How to Strengthen the U.S. Retirement System

Alicia H. Munnell is the Peter F. Drucker Professor of Management Sciences at Boston College’s Carroll School of Management. She also serves as the director of the Center for Retirement Research at Boston College. Before joining Boston College in 1997, she was a member of the President’s Council of Economic Advisers, Assistant Secretary of the Treasury for Economic Policy, and Senior Vice President at the Federal Reserve Bank of Boston. She has published many articles and books, including Falling Short, on retirement policy.

The views and opinions expressed in this interview do not necessarily represent the policies and positions of Guideline. The content of this interview is for informational purposes only, and should not be interpreted as tax, investment, financial, or other advice on behalf of Guideline. This interview has been edited for clarity and length.

Guideline: You have written extensively on the benefits of working longer, and the issue has been covered in the media. Are there signs that people are starting to delay retirement?

Alicia Munnell: People are working longer, for a whole host of reasons. The incentives with Social Security have changed. We've moved from a defined benefit world, which has incentives to retire at a certain age, to a 401(k) world which has no such incentives. People are better educated; jobs are not as hard. The labor force participation of older workers has increased. Not surprisingly, the more educated the person, the more likely they are to be in the workforce because they often have rewarding jobs. People with less education tend to have very physically demanding jobs and are less able to keep working.

Guideline: Is the message of financial benefit sinking in? Are people are beginning to do the math?

Alicia Munnell: They are doing the math, and the math really drives well-being in retirement. If you think of the traditional model, with people starting to work at 22 and retiring at 62, that's 40 years of work. They then have 20 years in retirement, so you have to put away enough in those 40 years--after paying for housing, educating your kids and other big expenses--to support yourself for at least 20 more years. That just is not feasible. If you can add eight years to your work life by delaying retirement, suddenly the ratio of work to retirement years changes dramatically. 70 should be the goal now.

Guideline: What does the picture look like for people at the lower end of the income spectrum or in physically demanding jobs?

Alicia Munnell: We need to be very cognizant that there's a group for whom working until 70 is not a viable option. Also, gains in life expectancy have been very uneven, with lower-income workers lagging behind wealthier workers. Which means that we need to reform benefits so that people who really can't work longer aren't penalized by huge early cuts in their benefits if they can’t stay in the workforce. And while all workers, at all income levels, should try to work longer, we need to take life expectancy into account when crafting good policy so that it’s fair for everyone. One way to do that would be to aim to have the same ratio of work years to retirement years for different groups. It would be a good measure of fairness and would reduce pressure to work longer for those who aren’t able to do so.

Guideline: For many years, our retirement debate has focused on shoring up our current retirement system, which developed in a piecemeal manner over many years. Who is talking about that segment of the population who are really in trouble?

Alicia Munnell: There hasn't been as much conversation about that. Word has gotten out that working longer is good, which was an important message. And now that it’s taking hold, we need to actually address what we're going to do for those who can't work longer. That discussion is just beginning.

Guideline: What can employers do to help their employees manage these challenges?

Alicia Munnell: Having a conversation with your employees in their 50s is critically important. If people are going to work longer, they have to invest in skills and training. They really need to say, "I would like to work until 70 and I want to be trained to make that happen. I want to continue to grow and contribute." It would be a great public service for employers to clarify for employees how beneficial it is to delay claiming their Social Security benefits.

Guideline: What about other benefits? What are the most valuable benefits for workers at different stages of their working lives?

Alicia Munnell: Obviously, retirement benefits are valuable for people all along the spectrum because the earlier you start, the better off you are. Some employers are starting to help employees pay off their student loans.

Guideline: What do you think of these new programs?

Alicia Munnell: I'm really worried about millennials who graduated with large student debts, especially those who entered the labor force during the Great Recession and the slow recovery that followed. Millennials are getting married later, buying houses later, and have less wealth in the first stage of their careers (ages 25-35) than previous generations. So while we are rightly worried about prospects for people who are in their 50's today, it’s hard to see how younger workers are going to accumulate comparable levels of wealth. Our research indicates that younger workers with college degrees are just as likely to participate in a 401(k) plan as prior generations, but their holdings are significantly lower. It appears that student debt is reducing 401(k) assets and delaying homeownership, which is the other way that people save for retirement.

Given the impact that debt is having on wealth, I think this benefit is valuable. It sends a message from employers, that they understand the financial responsibility of loan payments and want to help their employees with it. The message might be as important as the actual benefit.

Guideline: You’ve done very interesting research on fertility rates. So many women drop out of the workforce for some part of their careers, which has a big impact on retirement savings.

Alicia Munnell: I was just talking to a young woman who works here. It's so costly for women to drop out when they have kids. It seems like the only real choice for many women is to do too much and go a little crazy when they have young children. Life just becomes very stressful for a 10-15 year period. When you're in that position, you don't realize it doesn't last forever. So if women can somehow manage careers and parenting, they 'll be so much better off in the long run.

Guideline: So flexibility from employers is critical to keeping women from leaving work?

Alicia Munnell: That is a really important point. I served on the Governor's Council to Address Aging in Massachusetts. In our early debates, members were calling for special accommodations for older workers. But if you think about it from an employer's point of view, why hire an older person? The fact is that older people need the same things that younger people need, and the same things that women need, which is some flexibility. Any policy on the work force front should be geared for all the workers and not particularly for one group or another. I don't think that's helpful to women or to older people. Just have a more flexible work environment generally.

Guideline: If you could wave a magic wand and design the US retirement system from scratch, what would it look like?

Alicia Munnell: I'm very fond of Social Security; it's fairly well designed. But the fact that we have this huge coverage gap in the United States where half of workers in a given year are not participating in any employer plan, that's a travesty. Which makes expanding coverage the biggest, most important thing we can do. Everyone should have access to workplace retirement programs. It should be one where people don't have to make a lot of decisions.

Guideline: What are the most powerful design features you’d like to see in your ideal plan? Which ones have the greatest impact in terms of maximizing retirement security?

Alicia Munnell: First, don't make people wait to join a plan, have them automatically enrolled on their first day of work. I would make auto-enrollment a requirement, not a choice. Then increase the default savings level, and use auto-escalation to make sure people are saving enough. You also want high after-fee returns. For most people, that is probably an index fund. These changes, which could be made very easily, would help the U.S. system work better.

We also need some annuitized income, for two reasons. First, so people have some form of longevity insurance. They need to know that they're going to have something as they get older, no matter how long they live. Second, they also need a check that comes in the mail that gives them permission to spend some of their income, to spend some of their assets. Because my concern is that they're going to try and preserve the pile, try to live off any interest rather than just spend it. And to be very cautious about spending it. If some of it is annuitized, I think that says, "This is money that you should use to support yourself." And that would be very helpful.

Guideline: Do you think open MEPs, which could be approved later this year, will reduce the coverage gap?

Alicia Munnell: It's fine to have open MEPS. They might help the coverage gap a bit because the financial service firms might market them actively. But, I don't think they are the answer to the coverage gap. I think we need federal legislation to have everybody auto-enrolled in something.

Guideline: What about state efforts in California, Oregon, Illinois and other states? The main objective appears to be increasing coverage.

Alicia Munnell: My clear preference would be to have a national program. Because as much as I admire and am happy about the Oregon, California, and Illinois experiments, it really does seem to be a crazy way to do business, to have 50 different programs.