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Commentary

Expanding Social Security to Improve Retirement

Labor economist and retirement expert Teresa Ghilarducci unpacks the U.S. retirement crisis and discusses potential solutions.

Over the next two weeks, we'll be taking a closer look at the state of retirement security in the United States, featuring two very different perspectives on the topic.

To kick things off, labor economist, retirement expert, and author of numerous books, including Rescuing Retirement, Teresa Ghilarducci discussed the country's current retirement crisis and how to improve retirement security on The Long View.

To increase financial wellness among retirees, Ghilarducci has advocated for significant structural change to the current retirement system. Unpacking this argument, Ghilarducci addressed existing flaws in the defined-contribution system, the benefits of expanding Social Security, and the shortcomings of behavioral finance.

Here are a few excerpts on environmental, social, and governance investing from Ghilarducci's conversation with Morningstar's Christine Benz and Jeff Ptak:

Is There a U.S. Retirement Crisis?

Benz: One question we have asked several of our guests on this podcast is whether we have a retirement crisis in the U.S. What's your take on that question?

Ghilarducci: Of course, we do. Most people will not be able to really come near their preretirement standard of living. Meaning that if you are a middle-class worker, you have a great risk, more than 50% chance of being downwardly mobile into de facto poverty. And that has big political implications as well. I'm not the political scientist here. But tens of millions of people facing worse living conditions for the rest of their life will have a political consequence. As an economist, I know that it will mean less spending and less well-being in old age, and also an increase in the elderly poverty rate. And that will hit cities and state budgets before it ever hits the federal budget. So, that's a couple of dimensions of the crisis. You don't even have to ask an economist. Ask any individual whether or not they expect to live comfortably in retirement, and the number saying that they expect to be comfortable is falling.

How Is the Defined-Contribution System Flawed?

Benz: In your book with Tony James, Rescuing Retirement, you wrote about some of the key failings of the defined-contribution system that is now such a linchpin of our retirement system. Can you talk about some of the most important ones?

Ghilarducci: We can judge a retirement system based on three major elements: how well it helps people accumulate wealth, how well it manages that wealth, and how well it deaccumulates that wealth so that people have a steady stream of income for the rest of their lives. And on all three counts, the American system gets either a C, a D, or an F.

Some people in America have a system that is really built for them, where they get an A or a B. These people are the very highest-income earners who have steady jobs for their whole careers and whose employers give them raises every year. We have stable lives. We have been contributing every moment since we started working or contributing into Social Security with our jobs. And we can work for as long as we want, and we enjoy our jobs. We can control the pace and content of our job. And then, the Congress has given us a tax deduction from which we can deduct our contributions from our taxes. Because we pay a high tax rate, the government indirectly gives us a lot of subsidy. Our employer also pitches in. We are going to live a long time and we are going to work for a long time. And we have products where we can deaccumulate in a steady way. So, yeah, the system works for us, but we are about 5% to 10% of the population.

Half of the population earns incomes below the median. They've probably had about eight or 10 jobs. Most of those jobs did not have a retirement plan. These people had periods of unemployment. That is not an environment in which they could accumulate money. The only money that they have accumulated was their Social Security, because Social Security forgives periods of unemployment. And it follows you to every job no matter what your employer wants to do or not. It's mandated. 

So, the system is really bad at accumulation. Then deaccumulation, we get a big fat F. We have a system where we tell people that they should accumulate like a million dollars, and then manage it for the rest of their life. We are asking people to do a very complex financial job right when they are in their 60s. Well, most people start experiencing cognitive decline around their late 70s. So, we are asking our elders to basically pin tens of thousands of dollars on the lapel of their jacket, and then we put them on the bus and we hand them a couple of financial literacy pamphlets or some ads and AARP magazine and tell them to be real careful. We have a system which, the research shows, makes older people really depressed and anxious.

This article was adapted from an interview that aired on Morningstar's The Long View podcast. Listen to the full episode.