain age and then so-called encore workers. And so
older folks who still want to be in the labor force find
themselves in the, you know, forms of consulting, if you
will, where there are sole practitioners. So I think the
real issue is not a policy issue. It's really
understanding how we build models that have in the
workplace folks under so-called retirement age who are
working full-time and working together with folks who are
part-time, if you will, and doing an encore job. But I
think it's important to have that as sort of a way that
all of us start to think about things because it's going,
I think, to be inevitable for lots of folks. And I think
it's also good for society. If I can lengthen my answer a
bit in the report -- the DNS report that Susan and I
talked about, there was some work done by a German
economist Axel Borsch-Supan who got his Ph.D. at MIT but
has done some very interesting work in some manufacturing
and car factories in Germany. Pointing out that teams
that had people of different ages and different
generations were more productive than folks that have --
the teams that have only, you know, one generation. And
this is just sort of a special case of the general
knowledge that we've learned -- actually, I think a
University of Michigan professor has written books on this
on the value of diversity in the workplace leading to
better -- better answers and more productivity. So we
think of diversity in different ways around gender and
race and other things but we shouldn't forget generational
diversity as well. And Axel's work actually shows that in
a manufacturing atmosphere, productivity actually goes up
if you have intergenerational teams.
>> Dawn Lynn: Thank you. Our next question, with regards
to securitizing income streams in retirement with
annuities and the low annuity participation rate you
mentioned earlier, how can we secure but simplify these
annuity products and will this simplification increase
participation in your opinion?
>> Dr. Ferguson: The answers, one, we do need to simplify
annuity products. Obviously, we at TIAA-CREF have a very
good and simple annuity that works very well. And in fact
there's going to be a report that comes out that looks at
our participants -- I don't have the report but I've got
some of the data from it, and it shows that about
40 percent of our participants when they retire typically
take annuity income as their first draw from their
retirement assets. And then we also see that many people
take more than one version of retirement income and they
often what's called laddering their annuities. And the
reason I talk about our statistic that is about 40 percent
is there's -- that's clear proof that a simple annuity
that's in the plan and for which there's advice can get
people to have the right kind of outcome. Society as a
large I think therefore can learn a couple lessons. One,
simpler annuities because a lot of the folks who talk and
give advice are anti-annuity because annuities are very
complex and can be expensive. Secondly, we've got to make
annuities part of the plan. One of the things that
happens in the 401K world is you have this big bucket of
savings, you get to so-called retirement age, and then you
have to make an annuitization choice and that's a hard
choice for lots of people to make. And then I think the
third thing is really understanding better than we
currently do what it is that holds people back from
annuitization. So simplifying is one of the answers.
There's a professor at the University of Illinois named
Jeff Brown who has talked about framing. And if you talk
about annuitization, people aren't very interested. If
you talk about guaranteed income for life, they are quite
interested. I think we also need to understand some of
the -- I would -- not framing but sort of the more
rational things that people worry about when it comes to
annuitization such as having what's called an economics of
request mode. The desire to sort of leave money to others
and you have to build annuities that allow that to happen
as well. So there's putting annuities into the plan,
simplifying annuities, and then understanding and maybe
adjusting the products so we can -- so we can respond to
why it is that people do not annuitize.
>> Dawn Lynn: Thank you. Our next question is actually
from Twitter. How do we assure women's economic security
giving their lower lifetime incomes?
>> Dr. Ferguson: That's -- I love modern technology.
It's a question from someone named Twitter so [laughter]
My kids -- I have a 21 year old and 18 -- they'd be
appalled I made such a stupid joke. So I know what
Twitter is. That's a very good and a very important
question so let me tell you what we've tried to do. What
we have done in our company recognizing these issues
around gender differences, we've actually developed a
training session financial literacy symposium, I guess you
would call it, a seminar for women that's taught by our
women professionals. And that is starting to show some
real traction just in terms of the number of people who
are interested in doing this. And the most important
statistic is that after these general seminars which last
for about an hour, hour and-a-half something of that sort,
we're getting a very, very large turnout of folks who
want -- women who want to sign up for counseling sessions
and then they're tending to take action. They're tending
to save more, diversify their portfolios and other things.
So I think -- now we are a microcosm of what I think has
to happen more broadly. Which is, one, recognizing that
there are gender differences and sometimes it's hard to
talk about gender differences without seeming to be, you
know, doing things that are inappropriate but if there are
then one should recognize them. And two, then
understanding with those differences how you leverage them
if you will into getting people to take action. And I
think we started to figure out a little bit of that. How
we do that at a national level, I think ultimately it's up
to institutions such as this and such as mine to partner
together to give women a chance to understand these issues
better. Now you know easier said than done. It works in
places where you've got, you know, institutions like
University of Michigan and TIAA-CREF. What we do more
broadly at a national level, I do think it goes back to
K-12 financial literacy for one thing. I think it goes
back to that early enrollment moment where we start
immediately to identify what the differences might be.
And so those are some of the other things that we can do
but the challenge here is that there really is no silver
bullet because giving financial advice at some broad macro
level is not nearly as impactful as what you do sort of
case by case. And that's sort of big challenge so I've
got -- we know a little bit about what one can do if you
got the resources. I can't say there's sort of an obvious
sort of national answer that's going to work for, you
know, half the population but it's going to be very
important for us to start to look at that issue.
>> Dawn Lynn: Thank you. Our next question, the trend
towards defined contribution retirement seems to be
accelerating. Do you see regulations increasing in step
to monitor and regulate the providers?
>> Dr. Ferguson: I hope so in the follow sense and I've
seen this in a couple of states. I haven't talked much
about it but one of the states that's made a big change
has been Rhode Island. And what Rhode Island has done is
create a hybrid plan and so I think this trend towards
defined contribution can be dealt with if there are
regulations such as the -- or advice and then maybe
regulations so the TIAA advice about annuitization leading
to regulations from the Department of Labor, for example,
might be one way to do that. Or if states -- states are
one of the places where the move from DB to DC is
occurring most rapidly. Follow the models towards a
hybrid plan as opposed to going to a pure DC plan. So I
think since a lot of this is happening at those levels
that's where it can be done. And then as I said the
Department of Labor since it oversees Arista plans if it
really pushes for more annuitization in the plan can help
by that kind of regulation to create a hybrid plan that
has both a DC element and then a DB element to it.
>> Dawn Lynn: Thank you. Our next question, I have heard
that low interest rates are forcing retirees into riskier
investments. Your comments.
>> Dr. Ferguson: Well, the answer is that it is true.
Let me be a little clearer about it. Low interest rates
are forcing -- it's something -- everybody into, you know,
riskier investments. It's one of the reasons why we're
seeing a rallying in the stock market. It's one of the
reasons perhaps why we're starting to see a pickup in
housing. But I would be a little cautious because then
what happens when one says that is there's sort of a
natural sense that -- well, that means we must have higher
interest rates right away. So recognize for those -- this
is now getting the monetary policy issues so low interest
rates do have the effect of driving everybody into riskier
investments. On the other hand, a reason I think that the
Fed is engineering very low interest rates right now is to
create sort of a cushion under the economy and so it's a
tradeoff that they're making frankly. Now what does that
really mean? I think the fact that we are currently
having very low interest rates validates the importance of
having a diversified portfolio. Even as you get older,
even as people get into retirement, there's still reason
to have some equity exposure as well as fixed income
exposure. You know, I think people think, well, as I get
older I -- you certainly want to move more towards fixed
income, but having equity exposure even as you are in
retirement gives you a chance to offset moments when you
have low interest rates by having an increase in the
equity values that you might have in your portfolio. And
so the real message out of all of this is because you
cannot predict what the financial markets are going to
throw at you during the course of retirement, it's still
important to have a diversified portfolio. There is a
danger in being, even as one is retired, particularly if
one is retired of overly conservative just as there is a
danger in being, you know, sort of overly eager to take
risk. And this very low interest rate environment is sort
of proof of the importance of having diversification as a
way to deal with different kinds of economic environments.
>> Dawn Lynn: Thank you. Our next question, bear with
me, it's a little bit of a long one. How much of the
increase in the stock market over the past 30 years is
attributable to the change from company pensions to IRAs
forced entry into the stock market? And as the population
ages and begins withdrawals from these IRAs, how much of a
decrease in stock market is likely to occur?
>> Dr. Ferguson: Okay. Let me -- that's a great
question. Let me try to answer the second part partially
because I don't know the answer to the first part
[laughter]. So I should at least go where I think I know
the answer. So on the second issue there is, I think,
what we on our study team, that NAS study think of as
being a myth out there, that as baby boomers retire,
they're going to dump their stocks and the stock market is
going to collapse. We think that's not the likely
outcome. And that there will be other forces that will
drive equity markets but it's not going to be, you know,
the aging of the baby boomer population. The reason that
we believe that is that equity markets in particular are
really quite global. Well, a number of things. First, we
don't believe based on the diversification I've just
talked about that individuals are going to be sort of
dumping their stocks. They will be selling them gradually
over time as they get older, but they'll still hold on to
some as they diversify. Secondly, even among older folks
there are different risk profiles and so we shouldn't
imagine that everyone is going to, you know, reach a
certain age, you know, and start to act the same way. The
third is remember one of the things I've said is we may
have to -- younger people and maybe in some sense all of
us may have to increase savings so even as some folks are
selling their stock in order to -- their equities in order
to fund retirement, there will be other people, younger
people, a smaller cohort but increasing the savings rate
may offset some of that selloff, if you will. And the
final thing equity markets in particular are quite global.
And as growth picks up around the world, even though they
have demographic challenges, as the rest of the world
becomes much more middle class as they are forced to save
more and as they think about diversifying their portfolios
and overcoming what Susan and other international
economists call a home bias in investments, they will
naturally look to the U.S. market as the deepest and most
liquid. And so I think this statement that equity markets
are going to -- U.S. in particular be on a downward trend
because of demographic is false. It's a myth. So the
first part of the question I have to be very honest. I
honestly cannot tell you how much of the rise in equities
was driven by the increased use of DC plans. I'm not sure
that anyone can really tell you that. We can tell you the
amount of equity that's being held in DC plans but how
that drives pricing as all of you know depends on supply
and demand dynamics that are global. And so while this
has been an interesting trend, just as I don't think that,
you know, the aging of the population is going to lead to
a huge selloff, it's hard for me to say that the big rally
that we've seen in equities over the last period of time
is being driven by aging populations. In fact, as one
thinks back on economic history, there have been, you
know, lost decades in equity markets that are sort of
inconsistent with the notion that aging baby boomers have
been -- I'm sorry. That young folks, baby boomers, aging
through the population from the 60s to now have been
leading to this sort of steady uptick in equity
evaluations. Because if you look at what happened to
equities, there have been periods in the 70s where they
were really flat; then they rallied; then they're flat;
then they collapsed. So it's all the behavior of the
equity market's actually belies the notion that somehow or
another it's demographics that really we're driving what's
going on. I think there are many other forces including
policy forces and the other kinds of dynamics that drive
markets and demographics, I think, was probably a
relatively small part compared to other things.
>> Dawn Lynn: Thank you. Next question, I worry that our
children cannot save enough for retirement due to the
skyrocketing costs of undergraduate education. Your
comments.
>> Dr. Ferguson: I worry about it too. You know I wish I
had sort of a more insightful comment. I think the issue,
and I've talked to some people on various campuses about
this, we really are going to have to rethink the financing
model for higher ed. And that question sort of takes me
into that space. Because just as I've talked about the
threats of retirement not this campus -- this campus has
actually been, I think, in better shape than many others.
But we cannot continue to depend on, you know, 7,
8 percent increases in tuition year after year after year
in order to drive the higher ed model. Frankly I think
the higher ed model also is not going to be able to depend
for research support from the government as much as they
have in the past just because the general fiscal
challenges that we confront. There are a number of us who
think about endowments and we're not quite sure that
you're going to see double digit increases in endowments
as well. And so I think higher ed generally speaking, not
any particular institution is going to have to really
rethink it's financing model for lots of reasons. And one
of them is that young folks, our children, are not going
to be able to afford the kinds of increases that we've
thrown at them in higher ed space. Now my impression
based on conversations I've had on this campus is that the
University of Michigan is actually starting to come to
grips with this issue has started to think about sort of
gradually keeping costs under control for sure. I suspect
that's not popular with everyone. So I'm not getting into
what other political dynamics on the campus may be. But I
think the point I'm making is that a well managed
institution can think about a multi-year strategy for
trying to gradually adjust its approaches including
lightening up, if you will, on the big increases in
tuition because I agree that our children or in some cases
grandchildren will have a hard time affording the kinds of
education that I did and folks in this room have had.
>> Dawn Lynn: Thank you. We also have another question
from Twitter. How is the uncertainty in retirement
planning likely to affect labor management bargaining in
the near and midterm?
>> Dr. Ferguson: Yeah. That's a great question. I think
we've actually already seen that to some degree. Actually
some of you, I doubt if any of you or many of you are
football fans. You know that one of the disputes that
existed between NFL and the referees union was around
moving to a 401K type plan. And so we see that being
very, very visible. I think the reality is that this
issue around retirement and retirement security is going
to continue to be an important challenge in labor
management relationships. One of the reasons that I am so
enamored of the hybrid model is that our experiences has
been that it seems to be a middle ground that brings
together labor and management. Because it can create more
certainty about what the employer is going to have to pay
in by creating a DC type plan. But a hybrid model that
has an annuity or other kind of DB option creates some
certainty about retirement outcomes and risk sharing for
the employee. And so, you know, I do think that these
hybrid models that combine DB and DC are a good way to try
to break through some of the natural tensions that exist
or could exist around retirement security for management
and labor and we've seen already, you know, that at the
state level, local level etc. this has become a really hot
issue.
>> Dawn Lynn: Thank you. And this is going to be our
last question. What are the effects of immigration policy
on the retirement crisis? Some have suggested that net
immigration into the U.S. has to a certain extent made up
for the declining birth rate.
>> Dr. Ferguson: It has to a certain extent because
immigrants -- net immigration has tended to be somewhat
younger than the existing population. But one has to
recognize that even immigrants start to get older, you
know, no one's going to be perpetually young. And so
while it may at the margin be helpful, I'm not sure one
should look at that as, you know, the core solution. It
is part of the solution space. One of the reasons that we
have a relatively younger population compared to Japan or
China or other places is that immigration has helped us
over time. But, you know, that's once you get a stock of
immigrants by definition they're going to age as well so
you still have an aging population. You may start from a
slightly lower base which is one of the things that's
helped us. I don't want to go too far into immigration
policy but one of the other things that our report says is
that a solution to all of this, given the fact that we
have a smaller cohort of younger people that will be
supporting all of us aging baby boomers is that we have to
create greater productivity in society. And you know one
can think about immigrant policy, immigration policy that
can either be helpful in that regard or neutral in that
regard. And so I think the real issue around almost any
policy has to do with refreshing the population has in
part to do with how do we create much more productivity in
society. So it's not just around age. It's also thinking
about how you make those folks more productive. Well,
thank you all very, very much. These have been great
questions and I really have had a wonderful time here.
And look forward to maybe returning to Ford School at some
point in the future. So thank you all very much.
^M00:57:10
[ Applause ]
^M00:57:18
>> Susan: Thank you very much. That was terrific. It is
really wonderful to be able to have such a clear and
candid discussion of very important issues and we're
particularly pleased to have this important topic
addressed as part of our policy talk series. So thank you
very much. I'd also like to thank John Ciorciari and Dawn
Lynn Kaiser for framing the questions. And in particular,
our audience for pulling together such a wide range of
very thoughtful questions that enabled us to expand the
conversation this afternoon. So thank you both to those
who are here with us in the room and also to those who are
watching online. With that, let me ask you to help me end
the session by giving a final thanks to Dr. Ferguson for
his presentation. Thank you very much.
^M00:58:12
[ Applause ]