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What to Do About the Coming Retirement Crisis

A co-author of 'Falling Short' has ideas for Washington and for you

In their new book, Falling Short: The Coming Retirement Crisis and What to Do About It (to be published Jan. 2, 2015), authors Charles D. Ellis, Alicia H. Munnell and Andrew Eschtruth call themselves modern-day Paul Reveres. Instead of Redcoats, they’re fearful about our pockets — and how little money we’ll have in them at retirement.
“Millions of us won’t have enough money for the comfortable retirement our parents and grandparents enjoyed,” they write. “The world has changed, so we must adapt if we are going to have a decent retirement.”
But how?
To find out, I spoke with co-author Munnell, director of the Center for Retirement Research at Boston College, which estimates that 53 percent of Americans are at risk of not having enough money to maintain their living standards in retirement. Munnell was formerly a member of the President’s Council of Economic Advisers and Assistant Secretary of the Treasury for Economic Policy. Before that, she spent 20 years at the Federal Reserve Bank of Boston.

(MORE: Yes, There Is a Retirement Crisis)
Highlights of our conversation:
Next Avenue: I saw an Allianz Life survey that said 92 percent of Americans age 44 to 75 believe the nation has a retirement crisis. But some analysts don’t think so and say there won’t be one. Why do you believe there’s a looming retirement crisis?
Munnell: There’s a cabal of people who say there isn’t going to be one. They claim that 80 percent of people have pension coverage. That’s true if you add public and private employers that provide plans and if you don’t include part-time people. But if you look at how many Americans participate in retirement plans, it’s only half.
These people keep coming out with new arguments saying everything’s going to be just fine. If I believed it, I’d be happy.
How much are individuals responsible for creating the retirement crisis because we haven’t saved enough?
I think saving for retirement is really a hard thing to do. A lot of middle-income people are under enormous financial pressure because wages haven’t grown much.
And to save for retirement, you’ve got to think about how long will you work, how much will you earn, when will you stop working and how healthy you be. It’s very easy to put off the decision to save as long as possible.

(MORE: How to Fix the Retirement System)
With defined benefit [pension] plans, it wasn’t your decision. Your employer put you in the plan and saved for you. It’s become much harder with the advent of the 401(k), when people have to make choices and they’re not good at it.
We need an easy and automatic system and we can do that.
We need legislation to try to accomplish what we’ve tried to get through nudging. We should say: if you want to offer a 401(k), you have to automatically enroll people and the default contribution rate for employees needs to go up every year for awhile.  
And you’d like to see 401(k) plans automatically cover part-time workers?
Yes. Part-time workers need retirement income just as much as full-time workers. The idea would be that each year, you auto-enroll everybody in the plan.
How else should 401(k)s be changed?
We need to have employees in low-priced index funds and cut down on the leakage from the system [reducing the ability to withdraw money before retirement], so the money stays in the plan. If you use it when you’re working, the money won’t be there for you in retirement.

(MORE: Retirement Planning: U.S. Vs. the World)

What rules would you like to see regarding early withdrawals and loans from 401(k) plans?
There is some advantage to allowing people to have access to this money before retirement. It increases their probability of participating and how much they put in. But I’d limit access primarily to loans, which people generally pay back.
I’d shut down completely the ability to take money out when you move from one job to another and I’d limit hardship withdrawals to things that are truly unpredictable, with no penalty for them.
How have today’s low interest rates increased the prospects for a retirement crisis?
In the 1990s, if you put 6 percent into your 401(k) and your employer put in 3 percent, when there were stupendous returns in the stock market, it was possible to acquire a big pile of money. In the current super low rate environment, it’s much more difficult.
What’s your advice to people in their 50s and 60s who are worried they won’t have enough money to retire?
It’s important to tell people that they have a powerful lever at their disposal and that is working longer. Not until their 90s, but just five years longer than they had planned. It can make an enormous amount of difference in terms of retirement security.
Social Security benefits are adjusted, so the longer you postpone taking them, until age 70, the bigger they are. If you start taking them at 70 instead of 62, your benefits will be 76 percent higher.
If you can’t work until 70, but you have some 401(k) savings, you could try to use that money to support yourself and then take the higher Social Security benefits at 70.
You suggest raising the earliest age people can claim Social Security retirement benefits from 62 to 64. Why?
People tend to grab their Social Security benefits as soon as they become available.  By not having benefits available that early, we can discourage those who inappropriately claim early.
In the book, you’re a fan of reverse mortgages as a way to supplement retirement income. But reverse mortgages have gotten a bad rap from some financial advisers and journalists. Why do you like them?
I am a fan. The reason I like them is that the biggest asset most people have is their house and they save by making their mortgage payment each month. If you’re in a house that’s too big for you, you could buy a cheaper house and get your equity out that way. But if you want to stay in your house, I think a reverse mortgage is the way to go.
In the past, people were critical of them because reverse mortgages were missold and a lot of that has been cleaned up. That said, a reverse mortgage isn’t good for everyone. The last thing you want to do is sell one to someone who would be using it as a last ditch effort to stay afloat financially, because if you don’t pay the property taxes and homeowners insurance, you could lose your house.
The Social Security trust fund is forecasted to run out of money in 2033. What should be done to prevent that?
We deserve to be chastised for having this deficit and doing nothing to take steps to put the system in order. If nothing is done, benefits have to be cut. That’s the law. It’s a silly way to run a retirement system.
The tendency when we have a deficit is to split the difference and do something on the tax side and something on the benefits side. But I think action should be taken soon to maintain benefits — maybe raise the payroll tax rate and raise the cap on the amount of earnings subject to Social Security payroll taxes [currently $117,000].
Do you think Washington will do anything soon to shore up Social Security?
Right now, no one is in the mood to do anything constructive.

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