When I’m Sixty-Four:
The Plot against Pensions and the Plan to Save Them
BY TERESA GHILARDUCCI (PRINCETON UNIVERSITY PRESS, 2008)
A mandated increase in the retirement age could entail hardship for
many Americans. The solution that
Ghilarducci, who holds the Irene and
Bernard L. Schwartz chair of economic
policy analysis at the New School for
Social Research, proposes for dealing
with the problems of the second tier of
America’s pension system is called GRA,
for guaranteed retirement accounts. Before turning to this ambitious proposal,
it’s useful to summarize the author’s account of the inadequacies of the status
quo.
Employer-provided pensions have
for many years covered about half of the
workforce. This overall constancy masks
a huge decline in the coverage of defined
benefit (DB) plans—mainly final salary
plans—and an increase in the coverage of
defined contribution (DC) plans, mainly
401(k)-type plans. The author deplores
this trend. DB plans provide much more
security than 401(k) plans because they
shield workers from erratic investment
returns and because they usually pro-
vide precious longevity insurance in the
form of a life annuity upon retirement.
In fact, the voluntary character of 401(k)
plans means that workers need not even
join a plan or contribute enough to take
advantage of the match that their em-
ployers usually offer. Ghilarducci also
laments the huge cost of the pension-tax
expenditures that the tax deductibility
of plan contributions entails, and argues,
as many before her have argued that the
loss in tax revenues is largely wasted and
misdirected. The progressive character
of the income tax system
means that the chief ben-
eficiaries are the better
paid. Whether these tax
incentives actually boost
saving significantly is
doubtful.
The book includes an excellent discussion of the reasons for the demise
of DB plans, in particular the role of
declining unionization. She notes that
the Pension Protection Act of 2006 has
encouraged the further spread of 401(k)
plans but increased the cost of DB plans.
However, at least one provision, the
move to an AA corporate bond rate as
discount rate, would have improved the
plans’ finances.
AMERICA’S SYSTEM OF EMPLOYER-PROVIDED
PENSIONS is broken and needs fixing. That’s the princi-
pal thesis of Teresa Ghilarducci’s stimulating, readable and
provocative study. Its other main thesis is that the argu-
ments we’ve been hearing for some time, to the effect that
we are living healthier and longer and can therefore work
until later in life, are wide of the mark.
Preserving Retirement
Despite the problems of employer-provided pensions, the author argues that
there is one especially valuable feature
of retirement in America: The amount of
time that Americans spend in retirement
doesn’t vary enormously with their income. More highly paid people enter the
workforce later in life than do those who
are less well paid, but they retire later.
For blue-collar and many white-collar
workers, retirement is a great boon, a
reward for many years of physically or
psychologically stressful toil. Consequently, it should be preserved.
Ghilarducci addresses the question
of whether this position is compatible
with the view that with the increasing
ratio of retired to working Americans,
the retirement age needs to increase to
offset what would otherwise be a growing
Social Security deficit.
Here she sets up a straw
man, arguing that the
increasing dependency ratio will not entail
a physical shortage of
workers because wages
will be bid up. Nonetheless, it remains the case
that one worker will be
supporting more retirees in the future than
he or she used to support and that the share
of output consumed by the working generation will have to fall to maintain the
living standard of those who are retired.
The increasing dependency ratio will
have consequences, and increasing the
retirement age is one way of mitigating
its effects. The real issue is one of choice:
whether older Americans can retire with
an adequate pension when the pressures
of work become too much for them.
This brings us to the GRA. The basic
features of this radical and very comprehensive plan are as follows: Employers
would be required to enroll employees
in a DC pension plan with a contribution
rate of 5 percent, up to Social Security’s
taxable ceiling (currently $106,800).
DB plans would qualify if contributions
to them equaled or exceeded 5 percent
of salary. The tax preferences given to
pension plans would be replaced by a tax
credit of $600, which would effectively
defray the cost of participation of low-income workers. This proposal would
have a big impact on the after-tax income of the better paid.
The accounts could be managed by
the Social Security Administration and
their funds invested by the same agency
that manages the Thrift Saving Plan—
the federal government employees’ plan.
Limited investment choices would keep
