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>> Susan: I'm Susan Collins, the Joan and Sanford Weill Dean here
at the Gerald R School -- Gerald R. Ford School of Public Policy
and I'm delighted to have you with us this afternoon.
On behalf of the Ford School community, it's a real pleasure
to welcome you for another in our series
of distinguished lectures, the policy talks at the Ford School.
This afternoon we are very honored and very pleased to have
with us Dr. Roger Ferguson who is President
and Chief Executive Officer of TIAA-CREF.
You'll find a biography in your program, and I'm not going
to give all of the details, but I think as you take a look
at it, you will be very struck like I have been
by just how varied his career has been.
He has reached the highest levels
in an incredibly wide range of policy areas and just
to highlight a few, he has served as Vice Chair
at the Federal Reserve Board of Governors.
He is a member of President Obama's counsel
on jobs and competitiveness.
He's a lawyer by training and at one time was a partner
at McKinsey & Company.
He's shaped policy from the private as well
as nonprofit sectors as Head of Financial Services for Swiss Re.
And on the board of a number of nonprofits and, of course,
now in his current role as CEO of a Fortune 100 provider
of retirement services.
I first met Roger when he was a Ph.D. student in Economics
at Harvard and I was an undergraduate economics major.
And he was a very thoughtful and supportive colleague then
and has been ever since.
And so I, and many others in the profession,
are very grateful to him for that.
This past year he co-chaired a National Academy
of Sciences panel on which I was a member.
That panel was convened by the United States Congress
to examine some of the same issues that he will focus
on in his remarks this afternoon.
What are the long-term economic implications
of an aging population?
Can our government maintain current levels
of publicly funded support for older people?
What are the trends in retirement ages
and the prospects for people working longer?
And what are the levels of personnel savings today
that are necessary in order
to maintain current living standards in retirement
for a range of economic scenarios?
These are very important and challenging questions.
The panel actually released its findings just two days ago
and you might have seen some of the press coverage
from the briefing that Roger and his co-chair gave.
Again it's very important information for all of us
to understand and grapple with.
And so we're so pleased today to be able to welcome Dr. Ferguson
to share his views about it.
He's been very generous already with his time today meeting
with students and faculty as well
as delivering this public lecture.
And he's graciously agreed
to take questions after his remarks.
And so from the audience just before 5:00 o'clock we will be
collecting cards.
And so we invite you to write questions that you might have
and we will pick them
up a little bit later in the afternoon.
Professor John Ciorciari of the Ford School faculty will help
to select questions from the cards or from Twitter.
We invite questions from Twitter as well as --
and along with one
of our graduate students Dawn Lynn Kaiser
who will be actually asking the questions this afternoon.
And so with that it is my honor and great pleasure
to invite Dr. Ferguson to the podium.
[ Applause ]
>> Dr. Ferguson: Thank you very much for that kind introduction.
And let me be the first to say that it's really a pleasure
for me to be here at the Ford School.
I want to thank Susan Collins for inviting me.
I want to take a moment and recognize a couple
of friends in the audience.
Marina Whitman and her husband Bob are back there.
So I want to say hello to you and nice to see all of you.
And it's really a pleasure for me to be here in part
because my linkage to the school goes back to the original dean,
Ned Gramlich, who served with me on the Board of Governors
at the Federal Reserve and I counted
as a friend for many, many years.
And finally and most importantly I must say being an MR is
important because you get to go to Comet Coffee
which is an important stop in America as all of you know.
So it is a pleasure for me to be here and I will say that one
of the great things about the Ford School is
that in educating tomorrow's leaders
and also conducting research, this school embodies a hope
for a better tomorrow and we're counting on all of you
to help us get through some of the pressing problems
that I'm going to be describing and we'll talk
about in the Q and A session.
So today I want to take a look at one
of the more profound challenges that we are facing as a nation
and that's the issue of retirement, or more accurately,
how to insure safe and secure retirement for everyone
in America in the 21st century.
At a time when we have both great demographic
and economic changes and challenges,
retirement is an issue that's sort of natural for TIAA-CREF,
as many of you may know, because we are the leading provider
of retirement services in the higher ed space
and the nonprofit space in general.
And, in fact, we were founded over 94 years ago
to provide safe and secure retirement
for college professors.
Another great reason for me to be here --
another honor for me in being here is that, in fact,
the University of Michigan was the first school to sign
up with TIAA-CREF back in 1919.
And so we have a special relationship
with this institution.
So how have things evolved for us?
Well, today we serve 3.7 million people nationwide,
not just in the academy but also in research, medical,
and cultural communities.
We now do more than just retirement,
even though that's our core, and overall our mission
to provide financial security and well-being is unchanged.
So we've watched with alarm as retirement has become a source
of increasing angst across our nation.
Americans confidence
about achieving a comfortable retirement has hit record lows
in the faces of factors such as a 2008 financial crisis,
the shift from defined benefit or DB,
plans to define contribution or DC plans,
the aging of the population, the explosion of healthcare costs.
And all that adds up to some uncertainty about the future
of Social Security, Medicare and Medicaid.
And then many of us recognize that the personal savings rate
for many Americans and for America overall has been
abysmally low for some time.
So it therefore concerns us that most workers --
for most workers retirement has become much more
of a do-it-yourself activity.
Even as far too many
of our citizens lack financial literacy skills
to make the sound decisions about savings and investment
and retirement that they're being called upon to make.
So we at TIAA-CREF have been speaking out about the need
for a new retirement system,
one that fits the realities of the 21st century.
We've also worked to highlight the needs
for greater financial literacy.
But clearly there's much more work to be done.
So let me quote just a few statistics.
Just 14 percent of Americans said that they're, quote,
very confident that they will have enough money
for a comfortable retirement.
That's in the most recent Employee Benefits Research
Institute Study on Retirement Readiness.
That same study indicated that 60 percent
of Americans say they have less than $25,000 --
less than $25,000 in retirement savings.
And then according to a recent Gallup survey,
66 percent of Americans said
that their top financial concern is not having enough money
for retirement.
The need for actions only become clearer based on the work
that Susan Collins and I and many others did as part
of our National Academy of Sciences study.
And as she indicated we just released that study on Tuesday
and I'll talk about that a bit more in a minute
but it underscores the urgency of responding to the challenges
of retirement that we're talking about.
So what I'd like to do in my talk today is look at three
or four different things.
First, I want to talk about the issues, the broad macro issues
that underlay the retirement landscape.
I'm going to talk a little bit about the potential solutions
that might emerge over time, and then obviously I want to open up
and leave plenty of time for questions and answers.
So let me talk first about the issues
that underlie any discussion about retirement
and that is the issue of the aging
of the American population.
So the committee that Susan referenced was founded
or started in 2010 to look at that issue
and the macroeconomic effects of an aging population.
And the goal was to provide factual foundation
as policy makers, particularly in Congress, think about
and debate issues such as deficit reduction,
Medicare, and Social Security.
The starting point for the study and obviously one
of the major kicking off points for any discussion
on retirement is the demographic shift that's now underway
in which Americans age 65 or older make
up an increasingly large percentage of the population.
In fact, people 85 and above are now the fastest growing segment
of America.
And this is the result of two trends.
First being the rise in the average life expectancy
in the U.S. Today men can expect to live to be 76, women to 81.
Fifty years ago, the life expectancy was just 67
for men and 73 for women.
The second trend that doesn't get much discussed is the
declining fertility rate.
Today there are 2.1 births per woman compared to 3.7 births
for woman in 1957 at the height of the baby boom.
So together these two trends are what's driving our
aging population.
It's not just about the baby boom generation.
Although the entry of baby boomers
into retirement has certainly shined a spotlight
on this phenomenon.
It's more than the baby boomers though.
It's also the other cohorts that are smaller just
as the largest baby boom population moves
towards retirement.
The second big story is that aging
and the aging population is not just an American story.
By mid-century, many developing nations will catch
up to the developed world in terms
of old age dependency ratio.
That's the number of elderly people as a share
of the working age population.
That's remarkable considering that when I was
in graduate school and Susan was an undergraduate,
countries like China, South Korea,
and Mexico were struggling just to feed their own people.
And now as all of you know and particularly in China
because of the one child policy,
they have a rapidly aging population as well.
The upshot of all of this is that there are fewer
and fewer people working and they're supporting more
and more people who are getting to an age
that we consider retirement age.
And that's obviously a recipe for big fiscal challenges.
So our committee looked at what these trends, both in the U.S.
and globally, will mean for the U.S. economy in the future.
And obviously in the U.S. economy the real challenge is
the threat to health and stability of Social Security,
Medicare, and Medicaid.
Together the cost of these three programs currently amounts
to roughly 40 percent of all federal spending
and 10 percent of the nation's GEP.
And we're already well aware of some of the challenges
that the system is undergoing.
Just a few months ago, the trustees
of Social Security projected
that the combined trust funds will be exhausted by 2033,
three years sooner than projected just last year.
They also reported that the ratio of workers paying taxes
for Social Security benefit --
beneficiary will hit 2.8 workers per beneficiary this year.
That's down from 3.4 workers per beneficiary
in 2000 so 12 years ago.
So our report seeks to clarify the issues that are relevant
to policy makers and to suggest some potential options
that they may want to consider.
And we do believe, and there's some positive news here
that sound policies can, in fact,
mitigate the negative effects that we're going
to be confronting here.
And that those policies don't have to be a combination
of four different policy levers if you will.
One is the major structural changes to Social Security,
Medicare, and Medicaid.
Secondly, a higher savings rate during working years.
Third, the possibility for many of us of longer working lives.
And fourth, the need to find greater revenue
which frankly means having to raise taxes in order
to pay for some of this.
The other thing that we focused on is
that individual workers must be better prepared for retirement
by planning ahead
and by adapting their saving and spending habits.
So we therefore emphasize something that's unusual
in this kind of report which is the need
to take action sooner rather than later.
The longer our nation delays in making needed changes,
the larger will be what we call the liability,
the legacy liability that will be passed
on to future generations.
And the larger the increase we'll need to make in terms
of taxes on the future workers.
And frankly if we don't act soon, the larger the reduction
of benefits will be called for for future retirees.
So it's imperative that we act now.
We'll have more options and the cost
of acting will be lower now than if we delay.
Our report also emphasizes that financial literacy has become
on evener more crucial issue in light of these challenges.
We note that people who are not financial literate will have a
much tougher time preparing themselves
for the financially secure retirement that everyone wants,
particularly in an environment in which there's
so much uncertainty about Social Security, Medicare, and Medicaid
and which Americans have greater responsibility
for their retirements.
But sadly our nation is seriously under-informed
when it comes to financial literacy.
A research by two professors,
Annamaria Lusardi [assumed spelling] who was at Dartmouth,
I think is now moved to George Washington University;
and Olivia Mitchell of the University of Pennsylvania both
of whom, by the way, are fellows
at the TIAA-CREF University, our research group.
So Annamaria Lusardi and Olivia Mitchell have shown just how
unprepared many Americans are to make sound savings
and investment choices.
In their study of people over 50, only one third
of respondents were able
to correctly answer three basic questions having to do
with interest rates, the effects of inflation, and the concept
of risk diversification.
My company obviously cares deeply about financial literacy
because research has shown
that financial literacy has a profoundly important effect
on achieving retirement security.
People with a high degree
of financial literacy are more likely to plan for retirement.
And then in turn those who plan for retirement are more likely
to have better outcomes.
Planning for retirement is a powerful predictor
of wealth accumulation.
In fact, people plan for retirement have more
than double the wealth of people who do not plan.
And conversely people with lower financial literacy tend
to borrow more, they accumulate less wealth, and they tend
to select financial products with higher fees.
Folks with less financial literacy also less likely
to invest in stocks, they're more likely
to experience difficulty with debt including bankruptcy,
and they're less likely to know the terms of their mortgages
and other loans that they may have outstanding.
So the lack of financial literacy is certainly a broad
issue in America.
But when it's viewed through the prism of race,
the effects are even greatly magnified.
Minorities along with women and the least affluent have some
of the lowest financial literacy rates in the country.
So it's not surprising when it comes to saving for retirement
that studies have found serious gaps in the preparedness
of African-Americans and Hispanic workers.
And the older problem is likely to become worse.
There's a recent survey from the financial industry regulatory
authority or FINRA that found
that young Americans were less likely
to be financially capable than older Americans.
And the latest jumpstart coalition survey
of high school seniors showed that the financial literacy
of high school students has fallen to the lowest level ever.
Now that's hardly surprising
since 26 states have no financial literacy requirements
at all in their K-12 education systems.
And only four states mandate
that students take a personal finance class in high school.
I will say in this score there's some potentially
encouraging information.
The National Conference of State Legislators reported
that this year seven states have enacted legislature
or passed resolutions promoting financial literacy.
And in 28 states such measures have either been introduced
or are pending consideration.
So it's heartening that the nation is starting to turn
to this crisis of financial literacy and obviously I hope
that our NAS study will help drive that further.
So let me now turn to some of the changes
that we are confronting -- or challenges we're confronting
in funding retirement and how that's combined
with the demographic
and economic issues I've just talked about.
All of you probably know that once upon a time we talked
about a three legged stool as an analogy
for understanding retirement systems.
The three legs were pensions,
Social Security, and personal savings.
And today all three legs are a little wobbly.
Pensions have become a thing of the past for most Americans
in the private sector.
And the public sector headlines clearly indicate that states
and municipalities are confronting a crisis
of epic proportions in unfunded pension liabilities.
As I mentioned already, Social Security is in trouble
as the trustees have attested.
And it will soon begin paying out more than it takes in.
And the U.S. personal savings rate has been completely
inadequate for many years now.
Even back -- even dropping to negative numbers back when I was
on the Federal Reserve.
So given the scenario it should be no surprise
that Americans are less confident than ever
about their ability to afford a comfortable retirement.
People are also expecting to work longer and longer.
A recent survey found that 37 percent
of people said they expected to work past 65
and that's tripled the percentage of 20 years ago.
So how did we get to this point of such uncertainty
about the three legged stool?
Well, first we've seen the demise
of traditional pension plans in the private sector
over the past 30 years.
These traditional pensions are known as DB
or defined benefit plans.
And in the old days you'd work for a company for many years,
maybe for life and when you retired along
with the gold watch, you'd get a monthly retirement check.
Importantly the size of the check that you would receive
under a DB plan had nothing to do with investment returns
and may have had nothing to do with your salary.
It -- rather it was based on service and age and every once
in a while also earnings.
As recently as 30 years ago,
84 percent of private sector workers had access
to this kind of DB plan.
As of 2008 only 33 percent so from 84 down to 33 percent
in the private sector have access
to a DB plan of that type.
Today what's happened is the defined contribution plan,
particularly the 401K, has become the primary means
of saving for retirement in the private sector.
But the 401K and other DC plans don't guarantee workers a
specific retirement check amount.
Rather as all of you know, they are vehicles
that enable employees to save for their own retirement
and in many cases employers contribute as well.
But the kind of retirement check that a worker ends
up with depends on the combination
of contributions made
and investment returns earned during their working lives.
Importantly and people forget this because things have changed
so much but 401Ks were never intended
to play the role that they do today.
They were never intended to be the core retirement system.
They were meant to be a supplemental retirement system
to top off traditional DB plans.
And that's the fundamental problem with the new model.
Whereas once employers shouldered the responsibility
and risks of funding retirement, today it's the workers
who must bear that burden.
And workers who in many cases
as I've indicated have no formal education or training
in investing or have no financial literacy
and they're called upon to make these very important decisions.
Moreover, there's ample evidence that a 401K based model
in the private sector really is not doing the job in other ways.
Many eligible workers don't participate, many employers
and employees don't contribute enough,
many employees don't implement an appropriate asset allocation.
And finally and most troublesome,
many employees do not hold on to their retirement savings.
Instead they crack into their retirement nest egg
to fund living expenses.
So in light of all these kinds of challenges,
it is not surprising that McKinsey & Company,
the consulting firm, found
that the average American couple will be some $250,000 short
of what they need to retire securely.
Another problem with the current model is that people tend to get
up -- get caught up in the size of their account balances
without really thinking about or having much knowledge
about the income flow that will be required in retirement.
In fact, and this is hard for many people to get --
to gather because of increased longevity, many folks will need
to fund retirement that can stretch 20 or 30
or maybe even 40 years.
So the challenge that people are facing is managing longevity.
And managing longevity in which many of us will be living
with chronic illnesses.
So in this new model,
people need to see their savings not just as a pot of money
but have to understand what the income stream is that's going
to be associated with that pot of money.
So clearly the current model needs reform.
But to be quite balanced in this,
there are some positive aspects of a 401K model.
First, it's an individualized system.
So that's something that people really care about and enjoy.
Secondly, a 401K system is more aligned
with the way people work these days because individuals move
around from job to job and do not work
for a lifetime in one place.
Nevertheless these fundamental problems do remain.
So that's the private sector.
So far not so good.
Let's look to the public sector
and I would say they're facing some equally challenging issues
in the amount of retirement.
Their defined benefit plans do remain the dominant model
with nearly 80 percent
of employees having this type of plan.
But all of you know from reading the headlines it's states
and municipalities are struggling with large gaps
between promised retirement benefits and current assets.
And it's been estimated that the unfunded liabilities in state
and local pension systems have reached an astounding 4
trillion dollars.
And now many government entities have been working on this
and have been making changes in their plans
and over the past two years, 39 states have enacted some form
of revision including things like requiring employees
to contribute more, tightening eligibility rules,
and modifying how benefits are calculated.
So it's clear that in the public sector we need
to bring some approaches that will bring greater clarity
and cost certainly to employers while also bringing greater
retirement security to workers.
So you can imagine that we
at TIAA-CREF recognizing these challenges spent a lot
of time thinking about these issues and trying to figure
out what it would take to create a retirement system
for the 21st century.
So what would a retirement system
for the 21st century look like?
First, it would continue to recognize
that helping employees achieve financial security
in retirement is a shared responsibility
between employers and employees.
So the risk shifting that's going on would end
up in a middle place with both employers
and employees having a responsibility.
Secondly, retirement system
for the 21st century would provide an income
that could last a lifetime as I've indicated 20, 30,
maybe 40 years in retirement.
I haven't talked much about it,
but such a system would help employees to deal
with healthcare expenses which loom
as a very large financial burden as people live longer
and as I said with chronic illnesses.
The fourth element of a retirement system
for the 21st century would be
that it would not really be one size fits all given the
demographic and other challenges and changes in society.
Such a system would have to be sustainable dealing
with baby boomers, the 80 million of us who are going
to be retiring over the next several decades.
And importantly it would include a strong dose of education
and communication and advice recognizing
that most people bearing a greater responsibility
and not having enough financial literacy are going
to need some assistance in making these tough decisions.
One model that's working well and therefore can, I believe,
form national thinking
and certainly form our thinking is the one that works
in higher education, I believe,
and wouldn't surprise you I suspect being that as CO
at TIAA-CREF we are the leading provider
of that kind of service.
And there are a number of things that I think stand
out for the system that we have in higher ed
that might be appropriate as a national level.
First, most of them feature mandatory participation,
and so an automatic enrollment might be a feature
of a retirement system for the 21st century.
Secondly, employees must have the right mix
of investment options that can help them build the kind
of saving that they need.
And the mix of options needs to be optimally decided,
not too many choices, not too few choices.
A third thing that we've seen is in the academic sector
as you know the notion of preparing
for retirement still is a joint responsibility with employees
and institutions both contributing.
And finally employees typically have access to either a DB plan
or an annuity option that provides a level
of guaranteed income in retirement.
And then of course the important issue of education
and advice is an important part of what we provide in our model.
And we believe that the model is working and, in fact,
our participants tell us that.
In a recent survey by the TIAA-CREF Institute,
we found that 75 percent of higher ed workers are confident
that they will have enough money
to live comfortably in retirement.
And that compares with just 49 percent of all U.S. workers
so 75 percent versus 49 percent.
So it's clear that one of the most pressing issues then is
to move people into a system
that provides for lifetime income.
And that's essentially making availability --
available financial security for everybody.
This is a particularly important issue now if I can think
about one other segment and then wrap up here.
This is the issue of financial security
for lifetime is quite important for everybody
but it's particularly important for women.
And that is because women often end up with a nest egg
that is half the size of that of a man
of the same age and occupation.
And that's for a couple reasons.
One, is women still earn about 77 to 81 cents
for every dollar that a man may make.
And they often spend an average of 10 to 12 years
out of the workforce caring for children or elderly parents.
And yet women as I've already said also live longer than men,
and therefore, they'll have to support themselves
through a long retirement
with what might be a smaller nest egg.
And so the bottom line for both sexes is how do we insure
that people's primary savings vehicle is a DC plan can convert
their savings into an adequate and secure income
that lasts as long as they do.
And here the answer will not surprise you is annuitization.
There's a recent report
by the government accountability office last year
that encouraged annuitization as an important means
for addressing the issue of a lifetime income.
And in that scenario people who are retiring purchase --
take part of their savings to purchase an annuity to deal
with their basic lifetime income for the rest of their lives.
But the report noted that while annuitization is probably a
smart choice for many Americans, just 6 percent of those
in a defined contribution plan chose
or purchased an annuity at retirement.
The other thing that this report noted is
that many people took Social Security benefits before the
full retirement age, therefore passing up the opportunity
for higher benefit levels and additional lifetime income.
So the report found a big disconnect, this GI report
between what experts recommend and what people do.
Because experts recommend that retirees convert a portion
of their savings into an income annuity
to cover necessary expenses and they recommended
that people have an annuity instead
of a life lump sum withdrawal.
And experts also recommended
that you delay taking Social Security until reaching
at least full retirement age and in some cases continue to work
and save past full retirement age.
So they're clearly some important implications
that the GAL study has found is that while experts have a sense
of what folks should do, very few of our citizens outside
of the higher ed space are doing it.
So let me close now by just summarizing all the things
that I've said here.
First, talked about the aging population and recognition
of that as a global problem.
That clearly presents a number of macroeconomic challenges
to our nation, particularly for programs like Social Security,
Medicare, and Medicaid.
But I also said that policy options do exist
and implementing those policy options sooner rather
than later can start to at least mitigate, not reverse,
but at least mitigate some of the negative effects.
Or put it another way, the longer we delay,
the higher the ultimate cost is going to be.
The second thing that I've said is that this demographic shift
of aging baby boomers combined
with the recession have really combined
to shine a very bright spotlight on this retirement issue
and on the need to build financial security
that lasts a lifetime.
And indicated that obviously the issue
of financial literacy is a very important part
of this given the new requirements of individuals
to bear some of the responsibilities.
We have to increase financial literacy.
And then finally I pointed out that there are some solutions,
if you will, in building
or outlining what a financial secure retirement system would
look like for the 21st century.
So let me stop now by thanking you again for your attention.
Thank you for allowing me the opportunity to speak
in this wonderful school, and I look forward to being able
to answer as many questions as we can
in the time that's allotted.
So thank you all very much and I'll turn it
over to our moderators.
Thank you.
[ Applause ]
[ Pause ]
>> Dawn Lynn: Thank you very much for your lecture.
We do have questions from the audience
and if you still have additional ones, please raise your hand
and they'll be collected.
My name is Dawn Lynn Kaiser [assumed spelling].
I'm a second year Masters
of Public Policy student here at the Ford School.
And Mr. Ferguson, our first question,
what suggestions do you have regarding education programs
geared towards planning for retirement?
How early should this education begin and should it be a part
of the federal education policy?
>> Dr. Ferguson: That's a great question
and I think first it should begin as soon
as possible if you will.
Folks when they get their first job I think should start
to be educated on these issues.
Obviously I've also indicated the importance
of general financial literacy in K-12 in high school.
But if we could have a system
in which there is first mandatory enrollment
and then associated with that education at the very,
very beginning, I think that's helpful.
And the education I think should be around a couple of things.
One is a generally sense of figuring
out what one's risk tolerance is.
Two, figuring out there are some benchmarks
around how much one might want to save and invest.
The third is the importance of diversification because a lot
of individuals as we've discovered haven't understood
the value of diversification.
And then the fourth is starting to educate everybody
on what a life cycle might look
like because I think many people underestimate how long they may
well live in something that we might call retirement
and therefore tend to think they're going
to save too little.
And then the fifth thing -- or they tend to save too little.
And then the fifth thing obviously is the importance
of thinking about not just building this big nest egg
but what it means for lifetime income.
I do believe that it should be built into national policy.
I will tell you from my experience at the Fed
where we did make financial literacy one of the priorities,
it is very, very difficult even if it's a priority of a big
and important financial federal agency, to figure out how
to actually make it come to life.
And I think as I've thought about it part
of the challenge is that so much
of education policy is actually developed
at state and local level.
And so what happens there I think is as important
as what's happening at the federal level.
>> Dawn Lynn: Thank you.
Our next question, is the social security age destined to rise
with life expectancy and should it?
>> Dr. Ferguson: Well,
gee thanks for asking the easy questions.
[laughter] The ones that are not at all controversial.
I would say honestly I do believe
over time the social security age is destined to rise
with life expectancy and with the ability of people to work.
In fact, I think all
of you probably know there was a commission from many years ago
that already put us on the path towards a gradual increase
in retirement age but I think we're going to have
to take another look at that.
Now the other thing that's important to say is while
that may be true for many folks there still are a number
of people in American society
for which delaying retirement is almost physically possible.
And one of the things that happens, you know,
all of us who do these sort of jobs that require a lot
of intellect but not much in the way of physical activity.
You know, the moving of the mouse is not
for many of us heavy work.
We ignore that even on our campuses and certainly
in many parts of America there are a bunch of people
for whom delay in retirement is really not an option.
And so we have to figure out how to be sensitive
to both sides of this; right.
Because folks who influence policy makers tend to be those
that sell, sure, you know, I intend to and therefore all
of us can work a little longer.
True for a lot of Americans.
Society has changed over time but I do worry that those of us
who do sort of white collar jobs or get folks who do other kinds
of white collar jobs or blue collar jobs or pink collar jobs
or they're called so I always hasten to add
that I think social security retirement age is going
to have to increase.
How that works for everybody I think is going to be one
of the challenges that we have to work through.
>> Dawn Lynn: Thank you.
Our next question, what are your thoughts
about the encore career idea new meaning for --
meaningful work often part-time for older adults?
What policy changes would support more encore careers?
>> Dr. Ferguson: I think the so-called encore career
or the second act or whatever it's called is pivotal frankly.
I think it creates a great value for the individuals involved
or has a possibility of doing that.
There are a number of things
that I think stand in the way of that.
In some cases depending on how you work and where you work,
if you retire can you then come back as a consultant
or in a part-time role.
There's a question of policy that affects some institutions.
But I think bigger than that is really, you know,
there's not a business model yet that's evolved
for having both full-time workers at a certain age
and then so-called encore workers.
And so older folks who still want to be
in the labor force find themselves in the, you know,
forms of consulting, if you will,
where there are sole practitioners.
So I think the real issue is not a policy issue.
It's really understanding how we build models that have
in the workplace folks under so-called retirement age
who are working full-time and working together with folks
who are part-time, if you will, and doing an encore job.
But I think it's important to have that as sort of a way
that all of us start to think about things because it's going,
I think, to be inevitable for lots of folks.
And I think it's also good for society.
If I can lengthen my answer a bit in the report --
the DNS report that Susan and I talked about,
there was some work done
by a German economist Axel Borsch-Supan who got his Ph.D.
at MIT but has done some very interesting work
in some manufacturing and car factories in Germany.
Pointing out that teams that had people of different ages
and different generations were more productive than folks
that have -- the teams that have only, you know, one generation.
And this is just sort of a special case
of the general knowledge that we've learned --
actually, I think a University
of Michigan professor has written books on this
on the value of diversity in the workplace leading to better --
better answers and more productivity.
So we think of diversity in different ways around gender
and race and other things
but we shouldn't forget generational diversity as well.
And Axel's work actually shows
that in a manufacturing atmosphere,
productivity actually goes
up if you have intergenerational teams.
>> Dawn Lynn: Thank you.
Our next question, with regards to securitizing income streams
in retirement with annuities
and the low annuity participation rate you mentioned
earlier, how can we secure but simplify these annuity products
and will this simplification increase participation
in your opinion?
>> Dr. Ferguson: The answers, one,
we do need to simplify annuity products.
Obviously, we at TIAA-CREF have a very good
and simple annuity that works very well.
And in fact there's going to be a report that comes
out that looks at our participants --
I don't have the report but I've got some of the data from it,
and it shows that about 40 percent of our participants
when they retire typically take annuity income
as their first draw from their retirement assets.
And then we also see that many people take more
than one version of retirement income
and they often what's called laddering their annuities.
And the reason I talk about our statistic that is
about 40 percent is there's --
that's clear proof that a simple annuity that's in the plan
and for which there's advice can get people
to have the right kind of outcome.
Society as a large I think therefore can learn a
couple lessons.
One, simpler annuities because a lot of the folks who talk
and give advice are anti-annuity
because annuities are very complex and can be expensive.
Secondly, we've got to make annuities part of the plan.
One of the things that happens
in the 401K world is you have this big bucket of savings,
you get to so-called retirement age, and then you have
to make an annuitization choice and that's a hard choice
for lots of people to make.
And then I think the third thing is really understanding better
than we currently do what it is
that holds people back from annuitization.
So simplifying is one of the answers.
There's a professor at the University
of Illinois named Jeff Brown who has talked about framing.
And if you talk about annuitization,
people aren't very interested.
If you talk about guaranteed income for life,
they are quite interested.
I think we also need to understand some of the --
I would -- not framing but sort of the more rational things
that people worry about when it comes to annuitization
such as having what's called an economics of request mode.
The desire to sort of leave money to others and you have
to build annuities that allow that to happen as well.
So there's putting annuities into the plan,
simplifying annuities, and then understanding
and maybe adjusting the products so we can --
so we can respond to why it is that people do not annuitize.
>> Dawn Lynn: Thank you.
Our next question is actually from Twitter.
How do we assure women's economic security giving their
lower lifetime incomes?
>> Dr. Ferguson: That's -- I love modern technology.
It's a question from someone named Twitter
so [laughter] My kids -- I have a 21 year old and 18 --
they'd be appalled I made such a stupid joke.
So I know what Twitter is.
That's a very good and a very important question
so let me tell you what we've tried to do.
What we have done in our company recognizing these issues
around gender differences,
we've actually developed a training session financial
literacy symposium, I guess you would call it,
a seminar for women that's taught
by our women professionals.
And that is starting to show some real traction just in terms
of the number of people who are interested in doing this.
And the most important statistic is
that after these general seminars which last
for about an hour, hour and-a-half something
of that sort, we're getting a very, very large turnout
of folks who want -- women who want to sign
up for counseling sessions
and then they're tending to take action.
They're tending to save more,
diversify their portfolios and other things.
So I think -- now we are a microcosm of what I think has
to happen more broadly.
Which is, one, recognizing that there are gender differences
and sometimes it's hard to talk about gender differences
without seeming to be, you know, doing things
that are inappropriate
but if there are then one should recognize them.
And two, then understanding
with those differences how you leverage them if you will
into getting people to take action.
And I think we started to figure out a little bit of that.
How we do that at a national level, I think ultimately it's
up to institutions such as this and such as mine
to partner together to give women a chance
to understand these issues better.
Now you know easier said than done.
It works in places where you've got, you know, institutions
like University of Michigan and TIAA-CREF.
What we do more broadly at a national level,
I do think it goes back to K-12 financial literacy
for one thing.
I think it goes back to that early enrollment moment
where we start immediately
to identify what the differences might be.
And so those are some of the other things that we can do
but the challenge here is that there really is no silver bullet
because giving financial advice
at some broad macro level is not nearly as impactful
as what you do sort of case by case.
And that's sort of big challenge so I've got --
we know a little bit about what one can do
if you got the resources.
I can't say there's sort of an obvious sort
of national answer that's going to work for, you know,
half the population but it's going to be very important
for us to start to look at that issue.
>> Dawn Lynn: Thank you.
Our next question, the trend towards defined contribution
retirement seems to be accelerating.
Do you see regulations increasing in step to monitor
and regulate the providers?
>> Dr. Ferguson: I hope so in the follow sense
and I've seen this in a couple of states.
I haven't talked much about it but one
of the states that's made a big change has been Rhode Island.
And what Rhode Island has done is create a hybrid plan
and so I think this trend towards defined contribution can
be dealt with if there are regulations such as the --
or advice and then maybe regulations so the TIAA advice
about annuitization leading to regulations from the Department
of Labor, for example, might be one way to do that.
Or if states -- states are one of the places where the move
from DB to DC is occurring most rapidly.
Follow the models towards a hybrid plan as opposed
to going to a pure DC plan.
So I think since a lot of this is happening
at those levels that's where it can be done.
And then as I said the Department of Labor
since it oversees Arista plans if it really pushes
for more annuitization in the plan can help by that kind
of regulation to create a hybrid plan that has both a DC element
and then a DB element to it.
>> Dawn Lynn: Thank you.
Our next question, I have heard
that low interest rates are forcing retirees
into riskier investments.
Your comments.
>> Dr. Ferguson: Well, the answer is that it is true.
Let me be a little clearer about it.
Low interest rates are forcing -- it's something --
everybody into, you know, riskier investments.
It's one of the reasons why we're seeing a rallying
in the stock market.
It's one of the reasons perhaps why we're starting
to see a pickup in housing.
But I would be a little cautious because then what happens
when one says that is there's sort of a natural sense that --
well, that means we must have higher interest rates
right away.
So recognize for those --
this is now getting the monetary policy issues
so low interest rates do have the effect of driving everybody
into riskier investments.
On the other hand, a reason I think
that the Fed is engineering very low interest rates right now is
to create sort of a cushion under the economy
and so it's a tradeoff that they're making frankly.
Now what does that really mean?
I think the fact that we are currently having very low
interest rates validates the importance
of having a diversified portfolio.
Even as you get older, even as people get into retirement,
there's still reason to have some equity exposure as well
as fixed income exposure.
You know, I think people think, well, as I get older I --
you certainly want to move more towards fixed income,
but having equity exposure even as you are
in retirement gives you a chance to offset moments
when you have low interest rates by having an increase
in the equity values that you might have in your portfolio.
And so the real message out of all of this is
because you cannot predict what the financial markets are going
to throw at you during the course of retirement,
it's still important to have a diversified portfolio.
There is a danger in being, even as one is retired, particularly
if one is retired of overly conservative just
as there is a danger in being, you know,
sort of overly eager to take risk.
And this very low interest rate environment is sort of proof
of the importance of having diversification as a way to deal
with different kinds of economic environments.
>> Dawn Lynn: Thank you.
Our next question, bear with me, it's a little bit of a long one.
How much of the increase in the stock market
over the past 30 years is attributable to the change
from company pensions to IRAs forced entry
into the stock market?
And as the population ages and begins withdrawals
from these IRAs, how much of a decrease
in stock market is likely to occur?
>> Dr. Ferguson: Okay.
Let me -- that's a great question.
Let me try to answer the second part partially
because I don't know the answer to the first part [laughter].
So I should at least go where I think I know the answer.
So on the second issue there is, I think,
what we on our study team, that NAS study think
of as being a myth out there, that as baby boomers retire,
they're going to dump their stocks
and the stock market is going to collapse.
We think that's not the likely outcome.
And that there will be other forces
that will drive equity markets but it's not going to be,
you know, the aging of the baby boomer population.
The reason that we believe that is that equity markets
in particular are really quite global.
Well, a number of things.
First, we don't believe based
on the diversification I've just talked
about that individuals are going to be sort
of dumping their stocks.
They will be selling them gradually over time
as they get older, but they'll still hold
on to some as they diversify.
Secondly, even among older folks there are different risk
profiles and so we shouldn't imagine
that everyone is going to, you know, reach a certain age,
you know, and start to act the same way.
The third is remember one of the things I've said is we may have
to -- younger people and maybe in some sense all of us may have
to increase savings so even
as some folks are selling their stock in order to --
their equities in order to fund retirement,
there will be other people, younger people, a smaller cohort
but increasing the savings rate may offset some
of that selloff, if you will.
And the final thing equity markets
in particular are quite global.
And as growth picks up around the world,
even though they have demographic challenges,
as the rest of the world becomes much more middle class
as they are forced to save more and as they think
about diversifying their portfolios
and overcoming what Susan
and other international economists call a home bias
in investments, they will naturally look
to the U.S. market as the deepest and most liquid.
And so I think this statement that equity markets are going
to -- U.S. in particular be on a downward trend
because of demographic is false.
It's a myth.
So the first part
of the question I have to be very honest.
I honestly cannot tell you how much of the rise
in equities was driven by the increased use of DC plans.
I'm not sure that anyone can really tell you that.
We can tell you the amount of equity that's being held
in DC plans but how that drives pricing as all
of you know depends on supply
and demand dynamics that are global.
And so while this has been an interesting trend,
just as I don't think that, you know,
the aging of the population is going to lead to a huge selloff,
it's hard for me to say that the big rally that we've seen
in equities over the last period
of time is being driven by aging populations.
In fact, as one thinks back on economic history,
there have been, you know, lost decades in equity markets
that are sort of inconsistent with the notion
that aging baby boomers have been -- I'm sorry.
That young folks, baby boomers, aging through the population
from the 60s to now have been leading to this sort
of steady uptick in equity evaluations.
Because if you look at what happened to equities,
there have been periods in the 70s where they were really flat;
then they rallied; then they're flat; then they collapsed.
So it's all the behavior
of the equity market's actually belies the notion that somehow
or another it's demographics
that really we're driving what's going on.
I think there are many other forces including policy forces
and the other kinds of dynamics that drive markets
and demographics, I think,
was probably a relatively small part compared to other things.
>> Dawn Lynn: Thank you.
Next question, I worry that our children cannot save enough
for retirement due to the skyrocketing costs
of undergraduate education.
Your comments.
>> Dr. Ferguson: I worry about it too.
You know I wish I had sort of a more insightful comment.
I think the issue, and I've talked to some people
on various campuses about this, we really are going to have
to rethink the financing model for higher ed.
And that question sort of takes me into that space.
Because just as I've talked about the threats
of retirement not this campus -- this campus has actually been,
I think, in better shape than many others.
But we cannot continue to depend on, you know, 7,
8 percent increases in tuition year after year after year
in order to drive the higher ed model.
Frankly I think the higher ed model also is not going
to be able to depend for research support
from the government as much as they have in the past just
because the general fiscal challenges that we confront.
There are a number of us who think about endowments
and we're not quite sure that you're going
to see double digit increases in endowments as well.
And so I think higher ed generally speaking,
not any particular institution is going to have
to really rethink it's financing model for lots of reasons.
And one of them is that young folks, our children,
are not going to be able to afford the kinds of increases
that we've thrown at them in higher ed space.
Now my impression based on conversations I've had
on this campus is that the University
of Michigan is actually starting to come to grips
with this issue has started to think about sort
of gradually keeping costs under control for sure.
I suspect that's not popular with everyone.
So I'm not getting into what other political dynamics
on the campus may be.
But I think the point I'm making is
that a well managed institution can think
about a multi-year strategy for trying
to gradually adjust its approaches including lightening
up, if you will, on the big increases in tuition
because I agree that our children
or in some cases grandchildren will have a hard time affording
the kinds of education that I did and folks
in this room have had.
>> Dawn Lynn: Thank you.
We also have another question from Twitter.
How is the uncertainty in retirement planning likely
to affect labor management bargaining
in the near and midterm?
>> Dr. Ferguson: Yeah.
That's a great question.
I think we've actually already seen that to some degree.
Actually some of you, I doubt if any of you or many
of you are football fans.
You know that one of the disputes that existed
between NFL and the referees union was
around moving to a 401K type plan.
And so we see that being very, very visible.
I think the reality is that this issue around retirement
and retirement security is going to continue
to be an important challenge in labor management relationships.
One of the reasons that I am so enamored of the hybrid model is
that our experiences has been that it seems
to be a middle ground
that brings together labor and management.
Because it can create more certainty
about what the employer is going to have to pay
in by creating a DC type plan.
But a hybrid model that has an annuity or other kind
of DB option creates some certainty
about retirement outcomes and risk sharing for the employee.
And so, you know, I do think that these hybrid models
that combine DB and DC are a good way to try to break
through some of the natural tensions that exist
or could exist around retirement security for management
and labor and we've seen already, you know,
that at the state level,
local level etc. this has become a really hot issue.
>> Dawn Lynn: Thank you.
And this is going to be our last question.
What are the effects of immigration policy
on the retirement crisis?
Some have suggested that net immigration into the U.S. has
to a certain extent made up for the declining birth rate.
>> Dr. Ferguson: It has to a certain extent
because immigrants --
net immigration has tended to be somewhat younger
than the existing population.
But one has to recognize that even immigrants start
to get older, you know, no one's going to be perpetually young.
And so while it may at the margin be helpful,
I'm not sure one should look at that as,
you know, the core solution.
It is part of the solution space.
One of the reasons that we have a relatively younger population
compared to Japan or China or other places is
that immigration has helped us over time.
But, you know, that's once you get a stock of immigrants
by definition they're going to age as well
so you still have an aging population.
You may start from a slightly lower base which is one
of the things that's helped us.
I don't want to go too far into immigration policy but one
of the other things that our report says is that a solution
to all of this, given the fact that we have a smaller cohort
of younger people that will be supporting all
of us aging baby boomers is that we have
to create greater productivity in society.
And you know one can think about immigrant policy,
immigration policy that can either be helpful in that regard
or neutral in that regard.
And so I think the real issue around almost any policy has
to do with refreshing the population has in part to do
with how do we create much more productivity in society.
So it's not just around age.
It's also thinking about how you make those folks
more productive.
Well, thank you all very, very much.
These have been great questions
and I really have had a wonderful time here.
And look forward to maybe returning to Ford School
at some point in the future.
So thank you all very much.
[ Applause ]
>> Susan: Thank you very much.
That was terrific.
It is really wonderful to be able to have such a clear
and candid discussion of very important issues
and we're particularly pleased
to have this important topic addressed as part
of our policy talk series.
So thank you very much.
I'd also like to thank John Ciorciari and Dawn Lynn Kaiser
for framing the questions.
And in particular, our audience for pulling together
such a wide range of very thoughtful questions
that enabled us to expand the conversation this afternoon.
So thank you both to those who are here with us in the room
and also to those who are watching online.
With that, let me ask you to help me end the session
by giving a final thanks to Dr. Ferguson for his presentation.
Thank you very much.
[ Applause ]