Teresa Ghilarducci Talks Retirement, Pensions

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I'm here with Teresa Gillarducci.

She is the professor of economics at the New School for Economic Research.

And you are a thought leader.

A lot of folks on Wall Street go to you for advice on how to deal with what they think of as a retirement crisis. But there are some divergences here and what people think the solution should be. You think of Larry Fink, for example, Blackrock is now working to announce partnerships initiatives over years to even work on the average age of retirement, encouraging people to work longer. You recently came out with a book debunking a lot of that, thinking what's the discrepancy here?

Well, if I was in a room with Larry Fink, I would say, look, what you do at Blackrock is a solution that you're managing money. You're managing wealth for all America to say for their retirement.

That's a really good thing to do.

And Americans need to build more wealth for retirement. But if you think, mister Fink, that people working longer, maybe just a one year or two years longer, will mean that people won't go into their old age without being downwardly mobile into poverty from being a middle class worker. Or you think that working longer will maintain people's living standards, you'll.

Be wrong for eight reasons.

The first reason is that he and everyone else might think it just makes sense to work longer because people are living longer, and that's actually not true. Not everyone is living longer. There is a slice of the population that have had good health care, have had the kinds of jobs that enhance their health and their well being and their skills, and they're living longer. So white men are definitely living longer than they had before. But there are some parts of our economy, of our America where

I have six others.

But let's harp on that for a moment, because a lot of people on Wall Street believe that working longer is a solution just because of how healthcare has gotten better. Let's get a little more specific on who it doesn't work for and how large is that population not being addressed if.

This is a solution.

Well, I've been in these rooms for about forty years. That's how long my career has and ever since I started, when Social Security was being cut and pensions were going on the wayside and there were more four one k's or do it your self type systems, we all knew that people would not have enough given that we did not have a good pension system, and so people thought, well, for the small group of people who are blue collar workers brick layers, they will be able to be disabled earlier,

Of physical activity.

And those jobs break bodies down. There are also a lot of light blue collar jobs or semi pink collar jobs that require a lot of engagement with the computer, and the computer has made some aspects of jobs easier, easier on the knees, but the requirements for intense concentration, keen eyesight, and actually be able to speed up your work because of increased surveillance has actually made those jobs harder too.

And when you add up all the.

Complexities involved in jobs that older people have, those jobs actually can raise cortisol levels, increase inflammation, and cause more metabolic disorders and early death. So a lot of the jobs that people have are expected to have in old age are actually the kinds of jobs that will break bodies down and are accelerating sickness.

That's the impact on the individual.

It seems like the retirement burden in a lot of ways has shifted from employers to the individual. At the same time, there's a question of whether a lot of these jobs will be supported at that age level.

How do you see that conundrum working out?

Yeah, well, there are some businesses that are hoping that they'll be a big supply of desperate.

Older workers ready to work.

Those jobs are in home health care and personal care, So we have one of the biggest industries. Everybody is in this personal care. They're destined to add over a million jobs in an economy where we'll only add about eleven million jobs over the past ten years. A good ten percent of the new labor force will be these jobs and just that one occupation. But business services janitorial

Will be able to get those jobs.

The part of the crisis that I think that many experts, including Larry Fink, doesn't understand is that most people cannot decide when they retire. They are retired. They don't retire. The verb and the agent is really on the wrong person.

There's another problem here, whether you're on a state or local pension plan. Here, pensions across the entire country are underfunded. There's a separate issue as well with the four oh one K plans, where a lot of people are not saving enough to retire on. Whose responsibility ultimately is it to make sure that there's enough money for this population to retire on.

We can say that it's up to the eighteen year old to be financially literate and to understand that when they get out of school or start work. Because half of eighteen year olds don't even try college, it's not an appropriate place for them. And you could think so it could be on the individual, and then people say, well, it's up to their parents to tell them what to do.

Well, a lot of children did not pick the right parents.

That was a joke, But it's really important for us as society to realize that there's a lot of wealth, including knowledge and wealth actual wealth that it's handed down, and a lot of debt and a lot of burden that is also handed down So the answer to your very point of question, whose responsibility is, I'm going to say it is unreasonable to think that is just the person,

So when we moved away.

From traditional pension plans where if a worker worked, they were just put into a plan that money was managed for them, they couldn't choose, and we moved to four oh one ks where the worker had to decide how much to invest, whether or not to invest, and had to choose an employer that actually provided the plan.

Most employers do not.

Most people now eighty three million workers right now today as we're talking, are employed, but they're not employed in any kind of setup where they can save for work. So the employer doesn't even have to have any responsibility for it. And the government's responsibility is to give a tax deduction to an employee that happens to save. Well, who are those They're the highest paid and they have

Eighty percent of that is going to the top. Twenty's got a.

Call to eliminate the tax deduction.

Now, yes, my colleague Delicia Manel and her Republican counterpart came together to call out what I'm calling out, So we're agreement there. This is a very expensive and regressive tax, but it does help some people save for retirement.

So why get rid of something where.

If it works for one slice of the population. All I'm saying is, don't leave the eighty three million people who don't have access to retirement plans out of this big bonanza. So perhaps we can put a cap on it and make it less expensive and more efficient by not giving away thousands of dollars a.

Year to people who don't need it.

So we could cap it, but we also could broaden it so that everybody can get some help from the government.

I'm still going.

Back to your question whose responsibility is it? And it is the system's responsibility to get people to accumulate money for their retirement earlier in life they accumulate Social Security credits.

You know, there's no.

Choice about whether or not you're in social security or not. We would even the most conservative Republican would not call for making social security voluntary. So why do we have our pension system, the other vital part of the pension system accumulating money, having it managed by Black Rock or whoever, why would we make that voluntary? And the countries around the world that have a system that's graded A or A minus, there's an international grading system of pension systems.

This idea of voluntary social security. There are real concerns under the surface and how to fund social security for the long term. A lot of concern outside of the baby boomer generation on how America's money gets filtered into America's youth as they age.

What's the fix?

Yeah, so the fix for social security is to put more revenue in it. We are past the point where we can fix social security.

By cutting benefits.

That is a non starter because the benefits for social security are keeping almost all of the people on social security above the poverty level, everybody below a certain amount, so it is a vital anti poverty device. Cutting it would just make the system even more grim, so we need more revenue into it.

The Social Security actuaries back in the day.

I mean this is in the thirties again renewed in the forties, fifties, sixties said that social security will need revenue from general revenues. We should not just be dependent upon the payroll tax to fund the whole thing. So there are many, many easy fixes to social security, and it really requires just more money.

Pot from other pots.

Capital gains, lots of other places we can get social security revenue. The key thing as an economist is whether or not the amount of money needed will break the bank, you know, will break the economy. And we're nowhere near that. We spend much less in terms of our GDP on the elderly that their countries.

Even if we fully funded.

Social security, we would still be under the international averages.

It's less than half of a percentage.

It's interesting to hear you say that capital gains can help find social security.

How much would that help fill the gap?

And also wouldn't that be a transfer of wealth from the investor class to the broader public.

Well, you know, the investor class is part of the broader public and part of the conversation we've been having for the past five years is that if you only try to protect the investor class and let them be involved in the wealth accumulating part of our economy, the investor class may be threatened by the collapse the very economy they're benefiting from. So I think with Ray Dallio and even Larry Fink, there's a very much a recognition from the investor class.

I was just the Milk And.

Conference that if we have a wealth building institutions in this country, everybody has to be part of it.

So back to social Security.

I did a calculation that if Elon Musk paid for social Security just on his salary for the entire year, and some of his capital gains were taxed to fund social security, just one person, it would save one twentieth of.

The deficit in social security.

Imagine broadening that out to maybe twenty thousand other people.

To gently this is not very much.

You don't have to raise a tax rate to any perceptible amount, but just helping share in the funding of social security, we could solve that problem overnight. The problem with not funding social security and not having an actual report to say, hey, it's funded for the next twenty.

Five years, is it?

It depresses the savings rates of ordinary Americans. I we're finding out in surveys that people are saying, I'm not saving for I'm not saving for retirement, I'm not building

So it's interconnected.

So the fix for those eighty three million people, as you're talking about, is social security part of that fix or is it something else?

It's social security has to be part of it, but there has to be something else, which is much bolder than the kind of moving the needle legislation we've seen in.

The last forty years.

And almost everybody everybody I talk to agrees, from the very highest investor class to the person who just did my makeup this morning, is that we need to get people saving for their life cycle needs, their retirement earlier as early as possible. So as soon as someone starts working and having to pay into Social Security is exactly the moment they should.

Start paying into their own account.

And there is a bill in Congress, not even just in the House or just in the Senate, but both in the House and in the Senate, and not supported by just Republicans or Democrats, but supported by both Republicans and Democrats. So it's a bipartisan bi camerole simple fix, and that's called the Retirement Savings for Americans Act are SAA.

It only applies to all the people.

Over half of workers who do not have a retirement account now and won't next year, that they will be automatically enrolled into a government administered pension plan, a national pension plan. Automatically they'll save three percent. And if their earnings are below the median, so that's half half of workers in this eligible set, the government will match five percent.

They're not fatalistic about retirement anymore.

It's interesting, this sounds very close to what we see in some other countries, similar to something like a super fund or even a sovereign wealth fund of its own kind.

For America, that kind of idea.

Is something that you and a lot of the folks that are running these big financial institutions would agree on. Why would that be the fix? How hard is that to accomplish? Who manages the money?

Yeah?

What I've been working for a lot of years with many different people, many of them you know on Wall Street. I co authored a book with Tony James, who was the president of.

Blackstone at the time. This was the fix.

I wrote a paper with Kevin Hassett, who is Trump's top economic advisor. We all agree that we should take examples from other countries where they build a capital fund. Capitalists love it because it provides a capitalist fund and everybody is involved. And the Democrats love it, you know, because it actually provides economic security. Republicans should care about economic security as well. But there's something for everybody. It is like a soft and wealth fund, which is a lot.

So one big problem that a lot of Americans have is getting down, as you've been saying, to save early on.

Yeah, some people are living.

Many people are living meant paycheck to paycheck in which they find it difficult to save.

Yeah, I'm so glad you asked that, Sonali. We are finding in fact, in practice and in surveys that the lowest paid workers are the ones that want to save the most. They're not financially illiterate. It's actually the opposite. They're keenly aware of the hardships that they're facing, and they know that having a wealth cushion is really important.

I've interviewed Latino mothers in.

Chicago and Los Angeles as part of a project that did that, and they said, to us, give me a pension plan that's my own and that my family does not have access to, because if I try to save anything for my retirement, I have to use it for my family members. That's very much part of what wealth building is for.

Different communities.

So if we don't have a place where people can save for emergencies and also save have it protected for their life cycle, no one, not except the elites will be able to take advantage of compound interest.

The question of who manages the money, yes, fun like this. I think it's an important one because you know, I think the money management industry.

Wakes up every day to try to meet these retirement needs.

But at the end of the day, are they meeting that need?

Well?

The retail managers have a very different platform than the institutional managers. I'm a big fan of traditional pension plans, the ones that state local workers have, and many of the unionized workers in big companies or the companies that don't want to be unionized, so they provide a good plan like the like the non union car companies. What they do is they pool money. And this is what the government plan would do. The government would not manage

Right now, we provided.

A system to American workers that is guaranteed to not give them the best fee adjusted risk adjusted rate of return. Because the poor individual has to decide where to what portfolio to get them on the efficient frontier, completely impossible for a worker who has to deal with building a building or teaching an English class, you can possibly do. So we have a system that is not aligned with the capabilities of the people that have the most responsibility.

So there was a recent story in the New York Times with the question was the four oh one K a mistake? In cites your research, was the four to one K a mistake?

Yes, the four oh one K system was a mistake. If it was meant to be the retirement system for all Americans, it would have been called the retirement system for all Americans. Instead, it was named after an obscure part of the IRS Code, and it was meant for a completely different purpose. It was meant to supplement social security and traditional pension, but because of several factors, it became a retirement savings plan for just a privileged part of the of the American economy.

This idea of a pooled retirement plan, a giant.

Super fund let's call super fun of the super fun for the sake of this conversation. For in Australia, this is kind of one of the closest examples that there is even that's underfunded.

Yeah, so why would this be the right fix?

Well, you know, you always have a growing liability in any kind of pooled fund, and you saw that with Social Security. It's always had a drop dead date of twenty years, but it's lasted for seventy five years. No, there are many funds that aren't underfunded, and in fact those good funds are are funded because they the money always comes in. In this super fund you know that would be created, it would be always one hundred funded because because no money could come out that wasn't put in.

So in the world of money management, there's a large and growing debate about the role of private assets. This whole idea that private assets, given that there is some room to wait to pay out some of the pensioners or retirees that these private pools of capital can be used to increase yields in the interim, or even some say that there's a liquidity myth that exists in public markets versus private markets. But we are at a point where you're seeing pensions asking private fund managers for their

Yeah, I get that it's not a fix for an individual fund. An individual having private assets along with liquid assets, and a four oh one K account is very difficult to manage for exactly the reason you want. Four on one ks are not long term investments. They're fully liquid. A person can take money out of that account. Remember my Latino mothers and so we Congress call them retirement accounts,

So only you get this.

We have this system where we're trying to match short term assets with long term liabilities. It's a huge, giant asset mismatch that is costing Americans their old age and it's costing the American economy a huge inefficiency. So a super fund would be an asset that has long term ill liquid liabilities as well as others, but it would match this long term liability each worker has, which is their life cycle needs.

So to be clear, you think private assets make sense in a longer term pooled portfolio, but not.

In a four oh one K plan.

Yeah, and I know I'm up against some of my friends that are trying to sell them maybe little itsy bitsy parts in an account, but no, because the four oh one K is a liquid account. And even the private asset managers will say, yeah, it's not for someone who demands liquidity. And what I'm telling them is that every four or a one K holder will demand liquidity because they the leakage in these plans, you know, are gigantic.