Retirement Challenges for Individuals: A Global Comparison

Retirement Challenges for Individuals: A Global Comparison

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from Stephen C. Freidheim Symposium on Global Economics and Stephen C. Freidheim Symposium on Global Economics

This is the third and final session of the Stephen C. Freidheim Symposium on Global Economics. 

This symposium will focus on the future of investment management in a world of low returns, the financial pressures felt by universities, states, and individuals around the world, and methods for adjusting to low returns on investments.

MALLABY: OK, welcome back to Session Three: “Retirement Challenges for Individuals: A Global Comparison.”

So we heard in the first session about how hard it is for a university like Yale to adapt to a world of lower interest rates; in the second session how hard it is for a state like Connecticut to revise the public pension system. And in the third session of the Stephen C. Freidheim Symposium, we are going to hear about how individuals adapt.

So perhaps we’ll find that individuals are more flexible than the institutions that society creates collectively, but we’ll see where we get with that.

So I’m Sebastian Mallaby. I work here at the Council on Foreign Relations. I have, right next to me, Teresa Ghilarducci, professor of economics at the New School for Social Research. We have Neil Howe, managing director for demography at Hedgeye Risk Management, and on the screen behind me and—also in front of me, actually, we have Andrew Scott, professor of economics at the London Business School and author of the book, “The 100-Year Life.” We’ll get to—you’ve both written as well. We will get to that.

I’m going to start with Neil. We know that it’s sort of a truism that individuals have a hard time saving for retirement, but you’ve made an additional point, which is that it is particularly hard to persuade people right now that they should worry about preparing for retirement because the current crop of seniors is actually extremely well off. That’s the secret. Can you expand on that?

HOWE: Well, yes, this is really looking at retirement as a—and retirement planning as a generational experience. One of the reasons why the Greatest Generation, the GI Generation, and much of the Silent Generation that came of age in the late ’40s and 1950s did such a good job retiring is a lot of their own parents had been completely wiped out during the Great Depression. And back in the 1950s, old people were the most poverty-prone age bracket in America. When they first did the poverty line—first made their calculations in 1959, 35 percent of the elderly were beneath the poverty line, much higher than any other age bracket, and that’s why Lyndon Johnson used to talk about the poor and elderly almost as synonyms back then.

Well, flash forward to today where the Silent Generation is now comfortably over age 65, and I just relate to you that—sort of the preview of the most recent issue of the Survey of Consumer Finances—this comes out by the Fed. It’s done every three years, and it basically reviews median household net worth. And they—I don’t know why they do it every three years, but they do it every three years, so it was 2010, 2013. They just came out a few weeks ago with the results for 2016, and in addition to showing that average net worth has improved, or the recovery of the economy, and markets are doing better and so on, the most stunning news was underreported in that, for the first time ever, the highest median net worth of any age bracket is 75-plus, right? And this is a rags-to-riches transformation of seniors in America.

So this group is up there. They’re more likely to own houses, they own more—on average more stock, still, in their 80s and early 90s than any other lower age bracket. You go down the list, you know, of ways in which they are really doing well. They have done well all their life. And their savings years perfectly coincided with the enormous, you know, boom in equities and fixed incomes starting in the early ’80s. The last cohort of this generation, born in 1942, the last cohort to have no memory of World War II, reached age 65 in 2007—perfect timing. And then, after cashing in, then they had low interest rates and quantitative easing. And we often say that low rates of return penalize the elderly and savers—it penalizes savers, those who have yet to save, but it hugely benefits those who have already saved.

And so this group actually found their median household net worth, in real terms, actually increase by over 50 percent in just over three years. So this is the—this is the issue, to come back to this. So they saved a lot, and they made sure the political institutions bolstered saving because of the experience of their own parents.

MALLABY: And does this picture—

HOWE: Meanwhile, Boomers and X-ers are looking at this group and thinking, “I’ve got it made, you know. I have defined-contribution plan, I’ll put in 6 percent, 7 percent. Who cares where it goes? Maybe I’ll roll it over and maybe I won’t.” But it’s looking at their own parents’ experience. And I just think almost—this is something economists don’t talk about, but I think as a sociological reality is that generations look at the experience of their own parents. And when they see their own parents generally doing OK, they just don’t see much reason—

MALLABY: And just quickly, does that—does that picture mask large inequality among the over-75s, or is it a pretty low Gini coefficient—

HOWE: Remember, I was talking median, I wasn’t talking mean. So I’m talking about your typical person aged 75-plus. So it’s not just all Warren Buffet, you know? All that money.

But my point is that this is—and by the way, the Gini coefficient of that group, 75-plus, is lower than any of the lower age brackets. They are much more likely to own homes, which is the one biggest reason, as opposed to the younger age brackets.

MALLABY: Did you want to jump in, Teresa?

GHILARDUCCI: Yes, we used to have a society where the Ginis did get lower the older you got, but the main contributor isn’t home ownership or savings; it’s Social Security, and Social Security really compresses income. And also—

HOWE: And I was just going to mention the Fed data doesn’t—just looks at assets, so—

GHILARDUCCI: Right, it doesn’t value the wealth—

HOWE: —it doesn’t look at the present value of Social Security.

GHILARDUCCI: Yes, and that’s actually a big story for the advance of the elderly as well as defined-benefit plans.

HOWE: Yes, they have that, too.

GHILARDUCCI: So I think that it’s important to talk about how households are prepared, but not because of households’ or individuals’ decisions about current consumption or future consumption. It’s about the institutions with which households save for their retirement, and it’s those institutions that have really changed in the past 40 years.

MALLABY: Some combination of different institutions—Social Security, defined-benefit plans—combined with what Neil is saying about the fact that wealth results for savers in that generation were extraordinarily favorable, and has made the current generation of people around the age of 40 feel less exposed.

I want to get Andrew Scott in. One thing that Andrew’s work has focused on is pointing out that there’s the option in dealing with an uncertain over-65 phase of life of simply working longer. More people are doing that, and the official retirement age should arguably be retired. Andrew, why don’t you expand on that?

SCOTT: Yes, I think when looking at life cycle issues there’s two reasons why society is worried about an aging economy. One is changes in the birth rate and a very large cohort coming through into retirement—the Baby Boomers—but the other thing is that there have been very large increases in life expectancy the last 50 years, so that generation reaching their mid-70s, as has been described, aren’t just lucky on average in terms of their financial wealth, they’ve also done well in terms of education, they’ve also done well in terms of life expectancy.

So we have, you know, an issue about really how we define old age. If people are living for longer, how do we finance that? And also, what do we count as being old?

I’ll give you some U.K. statistics. In 1922, a 65-year-old man had a mortality risk of 4.3 percent. Today it’s down at 1.3, and if you look at the equivalent mortality risk, the 4.3 percent, today that accounts for somebody who is 78. So there has been a very big shift in life expectancy on average.

MALLABY: So 65 is the new 78?

SCOTT: Well, yes. In fact, you know who has got the 1.3 in 1922, it’s 51, so 65 is the equivalent to 51 in 1922, and today’s 78-year-old, in terms of mortality risk, is the equivalent of a 65-year-old. And you think about this longer life expectancy—you know, by some counts, children being born today can expect to live to high 90s, early 100s, if not more. It’s not clear that simply saving more will solve the problem, as we’ve been talking about here.

People never save enough anyway. People are fairly unresponsive to interest rates. So I think if we’re looking at how we finance longer lives, it’s going to have to be working longer.

MALLABY: So talk a bit this nice phrase you came up with, the “wellderly dividend.” We’ve got more seniors who feel well. They can contribute to economic output, and your argument is that they should do so and that’s a more fruitful way to address the burden of an elderly population.

SCOTT: Yes, I—one of the problems when one talks about aging is it’s a very loose and ambiguous word, and there truly are issues to do with aging. But everyone is aging. Everyone is aging one year a year, whether you are 1 or 99. So then the question is we’re talking about the average age of society. But if it’s about longevity—so people are living for longer—then literally what is happening is that we’re actually aging more slowly. I mean, we’re all sort of younger for longer is the way to look at it.

And the 20th century created a three-stage life: we educate, we work, and then we retire, and retirement was set at 65. Clearly, if we are healthier and more productive for longer, this should be a positive for the economy. Unfortunately we have that three-stage approach to life, and we tend to (mark?) the old age dependency ratio, which says everyone under 65 is going to be inactive. Oh, gosh, we’ve got a big increase in the proportion of people aged over 65.

But, you know, there’s an alternate assumption that everyone is healthier longer, so rather than be a burden, that’s a potential. So of course the question is how many people living way above 65 are still active and still productive and still able to work.

And of course we are seeing globally the increases in the proportion of the population still at work after 65. In the U.S., having declined almost continuously throughout the 20th century and reaching a low in the early ‘80s, we’ve seen a portion of people over 65 still at work up to 20 percent, I think over 70 it’s up to 10 percent. And we’re seeing some of the shift elsewhere.

MALLABY: Teresa, do you want to respond to that?

GHILARDUCCI: I mean, this may a U.K. story, but in the United States, saving retirement and funding retirement by working longer is just not practical. Most of the longevity gains have gone to the top income earners, the top socio-economic groups. The people who make pension policy, they’re living longer and they’re healthier, but actually the jobs that older people have in the United States are degrading in terms of the characteristics of the jobs. There’s an increase in the percentage of older workers saying that they have to do heavy lifting or more physical labor. Stooping and bending has increased for 62- and 65-year-olds since 1992. The pay for older workers is actually leveling off and, in real terms, falling, maybe because of this big cohort effect.

So there are some well-educated people in this room who are feeling better and are wanted and are working longer.

MALLABY: Wait, wait, wait. I think, Andrew, were you citing numbers for the top 5 percent or were citing numbers a bit broader than that?

SCOTT: No, but I think we are getting to a really, you know, key issue. There’s a lot of inequality in all the data—in income, wealth, and in life expectancy. And this is one of the big challenges we’ve got. It’s certainly not the top 5 percent. I mean, it varies of course from country to country.

I am very worried—I mean, you’ve seen it in the U.S., of course, the bottom end of the income distribution seeing the life expectancy fall, and if you do just increase the average retirement age, you do run the risk of eliminating one of the greatest inventions of the 20th century, which is retirement.

So the challenge we’ve got is how to we create a system, one, that doesn’t produce these extraordinary differences in life expectancy by income, which both the U.K. and U.S. have a problem with. And then secondly, how to create a system where the number of people who are fitter and healthier for longer can carry on working in a manner that isn’t demeaning, may require more flexibility, may require lower wages, but enables them to continue to be productive. And of course what is very striking with the data, too, is that effectively blue-collar workers, the earlier they retire the longer they live. White collar workers, the longer they work, the longer they live. I mean, it’s—old age has a very varied distribution across individuals, and some of that is strongly linked to income and particularly education.

So we do need to move away from sort of a one-size-fits-all policy and think about how to protect those who are less fortunate but reap the benefits of their—what is a tremendous achievement. People are healthier and fitter for longer.

MALLABY: A quick word from Neil about how you see the future of the over 65?

HOWE: I agree with you obviously. I mean, people should be gainfully and happily employed for as long as they wish. I mean, who could be against that?

But I do see some generational trends which worry me. And I will just point to two of them which I think are important here. One is that, by many measures, it’s unclear—after several generations in a row of people being actually healthier in mid-life than the prior generation—certainly the GI over the Lost, the Silent over the GI—you know, raised in a more healthy way, certainly higher income, better healthcare throughout their life and so forth.

With boomers we’re beginning to have some real doubts as to whether this generation is in better health. Estimates of self-reported health by boomers now around age 60 compared to Silent at the same age at age 60, fewer of them report themselves in excellent health, more of them have diabetes, more of them are obese, I mean, you have more of them—but you can go down a range of these indicators and so that—

MALLABY: But how do you square that with the increase in longevity?

HOWE: Well, the increase in longevity hasn’t occurred for them yet, right? I mean, come on, I mean, you’re looking forward, right?

GHILARDUCCI: I agree with you.

HOWE: But here’s the point. So we’re dealing with a cohort effect, but the one thing we do know—one thing we know for sure among that cohort is along with a greater degree of economic inequality, it’s correlated to the greater degree of inequality in wealth. And that gives rise to the findings of Raj Chetty and Angus Deaton at Princeton, and all these people saying that there are two parts to the Boomer Generation: there are the Ray Kurzweils out in Silicon Valley, and they’re taking pills every day, and they are running marathons, and they expect to live forever. And you know, one day they are going to download their wetware into software. They’ll live forever, they’ll be trans-human, that’s right.

Anyway, but then you’ve got the other half of the Boomer Generation that is basically retiring early on disability insurance, and we have a huge, massive explosion of disability insurance benefits, and this is non-college boomers, particularly late-wave boomers born in the ‘50s. They are—they generally are not the ones that are participating in this rising labor force participation that we’re seeing among boomers. So the problem is that those boomers who are working tend to be higher income, college educated. The boomers who aren’t participating in it are the ones that actually economically are most in need.

So I’m in favor of the trend. I’m just saying there are some huge problems in execution.

GHILARDUCCI: I think we all agree that working longer is not going to solve this retirement income security crisis.

MALLABY: Not for everybody anyway.

GHILARDUCCI: And for probably most people. Most people claim Social Security benefits before 65 despite the amazing delayed retirement credit you get until 70. Only 8 percent of claimers claim at 70, and probably most of us will claim at 70.

So I think we might want to talk about what the other panel has said all afternoon, is that we need a completely different design of our retirement income security.

MALLABY: OK, so tell us about your proposal.

GHILARDUCCI: So I happen to have written a book. I’ve completely redesigned the Social Security system. We made a big mistake 38 years ago when we changed the tax code and added a 401(k) for managers, the higher income people that weren’t as well served by the defined-benefit system. It was never meant to be the retirement income security system for America or else it would have been called the great American retirement security system rather than a small part of the tax code.

We created, unlike any other system in the world, a do-it-yourself, individual directed, voluntary, commercially driven savings program for retirement thinking that that’s the only reason that people saved, forgetting that they save for precautionary reasons, short-term reasons, and we gave tax-favored retirement savings incentives for people to take out money whenever they needed to. And that’s just crazy and uniquely American.

So we need to actually bring in some elements of Social Security and defined-benefit plans to mandate—even though I’m told in Washington to use the word “universal.” But I want an opt-in and stay-in program. Forget Richard Thaler, who just won the Nobel Prize. “Nudge” isn’t enough.

So a mandatory supplement above Social Security—my co-author and I, Tony James from Blackstone, have proposed a minimum 3 percent mandatory savings on top of Social Security, professionally managed like defined-benefit plans are managed so that you could match long-term liabilities with some long-term investments because now we’ve built this system where people can only invest in short-term liabilities and require most of that—

MALLABY: Short-term assets, I think—

GHILARDUCCI: —short-term assets, thank you—and to have that money be distributed mostly as an annuity of the life-long benefit. And if people want anything more above that then let them do it, but we need a higher—

MALLABY: Andrew, is there a, do you think, a paradox of thrift here potentially? You’ve got a situation where part of the challenge of people living for a long time beyond the traditional retirement age is—elicits the policy response, OK, let’s drive up national savings with a mandatory universal add-on pension. If everyone is saving more, and we’re worried about low interest rates, we’re going to have lower interest rates, aren’t we?

SCOTT: It is. I think if you look at the general equilibrium, though, it also depends on investment and if people—a large group or block are moving into retirement, then we’re going to have an excess of capital and we don’t need so much investment, and the rate of return on capital will fall. So, you know, savings—so, sorry, that’s going to increase it, isn’t it? It’s going to increase the problem of lower interest rates.

Yes, I think, you know, most macroeconomists talk about a sustained period of lower interest rates, and many actually argue that that is one of the contributing factors to the low level of long-term rates. It’s not all about QE; it’s this secular stagnation in demographic age.

GHILARDUCCI: But then how do you solve secular stagnation? You increase consumption and demand, and if older people have more income, you can actually grow the economy and you won’t have the paradox.

MALLABY: But if your objective is to increase consumption in the economy, a mandatory increase in savings will actually reduce the consumption in the economy.

GHILARDUCCI: But as any Keynesian will tell you, it’s the distribution of the income that matters, so if you actually raise incomes for people at the bottom, you’re going to get a higher multiplier—

HOWE: Can I just offer one bit of support for her system, if I may?

GHILARDUCCI: Thank you, Neil. Please continue. (Laughs.)

HOWE: Australia. So Australia is the one country in the world which is the only country that has a mandatory defined-contribution system, it’s a superannuation benefit, and if you go to Sydney or Melbourne, they’ve got these huge pension offices that manage that money. It is a ton of money. It is nearly 100 percent of GDP. It is a huge amount of money.

Australia is the only country that has not had a recession in what, 26 years or something like that, and they’re doing very well. We used to actually issue something, when I was at CSIS. We had a global aging index, and we used to give Australia the number one spot in terms of the affordability and sustainability of its pension arrangements.

But just to come back on one other side of this, what you said happened is true. The 401(k) system is really a pretty horrible system. It’s a bucket with a lot of leaks, and it’s complicated, no one understands it, how do you roll it over and, I mean, it’s costly. It’s kind of like our healthcare system.

But it wasn’t just the system that cheated X-ers and boomers. There is a little bit of generational agency in this. Boomers and X-ers deliberately chose not to want to go into those defined-benefit pensions because they didn’t want to belong to unions. They wanted to cash out all they were paying out. Remember, in the late ‘70s and’80s and ‘90s, it was a time of huge free agency, with all these new generations coming in. They wanted control of their own income, and as Jack Welch used to say, “You know, I pay you at the end of the week, on Friday, and we’re even.” And they liked that. I mean, that’s the spirit of the 1990s.

So the idea of kind of getting out of these long-term invisible handshakes, which the Silent Generation truly enjoyed, was partly the fault of the generations themselves. If there is a generation, I think, which actually would be attracted to this new system of mandate, I think it’s Millennials.


HOWE: And Millennials are already responding very favorably to the “Nudge” you talked about because, as many of you know, we’ve changed the rules. For 401(k) now you have to opt out rather than opt in, and Millennials, by all indications, are saving a lot more in companies that offer benefits. And I go and see corporations all the time, and the benefit managers, when they were—all the benefit seminars, all these people in the late 20s, early 30s showing up, and no one in their late 40s or 50s are showing up, despite the fact these X-ers really need the benefits more.

MALLABY: Neil, just one other thing. You mentioned Australia, and East Asia generally is noted for a couple of things. One is life expectancy rising faster than anywhere else—Japan, Korea, and so on. And secondly, not in Japan, but in parts of East Asia, more talk than action in terms of safety nets provided by the government for retirees. So you’ve got this huge aging and rather few public promises towards those people. So the response is precautionary saving—

HOWE: Yes, that’s huge.

MALLABY: —which is going to drive up global imbalances, drive down global interest rates. So some of what we’ve been talking about in this symposium of a low-interest-rate world—

HOWE: Do you remember Bernanke and—you know, Chairmen Greenspan and Bernanke both talked about, you know, excess savings from Asia. I think that’s what you’re talking about.

But just to back up, I think it’s important that everyone understands that two-thirds of the aging—when you talk about aging, increased age dependency ratios, proportion of the population age 65 and over relative to the working age population—these kinds of ratios—two-thirds of the growth is not due to greater longevity; it’s due to declining fertility. And I often have to remind people that the reason why we have such an older world is not because people are living that much longer. Yes, they are living longer, and they are living a little bit longer in South Korea and Japan than other places. The real reason is fertility rates have plummeted. Fertility rates are down. And thing people—because this is directly relevant to why we have low rates of return, and that is the working age population is no longer going to grow in most areas of the world. It’s going to be shrinking in Europe, it’s going to be shrinking in most of East Asia, and with productivity also declining on trend, with a declining workforce, that by just every kind of neoclassical equilibrium model just shows that the marginal return on capital will fall. And that’s what we’re experiencing today.

This is not a quantitative easing thing, this is not a short-term thing. This is a long-term difference in kind of market equilibrium due to the fact that we have a lot more capital being generated, but a lot less need for capital broadening investment. You don’t have to build new houses any more for working-age people. You no longer have to build new factories, you no longer have more people in the working-age population from one year to the next, and we have a lot of people reaching older ages when they are saving a lot more.

So we’ve got a fundamental alteration in the supply and demand for savings.

MALLABY: I want to see whether Andrew, who has the disadvantage of being remote, wants to comment on that.

SCOTT: Yes, on lots of things. I do certainly think in terms of East Africa—East Asia, sorry—it very much is the decline of the fertility rate that is driving the increasing life expectancy. I think elsewhere we’re seeing increasingly it’s about longevity, though that’s the trend of the future.

I really like a number of points that have come out so far because we started talking about generational conflicts, you know, one group is much richer than the other, but I think what comes out very, very clearly from all this debate is actually whether you are young or old, there is a big inequality challenge in the States. And going back to the Social Security reforms, as suggested, that’s fine to do a 3 percent top up, but if I haven’t got any money, 3 percent of nothing isn’t going to give me much money to get old.

But there has to be some form of transfer, and I think that holds both amongst the elderly and amongst the young. And so I think that it crucial.

In terms of demography, the only thing I would warn against is if you look at the last hundred years—take for instance the U.K.—we’ve seen the ratio of workers to pensions go from 14-to-1 down to 3-to-1, and it’s going to go lower, but there has already been a very, very big fall, and I don’t think that that decline has been responsible for the U.K.’s economic malaise over recent decades.

There are a lot of things that happen in the labor market to adjust—whether it be an increase in female participation, whether it be an increase in the elderly participation rate—that offset some of these forces. So one thing we do know is that demographics is a big driver of the macro economy, but it’s not destiny. There are lots of things that offset some of those challenges.

MALLABY: I want to go to members for questions, so remember this is on the record, and if you have a question, please wave your hand and we’ll come to you.

Q: Hey, I’m Allison Schrager. I’m a journalist at Quartz.

So I like your idea to change retirement saving to focus on long-term liability. But how can you get people to agree to annuitize. Andrew can speak to in the U.K. they used to have mandatory annuitization and people hated it so much they had to get rid of it, and now everyone is spending their defined-benefit lump sums.


Q: So how can you get people to start thinking more in terms of retirement income?

MALLABY: Are you directing that somebody in particular, or—

GHILARDUCCI: Allison, nice to see you finally. So we would pay for—to answer you, Andrew—for this mandate, 3 percent for the bottom half of the population—working population who have not gotten a raise, you know, for the past 20 years, by redistributing from the wealthy to the lower income. That’s the redistribution that really matters. The Republicans were right last week. I can’t believe I said it, but they were right that the tax deduction and benefit for retirement savings in this country is lopsided. It is—really benefits the very wealthy, and it doesn’t do anything for the bottom third of savers.

So we are proposing a refundable tax credit, to answer your question. So you don’t even have to think about it; the government refundable tax credit will pay for your 3 percent.

If you look at every poll—Gallup, Pew, the HSBC does a poll—and you ask Americans and you ask people across the world, what is your top economic concern? Even in 2009, they said it was retirement security. We did focus groups of Trump voters in December in the four famous states: Wisconsin, Ohio, Pennsylvania and Michigan. And they voted for Trump and they’re the most worried about retirement security. And a lot of that is folded up in their concern that their employers will want them at 63 or if they can find a job that they can do and—you know, in their late 60s. So I don’t think it’s a problem motivating savings—even I—so I beg to differ from you—it’s not an individual choice about savings, it really is about the incentives and the trusted environment to be able to do it.

MALLABY: I mean, I guess whether you—whatever you think is the right balance between longer working and more saving, in terms of providing for retirement, if you’re going to have some more saving, it doesn’t make sense to have 80 percent of the benefits from tax incentives for saving go the richest 20 percent, which is a number I have studied for years.

GHILARDUCCI: You’re exactly right, I know.

MALLABY: (Laughs.)

GHILARDUCCI: And I got it from, you know, the Tax Policy Center and the Republicans know it, too.

MALLABY: Andrew, did you want to say something?

SCOTT: No, I think this is the heart of the challenge because I think it’s actually hard enough for those people who’ve got the resources to focus on long-term. You know, there’s two challenges here: how people transfer money across their lifetime and then how we transfer from those who have resources to those who don’t. And clearly, our system has to combine both. You know, getting people to focus on retirement income can only be something for those that’ve got spare resources, and I think you look at low rate of return, you look at the traditional challenges the financial system’s made, and you can see actually why people don’t focus on long-term savings.

HOWE: The annuitization question you raised is a real one. Annuity markets don’t work very well because it’s a classic case of asymmetric information. It turns out that people know a lot more about how long they’re going to live than anyone else does no matter how much they measure you, no matter what they prick in you and, you know, what they—how they test you, you know more than they do, so that’s a problem for these markets. I don’t know whether government would have to come in with some guarantees there; that’s going to make the whole system a lot less palatable politically, I think—as well as your subsidy thing—I think that makes it a lot more politically problematic. But that is a problem.

I would say that one of the reasons it hasn’t been so much of a problem, in fact, is it turns out that a lot of the people like, you know, Milton Friedman and Modigliani—a lot of these people developed a life cycle hypothesis to savings—is that everyone’s object is to actually die with zero dollars in their bank account, right? I mean, that’s kind of what we want to do. That’s what annuities help you do, right? But it turns out that’s not actually how people actually live their lives. People amass—even people of modest incomes, as we know from the SCB survey, amass a huge amount of financial savings into their 80s and 90s undoubtedly because of bequest motives.

GHILARDUCCI: I think it’s long-term care. They’re capitalizing on long-term care risk.

HOWE: Well—


HOWE: —yeah, but—the kind of amounts—

GHILARDUCCI: In America, so Americans, right. Yeah.

SCOTT: In any case—

MALLABY: Some bequest motive probably exists.

SCOTT: But that in itself it would probably be a problem for annuities, right? I mean, annuity would suddenly, you know so anyway.

GHILARDUCCI: That’s fine. That’s fine.

MALLABY: Sorry. Yes, go over here.

Q: Stephen Blank.

What happens given the increasing role of the gig economy—


Q: —gig jobs in all of this, what do you do with savings then when people don’t even have continuing jobs, don’t have a continuing employer? How does all that work?

GHILARDUCCI: I mean, that—I mean, we actually have more secure jobs than we did when Social Security was passed and that was the Social Security answer—is that people go from job to job, they actually have—we measured, like, you know, four big income shocks, you know, during their lifetimes—they don’t just have a steady job. So you need affordable, mandated savings on top of Social Security that does not depend upon the employer. So that was—that’s an easy question.

On annuities, you’re right, Neil—an individual annuity market works as well as an individual, you know, healthcare market. It doesn’t work—the only way you can actually have an annuity that makes sense or a big, big group annuities like TAI or Social Security or a big government, so it has to be government(-financed ?).

SCOTT: We do have Keogh plans. We have SEPs. We have IRAs; we have a lot of things available. I mean, I’ve spent most of my life actually—only two years of the last 30 years I’ve actually been employed. So I’m very comfortable with this idea.


SCOTT: And actually, the real problem, I think, for the gig worker—or as millennials call it, permatemp—laughs—they thought it would be temporary; it didn’t turn out that way, right? But—


MALLABY: (Laughs.)

SCOTT: —but the real problem is, is that there’s no institutional framework that thing that kind of pushes you into doing it, right? And, you know, we’re all social animals.


SCOTT: We all respond to that, and when you’re out on your own you think—I’ll do that next year, I’ll do that—if you’re truly disciplined and you take advantage of these plans, they’re every bit as, you know, generous as the ones you get, you know, in your 401(k), but the problem is people generally don’t, you know—as Richard Toler and all these behavior people say, you know—

GHILARDUCCI: No, I mean we should create a system for the humans we have, not try to change the humans we have to adapt to the system. (Laughs.)

SCOTT: The humans we could have.

GHILARDUCCI: (Laughs.) Yeah, right.

Yeah, so that—so you just made my point: we need a mandated savings on top of Social Security that is portable and it’s progressively funded.

MALLABY: I mean, sort of as Allison said earlier, you know, in a defined-benefit world, underfunding is a feature not a bug.


MALLABY: Actually, in the individual world, underfunding is also a feature, not a bug. I mean, that is how people are; they just do underfund themselves.

GHILARDUCCI: Right. And actually, we want those kinds of humans.

You know, people who are overly cautious, they’ll hoard. We hear a lot about old ladies who have $25,000 in a shoebox under their bed—that’s a tragedy. And we’re finding in this survey—health and retirement survey is that having an uncertain retirement income is causing its own nutritional problem among elders; because they’re so afraid to spend they have no other way to actually capitalize their longevity or capitalize their health risks, but they’re skipping lunch. I mean, so our system is building in nutritional problems and also a level of anxiety amongst 75-year-olds that is so unnecessary, and I’m glad you save into your IRA or your SEP or your Keogh, but you actually don’t have a good way to invest it or even monitor the fees.

MALLABY: Let’s go—let’s go to a question over here.

GHILARDUCCI: Yeah, sorry.

Q: John Biggs, retired from TIAA-CREF.

TIAA—a point on the annuitization—we had a requirement from 1918 when we were founded until late in the ’80s that you had to annuitize; there was no other way you could get your money out of the system. It was the biggest annuity system in the world, but it was absolutely mandatory—it could be a stock fund, it could be a—

GHILARDUCCI: Mmm hmm. Mmm hmm.

Q: —but the riots at the universities—not riots but the pressures on us—they seem like riots at our annual meeting. (Laughter.) So we finally broke down, as you said—actually, it lasted as long as the 80s, which is sort of remarkable given the taste for freedom that, yeah people got earlier.

But I have a question that’s baffled me, is—I’ve never seen any economic study on this—if the typical defined-benefit plan was mandatory, no employee contributions and costs employer about 9 percent of the payroll. And that was sort of the median but most common plan. The average defined-contribution plan put in the employer pays at best 5 percent and will match employee money only up to that level. And so, it may not even pay 5 percent of the payroll.

Is there any—and the employees like that. They prefer that plan to the defined-benefit plan. You can imagine the employers might kind of like it, too. They go from a 9 percent for everybody down lower. Now. any labor economist will tell you, well, that gets converted into salaries to the employees. Well, we haven’t seen a lot of increases in salaries during this huge movement of American business toward a defined—a much more modest defined-contribution plan. Whether it just takes longer for that adjustment to occur—and maybe it will occur eventually. I sort of doubt it. I’ve never been totally convinced that the—

MALLABY: Yeah, there’s sort of a mystery here why workers were happy. Maybe Neil could comment on this. You know, did they—is it simply what you said earlier? That there was a zeitgeist that favored the perceived freedom of an account that you controlled and that was worth 4 percent.

HOWE: You know, Robert Putnam, went to Harvard, probably America’s preeminent sociologist wrote a book about it. He called it “Bowling Alone.” Why do Americans do everything as individuals that we used to do as groups? And he found that two-thirds of the explanation is generational; that is to say, people born from the, you know, mid to late 1940s on started doing things more as individuals. They wanted to opt-out of paternalistic institutional solutions which they felt disempowered them. I want to cash out now; I feel I can do what I want with my money.

I think it was partly also given an added push by a lot of talk in the late ’60s and 1970s about enormous productivity revolution. We had incredible projections about what our economy would be, so it was like a cornucopia out there of how America was going to be. We were going to have flying—you know—flying cars and monorails and dome cities and all kinds of great things. Why in the world do you take all of this income away from me now—(laughs)—when I’m going to have paradise tomorrow? So I think that also changed in subsequent decades.

But now we have—and then you had Generation X-ers coming after that that just didn’t trust anyone to do—to take their money, to follow some sort of fiduciary relationship with regard to their money. They wanted it now. You know, a typical Gen X-er, I mean, I—their attitude is, I have to get my hands on it and then I can trust I have it. In fact, we used to do surveys with regard to Social Security with Gen Xers and then say would you be willing to take fifty cents on the dollar for Social Security? In other words, could we cash you out fifty cents on the dollar for your present value, and most Gen Xers say absolutely, I’ll take it. Well, I’m just saying, older generations would not have said that. That’s my only point. And so—

GHILARDUCCI: No, Neil, I think your evidence isn’t there. One of the reasons why George Bush’s privatization plan failed flat on its face is that people understood the value of insurance or paternalistic Social Security and didn’t want that extra money to manage themselves. But also—this is the way I understand the history—employers love the 401(k) more than workers pushed it. So it was more of a push to 401(k) rather than workers pulling to the 401(k). Most people said the 401(k) was a second-best solution. My employer was moving out of the DB system anyway; my unions were losing power. And so, the 401(k) was better than nothing, which is very different than I choose 401(k).

HOWE: I favor your explanation, that when people are offered the choice, do you want the money now or do you want us to put it away for you for 30 years, it’s money now.

GHILARDUCCI: Yeah, but, you know, it doesn’t—but it doesn’t explain that workers actually get a say—

MALLABY: Let me interject another dimension—

GHILARDUCCI: Yeah, sure.

MALLABY: —with Andrew, maybe, which is that, you know, in your thinking about this big psychological adjustment to a life in which—you know, you quoted a hundred-year life, whether it’s the 82-year life, whatever—it’s a long life, and so the old idea of splitting it into education, work and then retirement is anachronistic. And therefore, in a new, more fluid and longer lifespan, some early withdraw from savings vehicles like 401(k)s may not be outrageous. You might want to re-educate yourself, whatever. You have—things happen and it’s getting—the fluidity of the usage of 401(k)s fits your story of breaking away from that rigid tripartite life plan.

Do you think there’s something to that?

SCOTT: Well, I mean, I think that’s right. I mean, I think the answer to the question why are we not seeing wages respond to a shift from defined benefits to defined contribution and why do people do it—I think we touched on some of the issues. We’ve got reduced job tenure by individuals. We’ve got reduced—sorry—increases in solvency rights of companies, and a reduced—reduction in labor power. So I think those things meant that you’ve seen the pension burden being shifted onto individuals perhaps and away from the corporate.

But yes, I do think so much of this conversation that one reads about is about trying to change the parameters to preserve a three-stage life. I think whether it would be for reasons of inequality that we require a much more individual, specific setup, whether it would be because of technology which is creating the gig economy and creating a very different employment situation, or because of longevity, simply changing the parameters of the three-stage life isn’t right.

If you look at the 20th century, we created teenagers and we created retirement. Retirement then lets the creation of the concept of a pension as being the third stage act. I think if you look at what’s happening, the age at which people retire is now much more variable. Some people do retire at 65. Some don’t. Some currently working full time, some currently only working flexible, and some just do something completely different. And you’re already seeing post-retirement—almost three stages of retirement beginning to emerge: one where people (stay at home ?), one where people hopefully are fit and healthy and want to do something; and then something that equates to a more traditional use of life—end of life.

So, even in retirement, I think you’re seeing people’s financial needs having shifted and changed a lot. And I think you’re seeing that across all the time spans. I think there will be a very big shift in the financial industry. The pension industry grew as a consequence of the three-stage life. If people need access to money at different points in time, we’re going to have to think about different saving vehicles. That then creates the challenges we talked about, is that people do have a preference for money now rather than money later. How do we deal with that? And there’s this fundamental paternalism at work here—or, conflict between paternalism, telling people what’s good for them or giving them the choice to do what they want. And that is something that no system can perfectly reconcile.

MALLABY: Let’s see if we have another question. Yes, over here. Just coming to you.

Q: No one has addressed the impact of health issues on retirement. People used to count on receiving inheritance. Well, most of that inheritance now goes to take care of their parent or parents that are in assisted living. And the—more and more of people are really impacted by health care issues. So they’re not allowed. They don’t have the means to save. And with the health care going forward—nobody’s sure if Medicaid is going to work, or Medicare. So I think that has to be addressed, doesn’t it, because I think one in five people are affected with some kind of—either Alzheimer’s, Parkinson’s, or whatever. So, and it’s at a younger age that it’s being diagnosed, or it impacts on their working.

MALLABY: Yes. I mean, anecdotally I agree with you. But I want to get Andrew in again, because I think you present data, if I remember right, you know, disaggregating the extra years that people are now living. How many of those years are healthy and how many are not?

SCOTT: So one of the problems with all these conversations, one talks about averages. And, of course, averages can be deeply misleading. And in fact, even the median can be somehow misleading, given how skewed the distribution is. I always say to my students, if I’ve got one hand in the freezer and one hand in a pot of boiling water, on average I’m doing fine. But, you know, what you’re seeing in the data across countries is roughly 90 percent of the extra years of life are deemed as healthy years of life.

I’m very mindful we’ve got a very heavy U.S. focus here. And there’s a concept of better-practice life expectancy, which is the country with the highest average life expectancy at any one point in time. And what you are clearly seeing—for reasons I think we touched on today—is that U.S. life expectancy and U.S. healthy life expectancy trends are beginning to deviate quite significantly from that best practice life expectancy. And I think the subtext (of all of this ?)—both about health, and Social Security, and retirement income—is that actually if you solve those three problems, that deviation is less likely to happen.

And therefore, you’re more likely to get what is, in many countries, a benefit. People are living for longer and healthier for average, that you do need to make sure you can support that in terms of education, health, and finances. And the gap between best practice in the U.S. is getting quite extreme right now. And I do think that has to do with the inequality trends we discussed.

GHILARDUCCI: I have some data—some brand-new data on the U.S. Women are much—they live about three years longer than men do. You know, at age 65. This is all age 65 mortality. But they’re twice as likely to live with morbidity. So they—about 30 percent of women live with three or more needs for assisted—assistance with daily living. Black women, almost 40 percent of their post-65 lives are spent sick. Twelve percent of men—white men in the United States die before they ever retire. They’re dying in their boots. So I can’t emphasize Andrew’s point even more. He’s not, you know, based in America, but that inequality or morbidity, of longevity, and of wealth and income security is really skewed here.

A lot of people are hoarding their cash, not for bequest but for those last four or five years. They—even though Medicaid pays for—that our long-term care insurance. People are very afraid of going into Medicaid nursing homes. You have someone, Alison, who has an annuity plan and the same present value in a defined contribution plan. At over 65 you’re much more likely to have signs of depression if you have a lump sum rather than an annuity. So we need to add long-term care insurance to Medicare. That was a proposal in the ACA. At the last minute it was taken out. It would cost a little less than 1 percent of payroll to add decent long-term care, like many other countries have.

So that’s just—that’s my answer to your concern about longer lives and longer morbidity.


HOWE: Long-term care is even harder to price than annuities. You know, just in terms of the moral hazard and who uses it. And it’s very difficult, because it gets into questions of whether family members should be living with people, and so on. I would just say, I wouldn’t—I wouldn’t design a retirement system to solve another huge problem, which should be solved separately, and that is our completely dysfunction, out of control, health care system, which is absurdly expenses, focuses only on acute care, and has utterly mediocre results, right? So none of the other countries, many of which have very high longevity, much higher than the United States—you know, South Korea and Japan come to mind—have this problem with extra expenses for health care, right? So I wouldn’t want to—I wouldn’t want to sidetrack a retirement system to pay for really a problem that we should solve in health care.

GHILARDUCCI: Yeah, I get it. But it is an issue about retirement security itself. I suffer from that. But you have to address it.

HOWE: But the only other thing I would do too is simply to talk about—you know, because I acknowledge there’s a lot of sick older people. And you’re right, I mean, elderly women are sick more than men, partly because they do live longer. There are more of them. But I don’t want to overstate this. The elderly today are healthier, better-educated, more capable than we’ve ever seen before.

GHILARDUCCI: They stopped smoking.

HOWE: Well, they’ve stopped smoking.

GHILARDUCCI: That’s really a big one.

HOWE: But one of the things that we’ve seen—I mean, an interesting statistic that was just unearthed—I thought this was sort of instructive when you look at—kind of take apart the data. Is that if you look at everyone over age 65, and look at those who live in households with younger children—that is to say, adult children—about 14 percent are the heads of households taking care of elder children living with them. Only 7 percent are dependents living with an adult child that’s taking care of them, right?

MALLABY: So Grandma doesn’t move into the kid’s house, it’s the other way around.

HOWE: Exactly. And this gets back to how the elderly are doing pretty well today. Only 2 percent are in institutionalized care. So I just—because when I speak to people, I find that their perspective is, my God, they’re all frail and dependent and they’re all living with their sons and daughters. That is not the reality today. And one of the reasons we see this movement back towards multigenerational family living, is partly because Millennials don’t mind being with their Boomer parents. They really get along with them. I mean, it’s partly a difference in generational affinity. But also because we see a graying of wealth in America. That’s where the wealth is. And so younger adults are actually sticking with their families longer, whereas in earlier generations they would have gone off to make for themselves.

MALLABY: I’m going to seize on that assertion of intergenerational love and harmony to end this symposium on a relatively happy note. So thank you very much to Teresa, thank you Neil, thank you Andrew. Thank you. (Applause.)



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