Jane the Actuary Retirement

Forbes post, “Pay Off Debt Or Save For Retirement? It’s Time For An Actuary-Splainer”

Originally published at Forbes.com on March 25, 2019.

 

Turns out, this is really a two-part question.

First, if you’re an individual trying to decide how to manage your finances, what’s the best approach?

And, second, if you fancy yourself a policy expert, should you promote a mandatory-savings program like Australia’s, give people options, or step back entirely?

The very short answer to the first question is this:  pay off high-interest-rate debt first.

Which begs the question:  when does the interest rate count as “high”?  Most of the time, that’s when the rate is higher than the investment return you can reasonably expect from your IRA or 401(k).  If you’re paying 15% interest on a credit card (at the low end according to the website ValuePenguin), and you expect to earn 6% in your IRA, this is obvious:  pay off the credit card debt first.  If you have a home mortgage with an interest rate of 5%, don’t be in a rush to pay it off early at the expense of retirement savings.  There is a grey area, though:  if you have an employer match on your contributions, don’t think of that as “free money.”  Think of it as boosting the interest rate that you earn over time — for example, a pure dollar-for-dollar match might be similar to the effect of doubling the investment return* — so that retirement savings can come out as the “winner” in your comparison.  At the same time, if you expect to gain from the tax advantages of an IRA or 401(k), that’s worth some extra interest in the comparison calculation.

(*This isn’t literally true, and the math is a lot more complicated but the point is that it might not always be a sure thing to go for the match at a cost to continued interest-rate compounding on your debt.)

This seems obvious, no?  But here’s a claim from the National Employment Law Project that caught my attention over the weekend:  in light of a paper voicing skepticism of state-run auto-IRA plans because they “could hurt low-income participants because they will be investing in lower-return retirement plans instead of paying off high-interest shorter-term revolving debt, such as credit card debt,” the author, Michele Evermore, responded,

these findings do not make a persuasive case for limiting access to savings vehicles for low-income workers. That’s because the multiplier effects of starting to save for retirement while young are hugely beneficial for the majority of workers.

The error Evermore makes, of course, is that of thinking of retirement savings and debt as two entirely separate buckets, and promoting the beneficial effect of compound interest in the former while ignoring its pernicious effect in the latter case.

Here’s an example:

Imagine you find yourself at age 25 with a desire to save for retirement but also with $10,000 in credit card debt.  You’ve done your budgeting and have $3,000 per year that you can apply to paying off that debt or saving.  If you apply all of that to savings and earn 6% in investment earnings over time, then you can end up with $17,000 five years later, and that will continue to increase over time.  But if you never make payments on your debt, and have a 15% interest rate, you will owe $20,000, and have a -$3,000 net worth.  If you pay off your debt instead, you will have a $0 net worth, which isn’t great but is in fact more than -$3,000.

What if you have an employer match which doubles your contribution, so that a $3,000 contribution to savings is worth $6,000?  In the short-term, that boost gives you a positive net worth very quickly, but the debt’s interest rate will compound enough to outpace the investment returns, particularly if that savings rate doesn’t grow over time.  So, yes, contribute at least enough to receive the full match, but not at the expense of paying down your debt at least to the degree to keep the interest rate compounding at bay.

The bottom line:  compounding investment returns are great.  Compounding debt interest can be ruinous.

So what does this have to do with auto-IRAs or mandatory savings?  Experts worry that forcing people to save, like Australia does, or creating strong nudges that have a similar effect, will just send more low-income workers into debt, and economics researchers have been trying to find out what happens in the real world.

There does appear to be some good news, in the form of a study, “Borrowing to Save? The Impact of Automatic Enrollment on Debt,” by a team of Harvard researchers (thanks to Scott Graves for the link via twitter @SHGraves29), which examines the outcomes of a “natural experiment” when the U.S. Army began auto-enrolling its civilian new hires into the Thrift Savings Program with a rate of 3%, and found that among those enrollees, “bad debt” did not increase but car loan and home mortgage balances did.  Is this good news, because car and home loans have low interest rates in any case?  Or, to the contrary, does this indicate that new enrollees previously had been able to fund car purchases, and make greater down payments, out of nonretirement savings which no longer exists? — But, on the other hand, if the autoenrollment program had been harming people by taking away money that was otherwise going to emergency funds, then presumably researchers would have found higher levels of credit card debt as participants resorted to paying repair bills with credit card debt.

It’s all a muddle, and relies heavily on Americans being able to navigate through combining retirement savings with their other financial needs.  That’s one of the reasons that in at least some countries with mandatory or auto-savings, the lowest tranche of income is excluded entirely (see “Should Poor People Save For Retirement?“) with their income needs in retirement taken care of with a flat anti-poverty-focused Social Security benefit.  In the United States, on the other hand, we’ve got a Social Security formula that is weighted towards low income but leaves people likely to struggle with determining how it fits in with their actual circumstances and savings needs.  In a perfect world, auto-IRA programs such as OregonSaves and equivalent programs coming online in Illinois and California would provide meaningful counsel to participants to help them identify whether and how much they should save, given their income level and other circumstances, but they fall short, and, realistically, given the Social Security formula, it’s difficult to prescribe a simple rule of thumb.

And here’s one final wrinkle to consider:  in an extreme case of a person with high levels of personal, unsecured debt, and a high IRA account balance, that balances is protected against creditors in the case of a bankruptcy.  Had that individual chosen, over the course of a lifetime, to pay off debt but never been able to save, she would have no recourse to go back to creditors and say, “please give me my money back so I can afford to retire.”

 

December 2024 Author’s note: the terms of my affiliation with Forbes enable me to republish materials on other sites, so I am updating my personal website by duplicating a selected portion of my Forbes writing here.

Jane the Actuary Retirement

Forbes post, “So, Hey, Is Australia An Example To Follow For Mandating Employer Retirement Benefits?”

Originally published at Forbes.com on March 20, 2019.

 

They are never-ending, it seems:  proposals to create a form of nationwide mandatory retirement savings.  A recent article at Third Way lists some of the newer ones, and proposes its own.  Forbes contributor Teresa Ghilarducci has been promoting what she has alternately been calling Guaranteed Retirement Accounts or the Retirement Savings Plan.  I have my own pet solution with mandatory retirement savings as an integrated part of a Social Security reform.  Some of these proposals require employees to contribute their own earnings, others require employer contributions, and yet others require both.

And, as it happens, any such program would not have to start from scratch.  It would not be innovative or especially unusual — if you take an international perspective.  A year ago, I profiled the retirement system in the United Kingdom.  Hong Kong and a number of Asian countries have what they call “provident funds.”  And Australia has a system they call Superannuation, in which all employers are required to contribute 9.5% of an employee’s pay into a retirement fund.

Now, there’s a lot to say about this system and other systems outside the United States but I want to focus in this article on one specific issue:  how did they get from here to there?  9.5% of income is a lot, and that contribution rate has to be understood in the context of an overall state pension system that’s much different than ours.  But there is one element of their experience that I think is very useful to consider:  what happens when a mandatory contribution (for retirement savings, or a new payroll tax for maternity leave, or something else) appears out of nowhere?

One gets the impression that many supporters of new taxes, especially when directly employer-paid, believe that employers have a secret stash of money somewhere that they’ll be persuaded to cough up, or that they’ll cut executive pay as needed.  The wiser, but more trivial answer to any such tax hike is “it all ultimately comes out of worker pay.”

And in the case of Australia more specifically, worker pay increases were effectively directed into Superannuation contributions, with a slow phase in starting at 3% in the program’s first year and increasing one percentage point every other year to 9% in 2002.  The further increase to 9.5% likewise happened in two steps, to 9.25% in 2014 and 9.5% in 2015.

But even this didn’t come from nowhere; Australia’s larger companies had long offered retirement savings programs to their workers, but only on a limited basis.  At the same time, unions played a much more significant role in the Australian economy, and negotiated wages not just for one employer at a time but for entire sectors.  In 1986, a time of relatively high inflation, the Australian government orchestrated an agreement for a wage increase of 6% for those covered by these wage agreements, with the stipulation that half of that increase would take the form of a 3% retirement savings contribution.  (See “Mandatory Retirement Saving in Australia” by Hazel Bateman and John Piggott for a history of the system.)

To ensure access to Superannuation contributions even for those employees outside the union wage agreement system, the government mandated contributions for all employees in 1992.  Here’s an account of the politics behind the change:

‘Wages were due to go up 3 per cent that year and he ([Prime Minister] Paul Keating) wanted to restrain inflation,’ [economics reporter] Mr [Peter] Martin says. ‘Of course he still wanted to give workers the wage rise, so he and Bill Kelty, the head of the Australian Council of Trade Unions, came to a deal that employers will have to give the workers 3 per cent, they just won’t be able to spend it. And so that was the deal, that all awards had to give employees 3 per cent of their salary paid not as salary but into superannuation funds.’

And again, it was acknowledged that the mandated superannuation contributions were not coming out of employers’ pockets but were a redirecting of employee wage increases; so long as those pay increases exceed inflation, workers are no worse off in terms of living standards but accumulate retirement savings they otherwise might not have.   Another article, from Australian-based The Conversation, reports that recent renewed discussions around further increases in the contribution rate up to as high as 15% are based on the belief by supporters that employers are unfairly withholding wage increases, so that mandated increases in Super contributions are a way to force employers to grant this increase — though the author, Brendan Coates, disputes this, since, so long as nominal wages grow due to inflation, employers can implement Super contribution increases out of this nominal pay increase without having to cut pay.

In this respect, what Australia did as a country is not all that different from the savings strategy being promoted for American workers, who are encouraged, when they receive a raise, to use that money to increase their savings rather than just boost their spending.  It’s the same principle that underlies the concept of “auto-escalation” in 401(k) accounts, when employers design the accounts so that, having first automatically enrolled their employees at a certain contribution rate when they are hired, the amounts those employees contribute increase each year at the same time as that year’s raises are processed, so that employees increase their savings without seeing a reduction in their take-home pay.  (See this description at US News.)

The bottom line is this:  if American workers’ wages rise above inflation, then mandating that some of that increase be directed to retirement savings might well be a pain-free way to achieve a long-held goal.  But that’s not a sure thing.

 

December 2024 Author’s note: the terms of my affiliation with Forbes enable me to republish materials on other sites, so I am updating my personal website by duplicating a selected portion of my Forbes writing here.

Jane the Actuary Retirement

Forbes post, “Public Pensions And Social Trust”

Originally published at Forbes.com on March 17, 2019.

 

So it seems that I hit the one-year mark of my writing on retirement at this platform, and have still not managed to address some of the topics I wanted to discuss, in particular, questions of what pensions look like abroad and what we can learn from them.  But right now I find myself thinking about international comparisons in another way, around the question of social trust.

Round about a year ago, Megan McArdle, formerly a Bloomberg columnist and now writing at the Washington Post, wrote a series of articles coming out of a visit to Denmark.  Her first, at Bloomberg (paywalled), expresses the gist of the article in its title, “You Can’t Have Denmark Without Danes; What a small, happy country can teach a huge and fractious one. And what it can’t.”  Fundamentally, Demark can do what it does and function as well as it does because of its considerable degree of social cohesion; a sense of cohesion that, to her understanding, was not the result of an expansive welfare state but a precondition for its success.  (She subsequently expanded on this in a series of tweets, though non-subscribers will miss out on what I vaguely recall, from pre-paywall days, to have been an anecdote about losing her wallet and having it returned.)

She subsequently wrote again on the topic of the Danes’ system of disability and the country’s level of social trust at the Washington Post, observing that it has very generous social insurance provision of such benefits as disability income replacement with neither the sort of cheating nor the fears of cheating that you’d see elsewhere, including, yes, the United States, where one periodically sees reports of city workers taking advantage of generous disability pay-replacement and being seen out and about engaging in all manner of activities that indicate their claims of incapacity are fraudulent.

“Social trust” is, well, what it sounds like: How much do you trust your neighbors? And in turn, how trustworthy are they? In a low-trust place such as Greece, people don’t trust their neighbors not to cheat, which in turn makes them more likely to cheat themselves, because why should you stay honest when everyone else is getting away with something? This affects everything: whether people pay their taxes, whether they take benefits they don’t really need, how easy it is to regulate companies. And social trust also works as a productivity booster, because you can do away with a lot of the cumbersome monitoring that is ubiquitous in modern societies — the supervisors who oversee low-level workers, the store clerks who keep an eye on the customers. Every worker who is not making sure that people don’t steal or shirk can be re-employed doing something that actually increases output.

The United States simply doesn’t have that level of trust. And while it would be nice to think that we could get there if companies and government simply stopped acting so suspicious, the fact is that they frequently act suspicious because, well, Americans cheat more than Danes do. (Compare, for example, the American and Danish rates of tax evasion). Moreover, the mutual suspicion that Americans feel for each other restricts the range of politically feasible policies. Even if people aren’t cheating on benefits, if there is a widespread social belief that your fellow citizens might, you will not be willing to support a generous welfare state. (This helps explain why support is highest for old-age benefits in the United States; it’s hard to fake turning 65).

I find myself revisiting this article in light of both my own articles on prospects for public pension reform in Illinois (among others, my own proposal for reform and  my pessimism that Illinois politicians even recognize the importance of pension funding in the first place) and models for improved systems such as Wisconsin’s (and — spoiler alert — there are other systems with risk-sharing elements which I’ll profile soon) as well as the politics around Illinois Gov. JB Pritzker’s proposal for a graduated income tax.  In both cases, any such legislation requires amendments to the constitution Illinois adopted in 1970.  And in both cases, Illinois faces a lack of social trust.

Does a statement about public employee pensions belong in the constitution?  As it turns out, Illinois is only one of two states (the other is New York) with an explicit guarantee protecting future accruals.  (Others guarantee this by means of state supreme court decisions.)  Does it make sense to prohibit a graduated form to an income tax in a state constitution? Illinois, Michigan, and Massachusetts are the only ones which do so.   (North Carolina passed an amendment capping income tax rates to 7% in November 2018; in a peculiar turn of events, this was overturned in a February court decision because of the claim by plaintiffs that the state legislature was invalidly gerrymandered.  The decision is being appealed.)

As the Chicago Tribune reported in 2013, no thought was given in the 1970 discussions to the question of funding those pensions:

In short, state and local governments would be required to keep their pension promises but not be required to sock away enough money to cover payments years into the future. When it came to funding, officials of both parties in Illinois took significant advantage of the escape clause, helping them skate by for decades without having to make politically difficult decisions on raising revenues or cutting services to meet pension obligations.

In May 1971, just weeks before the new constitution would go in effect, an official state pension oversight panel of lawmakers and laymen issued a report warning that the new pension safeguards were a mistake.

The Illinois Public Employees Pension Laws Commission, which no longer exists, said it had opposed the language inserted into the constitution and had asked one of the sponsors to soften it or at least read a statement into the convention record that it wouldn’t preclude “a reserved legislative power” to change benefits in order to keep retirement plans sound.

Nothing came of the request, the report noted.

As it happens, I’m on record in support of removing both these clauses from the Illinois constitution in one fell swoop.

But to raise the issue of a change to the constitution in either of these respects raises fears:  how can we trust the legislature to use their newly-expanded powers reasonably, sensibly, justly?  Republicans will cut the pensions of hapless retirees!  Democrats will recklessly raise taxes!  In comments at my personal website JaneTheActuary.com and via Twitter @JanetheActuary, readers told me that they simply could not believe that Illinois politicians would make the hard political decisions needed to reform pensions, when it would cost them votes and would cost them campaign funds.  And similarly with respect to the proposed income tax amendment, opponents raise objections that this is just Pritzker’s opening bid, but that, once the limits on graduated income taxation are removed, the Democratic supermajority will be unfettered in its tax-and-spending spree.

It is, in the end, the fruit of a long history of corruption in Chicago/Chicagoland and Illinois.  After all, just this past February, the Chicago area was named the most corrupt in the nation, based on its share of corruption convictions.  Statewide, Illinoisians can now breathe a sigh of relief that our past two governors appear not to have been criminals, unlike their two predecessors.  Reforming pensions and instituting risk-sharing mechanisms simply can’t happen if Illinois voters don’t trust that their politicians will seek to make fair decisions.

 

 

December 2024 Author’s note: the terms of my affiliation with Forbes enable me to republish materials on other sites, so I am updating my personal website by duplicating a selected portion of my Forbes writing here.

Jane the Actuary Retirement

Forbes post, “‘Go North, Young Man’ – To The Wisconsin Public Pension System”

Originally published at Forbes.com on March 8, 2019.

 

To parapharase Horace Greeley in his Manifest Destiny exhortation, but for those seeking out well-funded public pension plans, it’s time to go north — northwards from Illinois, that is, to the greener pastures of the Wisconsin Retirement System.

Let’s start with some charts:  first, the funded ratio.  (This and the following charts come from data extracted from PublicPlansData.org, which includes the years 2001 through 2017, as well as the Wisconsin 2017 actuarial report.  For Illinois, the three major public plans for with the state bears funding responsibility are combined and, where applicable, weighted averages calculated; for Wisconsin, the WRS already includes the three categories of state employees, teachers, and university employees, as well as most municipal employees except for those of Milwaukee city and county.)

Comparative funded status, based on data from... [+] https://publicplansdata.org/public-plans-database/browse-data/

own work

Yes, that’s correct.  The Wisconsin funded ratio hovers at or just barely below 100% for this entire period.  What’s more, regular readers will recall that in my analysis of Chicago’s main pension plan, I did the math to demonstrate that even if the city had made the contributions as calculated by its actuaries during this time frame, they would have been insufficient to have kept the plan funded, and even so, would have increased dramatically.  Is Wisconsin keeping its plan funded only by means of unsustainably-increasing contributions?  Let’s compare:

Comparison of actual contributions based on... [+] https://publicplansdata.org/public-plans-database/browse-data/ data

own work

To be sure, the scale required for Illinois’ contributions makes interpreting Wisconsin’s contributions difficult.  For reference, Illinois’ contributions increased from $1.4 billion in 2001 to $7.6 billion in 2017, a 450% increase.  Wisconsin’s contributions increased from $411 million to $1.0 billion in the same time frame, an increase of 150%.

The Public Plans Data site also provides payroll data, which means we can view change over time in the contributions as a percentage of total payroll.  That’s easier seen as a table.

 

data from https://publicplansdata.org/public-plans-database/browse-data/

own work

 

Finally, the Wisconsin actuaries are not hoodwinking us by means of artificially-high valuation interest rates; during this time period, the weighted-average Illinois discount rate dropped from 8.5% to 7.3% (it is now somewhat lower in the plans’ most recent valuations), and the Wisconsin plan’s rate was consistently lower, from 8.0% to 7.2%.  (Remember that lower discount rates result in higher liabilities and relatively lower funded ratios.)

So what is the secret sauce to Wisconsin’s full funding?

A small piece of the puzzle is the much-restrained growth in benefits during this timeframe:

 

Average benefit per retiree (weighted average for Illinois' 3 main plans), from... [+] https://publicplansdata.org/public-plans-database/browse-data/ data

own work

 

The much larger piece of the explanation, though, is this:  Wisconsin’s public pension system, unique among not just public pensions but among any defined benefit pension in the United States, is designed to share risks between participants and the state, through two key mechanisms.

First, the contribution each year is recalculated as needed to keep the plan properly funded, and that contribution equally split between workers and the state.

Second, unlike Illinois’ retirees, who are guaranteed a 3% benefit increase each year, no matter what, Wisconsin’s cost-of-living adjustments are dependent on favorable investment returns, and, far more crucially, retirees’ benefits are similarly reduced in down years.  The gains and losses are smoothed on a five-year basis to reduce the impact any given year, but, despite fears by many retirement experts that, when it comes down to it, plan administrators would chicken out on benefit reductions, in Wisconsin, these benefit reductions really have been applied just as consistently as the benefit increases.  What’s more, the adjustments take into account not just investment returns but also mortality improvements and other plan experience/assumption impacts.

(For more information, see “Wisconsin’s fully funded pension system is one of a kind” from 2016 at the Milwaukee Journal-Sentinel as well as Mary Pat Campbell’s analysis on her blog last summer; also, note that the Wisconsin actuarial valuation, as do all plans valued in accordance with actuarial standards of practice, already assumes future improvements in life expectancy over time; benefit adjustments reflect the degree to which actual mortality matches this expected improvement over time.)

Of course, the increasing plan contributions during this time frame, from 4.1% to 7.3% of pay, suggest that it’s not all magic.  And as the Journal-Sentinel reports, lawmakers succumbed to the temptation to boost benefits in 1999, and, as Campbell reports, they then resorted to a Pension Obligation Bond and its “beat the stock market” gamble, to fill a budget hole, which, again per the J-S, has worked out in their favor.

Nonetheless, in my article earlier this week on the Aspen Institute’s report on non-employer retirement plans, I wrote that they sought the “holy grail of retirement policy” — risk pooling as a replacement for the risk protection that employer-sponsored retirement plans had formerly provided.  If we want to analyze prospects of risk pooling, collective defined contribution, defined ambition — however we wish to label this sort of plan, there is no better place to start than the Wisconsin Retirement System .

 

December 2024 Author’s note: the terms of my affiliation with Forbes enable me to republish materials on other sites, so I am updating my personal website by duplicating a selected portion of my Forbes writing here.

Jane the Actuary General Interest

Pritzker’s tax plan: now we know

So, readers, I had every intention of keeping this space nonpartisan, so I’m going to say this in the most nonpartisanly-way possible:  the just-released Pritzker tax plan (as linked to at CapitolFax.com) is terrible.

I should preface this by saying that I have no objection to graduated income taxes in principle.  They give due recognition to the principle that everyone should pay into the system to at least some degree, but that it’s appropriate for those who can pay more without being deeply burdened, to do so.  But at the same time, a graduated income tax should not be so imbalanced as to create a situation of excessive dependence on the wealthy for tax revenue, a dependence that puts the state at risk of substantial revenue volatility (as, for example, California experiences with half of its income tax revenue coming from people earning $500,000 or more, or 1% of its population), and simply creates a tendency to see government spending as “free money” rather than funded by taxing and spending decisions made in the best interests of state residents.

With respect to Illinois in particular, I have been distrustful of claims that our state will solve its financial woes with a graduated income tax because of the promises being made by Gov. Pritzker that only “people like me” (that is, the insanely wealthy) will be affected, and therefore no particular sacrifice is required on the part of any real people — and that’s on top of a generalized distrust of our elected officials.  And no where in any of the discussion is there any statement made that there will be any efforts made to ensure that our tax money is spent wisely and as effectively as possible.

That being said, let’s look at the proposal, bearing in mind that the current Illinois personal income tax rate is 4.95% for all income above a personal exemption of $2,000.

Income up to $10,000 (27.2% of taxpayers) – 4.75%

Marginal rate up to $100,000 (58.9% of taxpayers) – 4.90%

Marginal rate up to $250,000 (11.1%) – 4.95%

Marginal rate up to $500,000 (1.9%) – 7.75%

Marginal rate up to $1,000,000 (0.6%) – 7.85%

Total rate for taxpayers with income above $1,000,000 – 7.95%.

So what do you notice?

In the first place, the incessant promises of “tax cuts for the middle class” may be literally true insofar as 4.90% is 0.05 percentage-points less than 4.95%.  But these trivially-reduced rates demonstrate more than anything else the foolishness of having promised a “middle class tax cut” in the first place.  It would have been far better for Pritzker to have acknowledged this (and better still not to have promised it); to hold to his campaign promise in this manner treats Illinoisians as fools, really.  It also feels a bit like the game of pricing ending in .99, what with these brackets that are basically 5% and 8% but rely on residents thinking of 4.95% and 7.95% as meaningfully less than that, and having the multiple brackets with nearly identical tax rates makes no sense either.

In the second place, the proposal makes no differentiation between single and married taxpayers, imposing a substantial marriage penalty on upper middle-class earners.

And in the third place, the “millionaires’ tax” is astonishing.  Here’s the math:  a household with $1,000,000 in earnings would pay $70,935 in Illinois taxes.  A household with $1,000,001 in earnings would pay $79,500, or $8,565 more for a single dollar more in income.  Yes, I know, world’s tiniest violin, etc., but it makes no sense.  It seems to be a matter of proving that you’re serious about sticking it to the wealthy, perhaps with some notion that there is no such thing as being “just a little bit rich.”  But as an actuary, it makes me question whether these people can do math, and it also reeks of hubris, that is, a conviction that Chicago(land) is so indispensable, its economy so strong, its quality of life and cultural institutions so irreplaceable, that its denizens cannot possible leave for greener pastures.

Or has Pritzker intentionally omitted single/married brackets and intentionally added the all-income tier so as to subsequently eliminate these to proclaim that he’s compromising?

Again, I’m not going to burst into a rage or start using ALL CAPS but here we are.  Democrats hold not just a majority but a supermajority in the General Assembly so they can afford to lose the votes of a few of their members in swing districts worried about re-election, and there’s no reason not to think they’ll steamroll this through just as quickly as the minimum wage hike, then present voters with the amendment as practically a done-deal.

 

Image: https://media.defense.gov/2019/Feb/12/2002088973/-1/-1/0/181206-A-UM169-0001.JPG; https://www.dover.af.mil/News/Article/1755127/what-you-should-know-about-filing-2018-taxes/ (public domain/US gov)

Jane the Actuary Retirement

Forbes post, “How Will Alienated America Save For Retirement?”

Originally published at Forbes.com on March 4, 2019.

 

Alienated America is the title of a new book out by Tim Carney, commentary editor at the Washington Examiner and American Enterprise Institute visiting fellow.  Its core observation is this:  while in the 2016 general election, Trump had the support of evangelicals and other pro-life Christians, because of the binary choice between Trump and Clinton (where the single issue of abortion was key for many reluctant Trump votes), quite the opposite was true for the primaries.  Then, as now, Trump’s core support came elsewhere, from those disconnected from religious communities.  What’s more, it was localities in which community institutions were strong that Trump did poorly in the primaries, and in areas where they were weak and where residents were disconnected from each other, that Trump did well.  For wealthy communities like the D.C. suburb of Chevy Chase which Carney uses as one reference point, a swim club or a book discussion group or garden club might do a great job of connecting up residents, but for most Americans, it has historically been their church/house of worship which has been their primary “community institution” and, despite stereotypes otherwise, it is among the white working class that the trend of religious disaffiliation has been most dramatic — and its impact is much more far-reaching that the results in an election, as the loss of those institutions impact the well-being of the alienated.

So what does this have to do with retirement?

In early February, the Aspen Institute published a new report, “Portable Non-Employer Retirement Benefits: An Approach to Expanding Coverage for a 21st Century Workforce,” which sought to address the 55 million Americans who, according to survey data, lack access to a workplace retirement plan, by describing/proposing six alternate ways of providing access to retirement plans which might be scaled up or, in some cases, brought into existence.

Some of these mechanisms are still very much workplace-centered.  The report proposes that employers and workers in a specific industry sector might band together to provide retirement plans in which all employees could maintain participation even as they move from one employer to another.  These sector-based plans are common in the Netherlands — for example, the Dutch multiemployer plan which I contrasted with the US equivalent back in November was a plan for the metal industry.  In Massachusetts, nonprofit organizations are partnering to provide a multiple employer 401(k) plan, as is a similar coalition in Canada for its nonprofit workers.  The report also profiles “new worker organizations” — union-like groups formed to advance the interests of workers, such as domestic workers, freelancers, app-platform drivers, and so on — and suggests that they might offer workers the ability to enroll in a retirement plan, and considers professional associations and trade associations as further sources of retirement plan access — ideas which have been proposed elsewhere.

But there are two suggestions which are new.

The report suggests that labor unions might be a source of retirement benefits — not in the form of Taft-Hartley multi-employer plans which are already so troubled in their defined benefit form, but as a sponsor of retirement savings that reaches beyond mandatory contributions as a part of collective bargaining (though it does suggest this) to acting as a plan sponsor for spouses of union members, “non-unionized workers who might join a union under an ‘associate member’ category” and workers at employers who choose to participate in the union-sponsored plan.

The report also proposes that faith communities be a source of retirement plan participation.  They observe that the United Methodist Church provides retirement benefits for all its clergy and lay employees via its Wespath entity, the “largest publicly reported denominational plan in the US.”  (Side note: you’d think the Catholics would be larger, but they manage everything at the level of the diocese rather than country-wide.)  But the Aspen report suggests taking this a step further:

A potentially more far-reaching approach would be for faith groups to sponsor portable non-employer retirement benefits for the members of their community. The addressable uncovered group here is, in theory, very large. If we assume 55 million Americans lack access to a workplace retirement plan, and 36 percent of those attend religious services once a week or more (assuming the same proportion as the population as a whole), then there is a pool of nearly 20 million regular participants in faith communities who could be served by a faith group-sponsored portable non-employer retirement benefit. Where the faith community already sponsors a retirement arrangement for its employees — especially where that arrangement has scale, as in the Wespath example — there could be opportunities to extend access to that arrangement to the broader faith community.

To be sure, for an entity such as Wespath to reach beyond the employees of the church it serves, to those parishioners, it would become more like a “retail retirement account.”  Would this, then, be no different than a church partnering with a Vanguard or Fidelity, or allowing that member whose day job is financial planner to set up a table during after-church social hour or sponsoring the after-mass donuts?  The report’s suggestion might sound trivial to educated Americans who already have done their due diligence on how to save for retirement, but the kernel of this proposal could make a big difference for those who haven’t.

Carney emphasizes that churches in America have a key role as community institutions, and, at least among churches with greater resources, they offer groups that reach beyond Bible studies to provide support for the bereaved, young mothers, the unemployed, those in recovery, and so on.  In many parishes a “parish nurse” provides further resources and referrals, visits the sick, and provides other aid.  Whether through a formal organization or simply through an informal process that materializes as needed, they deliver casseroles to families struck by illness.  And many evangelical/mega-churches offer Dave Ramsey’s “Financial Peace University” money-management classes.

In this context, it’s not so crazy to imagine that churches, community groups, and unions acting as a community group could and should have an important role to play in financial wellness and retirement savings — both as organizations which might provide education and support on the path, and because they provide the sort of informal social networks that nudge people forward towards, for example, saving for retirement.  Yet these are exactly the organizations which Carney (and others) reports are disappearing in the regions of America that turned to Trump in 2016.

How to get from here to there?  That’s another question.

 

December 2024 Author’s note: the terms of my affiliation with Forbes enable me to republish materials on other sites, so I am updating my personal website by duplicating a selected portion of my Forbes writing here.