Webinar: Retirement security and the 2020 campaign

Yahoo Finance's Adam Shapiro moderates a conversation between Andrew Biggs, a resident scholar at the American Enterprise Institute, and Alicia Munnell, the director of the Center for Retirement Research at Boston College, on how a Biden or Trump administration would approach savings & retirement in 2021.

Video Transcript

KARA WATKINS: Hello, and thank you for joining the Bipartisan Policy Center and Yahoo! Finance for today's conversation about financial security and retirement savings. I'm Kara Watkins, the campaign manager of Funding Our Future, a coalition of over 40 organizations, from the leading academic and nonprofits to America's top corporations, all working together to make retirement security a reality for all Americans. You can check us out at fundingourfuture.us.

The Bipartisan Policy Center and Yahoo! Finance have partnered to bring you an election series, with perspectives from both the right and the left, focused on the critical economic issues facing our country. This is our final segment of the series, in which we will examine how a Biden or a Trump administration would approach savings and retirement in 2021.

Even prior to COVID-19, the Employee Benefit Research Institute projected that over 40% of US households were on track to run out of money in retirement. Surveys show that roughly half of the population was already living paycheck-to-paycheck, with almost no emergency savings on hand.

Unfortunately, the pandemic and its economic fallout have put these kitchen-table issues front and center for households across the country. Too many Americans are struggling to make ends meet, and have heightened anxiety about their financial futures. Next year, with lingering economic pain, there is no doubt that leaders on both sides of the aisle will need to look at the short and long-term financial security solutions.

So what should Americans expect on retirement security in the next administration? What policies would help households both in this current crisis and withstand a future economic shock? And are there opportunities for bipartisan agreement? We hope today's discussion provides valuable insight into these two parties' savings and retirement security priorities.

With that, let me turn it over to our moderator, Yahoo! Finance's Adam Shapiro. Adam, please take it away.

ADAM SHAPIRO: Kara, thank you very much. I want to introduce you to the guests who are going to be talking about this issue. Joining us for this webinar are-- Alicia Munnell is the Peter F. Drucker Professor of Management Sciences at Boston College's Carroll School of Management, also serving as the Director of the Center for Retirement Research at Boston College. Before all of this, she spent 20-plus years at the Federal Reserve Bank of Boston, where she left as the Senior Vice President and Director of Research.

Also joining us is Andrew Biggs. He is a resident scholar at the American Enterprise Institute, AEI, where he studies Social Security reform, state and local government pensions, and public sector pay and benefits. Before that, Biggs was the Principal Deputy Commissioner of the Social Security Administration, where he oversaw the administration's policy research efforts.

I want to throw a question to both of you, because you were debating this in the press, in the Wall Street Journal, not too long ago. Something Kara said as we were getting into this. What if she's wrong? What if there's not a retirement crisis? Because there's a real debate as to, have we been approaching this incorrectly? Alicia, I'm going to start with you, because I think you would say, absolutely there's a crisis. So what more can you tell us?

ALICIA MUNNELL: So I think there's a crisis. If there's no crisis, then we can all go home, and I would be more delighted than anybody else. Basically, older people were never rich. And over the last 10, 20 years, we've also seen an increase in the need for retirement income or retirement resources, and we've seen a decline in the amount of money available.

And so basically, people are living longer. They are going to face high medical costs. And we now have a near-zero rate of return, so they need a bigger pile. At the same time, Social Security, which is really the backbone of the system, is going to provide less relative to pre-retirement income, because the full retirement age has increased. And then you have a big chunk taken out for your Medicare premium, and then an increasing number of households are taxed on their Social Security benefits. So that's Social Security.

On the other side we have 401(k) plans, which I think work quite well for the top 40% of the population but really don't provide very much for the bottom 60%. And so you add increasing retirement needs and reduced retirement income, and things look bad. In our census, about half of today's working households are not going to be prepared for retirement in the sense that they won't be able to maintain their standard of living in retirement.

ADAM SHAPIRO: But standards of living when we're older-- we don't need as much. Andrew, isn't-- are we perhaps all getting worked up over an issue that needs attention, but not panic?

ALICIA MUNNELL: Oh, panic? No panic.

ANDREW BIGGS: [INAUDIBLE] crisis doesn't come to pass, I'd say I might be out of here. I've staked quite a bit of research and my reputation on, essentially, the argument that this is a crisis that is that it's overblown. Alicia's clearly right that if you go to the past, retirees were disproportionately a poorer part of the population. If you look at more recent data from the IRS, they're today a disproportionately high-income part of the population.

Going into the COVID recession, retirement incomes were at the highest level ever. Poverty among retirees had been dropping. If you ask retirees, they'll tell you. I mean, 80% will tell Gallup, you know, not simply we have enough to survive, but we have enough to live comfortably. Only 5% to 10% say they're really having problems.

And then if you look at the level of retirement savings among working-age Americans, we are saving much, much more for retirement than we did in the past. You know, compared to the days when traditional pensions were the norm, retirement savings today are six times higher relative to the size of the economy. More American households are saving for retirement than before.

So it's-- if we don't have a crisis today-- and we don't. And you know, younger Americans are saving more than their parents or grandparents did. You know, sure, we're going live a bit longer, and I don't deny there are issues we need to deal with. But the idea that this is a crisis-- you know, of all the things the nation has to tackle-- I just don't think the data really support it

ADAM SHAPIRO: So Andrew, let me start this question to you. And we're going to talk about tax plans. President Trump, his plans for Social Security, and Mr Biden's plans for Social Security. And Andrew, it is a fact that the Social Security trust fund will be able to provide, I think they're saying, about $0.70 on the dollar if we don't make any changes in the not-too-far future. It used to be 2035, but given the pandemic it might be sooner.

Candidate Biden, Vice President Biden, has a plan to raise taxes on incomes of $400,000 or more as a way to shore up Social Security, and he would not remove the cap. But you had an aha moment in regards to that plan. What is it, and would his plan help save Social Security?

ANDREW BIGGS: Well, Vice President Biden has a proposal to fix Social Security. And you know, if you're in this game, like Alicia and I are, you're happy to see anybody proposing anything on this. And so, you know, I'm glad he has a plan out there.

The crux of the plan is that he would impose a Social Security payroll tax on earnings above $400,000. Currently, the tax goes up to the first $137,000 you earn, and then disappears. So he would impose the payroll tax on earnings above $400,000. You have this sort of donut hole in between, on which, you know, sort of the upper middle class would not be taxed.

The way the plan works, though, is that-- and with every passing year, that donut hole shrinks. So eventually, all earnings would be taxed by Social Security. So it's not just, you know, the millionaires and billionaires, as some people would say. Eventually, you know, the folks who are, you know, upper-middle-class folks but not rich, they're paying an extra 12 and 1/2% of their earnings to Social Security. And that puts the US in a pretty high tax environment.

The second part of his plan is that about 2/3 of the new revenues Vice President Biden would raise by raising taxes, he doesn't dedicate that to fixing the solvency problem for Social Security. He dedicates it to various ways of raising benefits. You know, it's been kind of a call among many on the left to expand Social Security, and he's gotten caught up in that.

So what you have is a plan that essentially taps out, you know, higher earners on the tax, and only adds an extra five years to the trust fund. And so I'm glad the conversation has started, but I certainly wouldn't want the conversation on Social Security reform to end with this, because I think it's just not-- it's not really a sufficient plan.

ADAM SHAPIRO: Alicia, what do you think? Because I mean, the president's plan is to rely on 401(k)s. And we'll hit that in a second. But a colleague, an economist, Teresa Ghilarducci, along with Tony James, in their book, Saving Retirement, points out that on the trajectory we were on before the pandemic, 25% of retirees will fall into poverty with Social Security. Social Security, I think-- the poverty level right now in the United States is around, what $15,000, $16,000 a year. So that-- even if you do the Biden plan, doesn't seem like we're going to be helping those people. What am I missing here?

ALICIA MUNNELL: A couple of things about the Biden plan. I agree with Andrew. It's a step in the right direction, but it doesn't take you at all where you need to be. And I'm surprised that the increase in revenues are so absorbed by benefit enhancements. They seem like very modest benefit enhancements to me. But one of them is to deal with people who have a lifetime of low income. So in that sense, it would help.

But we need a proposal to really restore financial solvency to Social Security over the long run, and that takes a significant increase in revenues, on the revenue side, or if you're going to do it on the benefit side, which I would not want to do, it means big cut in benefit.

So there are proposals around. The Social Security 2100 Act actually tries to cover the entire financing shortfall. And so this is just the beginning of a conversation. I don't think-- and it shows that the intent is to try to restore solvency, but it doesn't get you all the way there.

ADAM SHAPIRO: Alicia, should Social Security be the sole foundation of retirement for the majority of Americans? Because this is going to lead into a discussion about 401(k)s. Or do we need some kind of government-guaranteed pension for everybody?

ALICIA MUNNELL: So it was never intended to be the sole source of support for people in old age. It was supposed to be a base upon which they would build with private savings. And that's the way it works for people in the upper 40% of the income distribution. They have 401(k)s that they can use to augment their social security benefits.

The problem is, we really don't have something good for people at the lower end of the income scale, and we need one. And I really think that the coverage gap is probably-- the lack of universal employer-provided or second-tier savings is really one of the biggest problems in our retirement system.

ADAM SHAPIRO: So what would-- Andrew, what would that potential assistance for the lower income brackets, the bottom two quintiles, what would that look like? Because 401(k)s are only accessible to, what, 50% of the population, and of that 50%, only 25% take part in them.

ANDREW BIGGS: Well, I think this gets a little bit into the question of, you know, how much do people need to save for retirement? You know, there is this sort of tacit assumption that everyone should be saving for retirement at all points in their life, and if they're not, then there's some sort of problem.

The reality is, if you look at, say, Congressional Budget Office data for the bottom third of the population, the poorest third of the population, they're going to receive a Social Security benefit equal to 75% or so of their average pre-retirement earnings. You know, if those folks were to go to a financial planner, he's not going to tell them they need to save that much more for retirement. So it's-- you know, this isn't just a morality play, we want people to save just for its own sake. You know, the financial planning in the Social Security benefit formula points towards those folks saving very little.

The question, I think, is the folks in the middle. The people who do need to save, but may not have the opportunity to do it because they're not offered a 401(k) at work, because-- most people, they can use an IRA, but they just won't sign up for it. The states have done various policies. You know, sort of auto-enrollment IRAs for individuals who are not covered by a plan at work. You know, I have some issues with those.

But I think ultimately, we need to get some sort of vehicle that is available to everyone, that follows the person from job to job. You know, we have a very fragmented retirement system even when it does work. So I think we need to rethink how all of this is going to work. You know, I don't think we have enormous problems. Americans save a lot for retirement compared to other countries. We have very high retirement incomes compared to other countries. But we need to have a system that works for everybody so we have confidence in things.

ADAM SHAPIRO: Alicia, I think I saw you shaking your head in disagreement when I was asking that question to Andrew, so please correct me, because you know far better than I do. What do you think that, perhaps, new system should look like?

ALICIA MUNNELL: So I just-- I mean, I agree with Andrew on some things. I think both he and I have the same goals. We want people to have enough money for retirement, and we don't want them to have too much money for retirement. But the-- just as point of fact, he and I differ on how you measure how much money low-income people get from Social Security. And you'll turn off all your viewers if we [INAUDIBLE] so we don't need to. But I don't think low-income people are as well provided for as he does.

In terms of this new-- this second tier, I think that we really need to think whether that should be employer-based or not, or whether there should be sort of a system that covers everybody. I do think they need to be auto-enrolled, because nobody goes and signs up for a retirement plan, as Andrew said with regard to the IRAs.

And so I'm hopeful that in a new administration where we can think about retirement seriously, that covering-- eliminating the coverage gap and providing this extra tier will be a high-priority issue.

ADAM SHAPIRO: So Alicia, I'm curious about 401(k)s, because I had the good fortune to speak with Ted Benna. He's a Jeopardy question, by the way. The guy who a lot of people attribute with understanding how to create the 401(k) system we all now live with. And he talks about what works and what doesn't when I spoke to him.

Well, we have this notion that retirement in the '60s and '70s was some grand, you know, period in our lives, when it never was. There weren't pensions covering the majority of the public. How did people do it before the 1980s?

ALICIA MUNNELL: They used to die faster, which made it a little easier. No, it wasn't. I think we have all-- or certainly I have been guilty of sort of thinking back on the defined benefit world as a golden age. It wasn't that much of a golden age.

The problem with the 401(k) system is that for people who have constant coverage, and who contribute all the time, they end up with a nice big pile. And so when Andrew says we're saving more, I think that the pile of savings is very large. The problem is, it's all in the upper 40% of the income distribution, and that what we're really missing is, as Andrew said, the middle, but I'm also more concerned about sort of the bottom as well.

ADAM SHAPIRO: Andrew, can you create a system that would allow a 401(k)-type vehicle, or some kind of guaranteed vehicle-- because a 401(k) is not guaranteed. You could lose it and your investments-- to the lower quintiles without doing a wealth distribution from the upper income? Or do we have to do it that way?

ANDREW BIGGS: I don't think people, to be frank, want a guaranteed retirement income vehicle. I mean, if they could get it for free, if somebody's giving them the money, they would take it. But if you look at individuals who invest with their IRAs or 401(k)s, they have the option of a guaranteed investment vehicle. It's called US Treasury bonds. Almost nobody invests all their money in very, very safe instruments, because that means they have to save more in order to get an adequate retirement income. They're trading off, you know, risk versus contributions.

When you look at state and local pensions, you can see it's extremely expensive to-- and very risky for the sponsor to offer guaranteed benefits to people. And that risk and cost doesn't go away just by shifting it around and using accounting.

I mean, 401(k)s have their downsides. But the real upsides they have versus the traditional pensions that came before them is, first, more employers are willing to offer them. I think around 40% of private-sector employees at their peak had a defined benefit plan. Today, we're looking at well over that in terms of participation.

But second, unlike defined benefit plans, you have two parties contributing. Traditional pensions had just the employer. 401(k)s have both the employer, generally, and the employee. So that really accounts-- I mean, the contributions to these plans as a percentage of wages are probably 2/3 higher today than they were in the 1970s.

So it's-- there is a balance of these imperfections versus sort of the costs of trying to make it perfect. And often, those costs mean the plans are not gonna be as attractive to people, and they're gonna carry a lot of risks for whoever is running the plan.

ADAM SHAPIRO: When we talk about 401(k)s and pensions and all of this and running these plans, does the government-- because it sounds as if Andrew, Alicia, is saying that the government really should step back and not tell people how to invest their money, or even protect you from yourself in investing your money.

But if you look at that period in the '60s when there were some defined benefit plans and there were stock grant portfolios where you would lose it if you got fired before you vested, doesn't government have to step in to guarantee that kind of stuff doesn't happen again?

ALICIA MUNNELL: So I think there's a government role here in two ways. I think that you want to make sure that the plan is managed appropriately. But I also think we're never going to get to anything like universal coverage at the second tier without a government mandate that says to the employer that the employer must enroll his or her employees in some kind of plan, if they're not going to provide a plan of their own.

So employer-- the people who-- the employers that don't provide coverage are smaller employers. They have a lower-paid workforce. Providing retirement benefits is sort of very low on their priority list, and probably on the priority list of their employees, who have pressing needs. And so I think you can have a government role to make sure that everybody is auto-enrolled in something, and then they have the right to opt out.

ADAM SHAPIRO: Andrew, you're nodding your head, it looks like, in agreement with that. Do you agree with that or not?

ANDREW BIGGS: I basically do. I think Alicia and I are very close when it comes to, you know, where we would be in terms of private-sector retirement plan design and coverage. I think we want everybody to have the opportunity to save for retirement. You know, ultimately, if somebody doesn't want to-- and there are people who just say, I have other priorities. If that's where they are, it's really hard to force them.

But I don't think there's great differences between us in terms of plan design. I think it would just be difference of emphasis on how much should we rely on personal savings versus social security. You know, how much of a gap do we have to fill? But I think with a well-designed plan, those are gaps that people can sort of fill themselves, in a sense. People have different tastes for saving, different habits. And you know, within reason, they're going to adjust to that.

So I think there is room-- as partisan as Social Security reform always is, retirement policy in the private sector has actually been a much more bipartisan environment. We had the SECURE Act in this past Congress. We've had reforms before where Democrats and Republicans can work together. So this doesn't have to be an area where we just beat each other up. Social Security might be, but this really is an area where I think people can work together.

ADAM SHAPIRO: Alicia, as we get close to wrapping, I'm curious, because if the president is re-elected, he's already proposed a plan that would cap the funding for Social Security in the form of a payroll tax cut that would put, allegedly, money back into people's pockets. Do you think this would ever happen? Would Congress ever say OK?

ALICIA MUNNELL: So two things. Just so you don't think there's no disagreement between Andrew and myself, is that I like the current level of Social Security benefits. And I realize there's a big financing gap, and I would try to make that financing gap-- close that financing gap by raising revenues. And Andrew thinks that-- I don't need to put words in his mouth, but I think that he--

ANDREW BIGGS: Oh, you can.

ALICIA MUNNELL: --would think there could be some type of compromise between revenues-- cutting benefits and raising revenues. I don't want to cut benefits. So that's one important thing.

In terms of the president, the current president, he has no plan. He has this silly idea that people don't have to pay their payroll tax, or some people don't have to pay their payroll tax in the last quarter, and then they can make it up in the first quarter of next year. And then maybe if he's reelected, he'll get rid of the payroll tax totally. That's not a plan. That's not a plan.

ADAM SHAPIRO: OK, so I'm going to wrap this up by giving each of you a chance to tell us what you think the future looks like. You can pick a winning candidate and tell us what this discussion-- whether it be Social Security, private retirement funding-- what does it look like based on the candidate you think is going to win the election? I'll start with Andrew, and we'll finish with Alicia.

ANDREW BIGGS: Well, I have no idea who's gonna win the election.

ADAM SHAPIRO: Take a shot.

ANDREW BIGGS: I suspect-- You know, I mean, Alicia's right. I mean, President Trump doesn't have a plan for Social Security. He has sort of an idea. The idea, to the degree he's fleshed out at all, is essentially substitute sort of income tax or general revenue tax financing for the Social Security payroll tax.

Now, as an idea, I think that's actually a good conversation-starter, in the sense that you can-- and I mean, there are countries, like Australia and New Zealand, who fund their retirement plans using income tax revenues. What they do, though, is they fund a more limited safety net retirement plan. They wouldn't fund something at the size of Social Security. So I mean, to my view, a much more progressive source of revenue for a more modestly sized Social Security program is something that could actually sort of move things ahead.

But you know, Social Security in particular is something where a president has to be fully committed to it. I worked in the Bush White House. He was fully committed, and we still didn't get anything done. So unless it is a really top-tier priority for President Trump, or for President Biden, I don't see anything happening soon.

ADAM SHAPIRO: Alicia?

ALICIA MUNNELL: So Andrew, I'm surprised you said-- I also don't know who's gonna win the election. You're talking to economists here. This is not our field. But if Biden wins, then I think that-- well, first of all, something has to be done about Social Security. We can't just let it go, because as you alluded to, Adam, the trust fund is exhausted, whether 2030, a little earlier, or a little bit later. We should get-- and then benefits are cut automatically. We have to address it.

And this idea of using some general revenues, I'm not opposed to it. But my rationale would be that they're-- part of the cost of the program is due to legacy costs from giving money away to the first generation of retirees. I'm not sure that's President Trump's rationale for it.

So we need to fix Social Security. We need to have this second tier. I think the second-tier thing-- I think Andrew's right-- is something where people could come together and actually design something that makes sense, that would help everybody. And we have the Brits, who've have gone ahead of us, and we can look over and see how they bring in small employers, and how the savings by lower-paid people have affected other parts of their balance sheet. And so I think it'd be a fun thing-- I want to work with Andrew for the next four years and get this done.

ANDREW BIGGS: Sign us up.

ADAM SHAPIRO: Andrew Briggs? Oh, go ahead, Andrew.

ANDREW BIGGS: I'm happy to do it. You know, the retirement policy community is a very small one, so we're always happy to work with each other. And you know, this is super important stuff, both for the government in terms of its budget, but just for households.

And you know, people do worry about their own retirement security. So even if I personally in my spreadsheet don't see a crisis, you want to do something so people can worry about something else other than retirement. So I think there's some prospects, certainly, on the private side to think of how we make this system work better for people.

ADAM SHAPIRO: And perhaps we can have both of you come back to have a discussion about public pensions and some of the problems that the cities and states face in regards to that, as well as the Pension Guaranty Benefit Corporation. But unfortunately, I have to say thank you to Alicia Munnell as well as Andrew Biggs. Good to have you here. Kara?

KARA WATKINS: Thank you. Wow. Alicia, Andrew, and Adam, that was such a terrific conversation.

As we wrap up, at the Bipartisan Policy Center, we look for opportunities to make progress in critical policy areas. And I want to note, in 2016, a BPC commission released a report that focused on just that, the retirement security and personal savings issues, outlining a comprehensive package of bipartisan solutions to address these key challenges. So some of these proposals were incorporated in recent legislation. But plenty of work, including Social Security, remains. So to learn more about our work, visit bipartisanpolicy.org.

After the election, BPC will host a virtual policy summit during the second week of December. In partnership with Prudential Financial and broadcast on Yahoo! Finance, we will explore the critical topic of retirement and financial security through the lens of the workplace.

On behalf of BPC and Yahoo! Finance, thank you all for joining us. You can find the prior events in our election series on finance.yahoo.com. Stay well, and take care.