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Roger W. Ferguson, Jr.

Roger W. Ferguson, Jr.

Posted: April 20, 2010 04:28 PM

Reframing Retirement

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The federal government is now soliciting advice on the rules that govern workplace retirement plans. Its core question concerns workers who've reached retirement age. Is it prudent to encourage retirement accounts that afford these retirees guaranteed income for the rest of their lives?

The answer is emphatically yes.

As President Obama has said, retirement security should be available "even if you're not rich." Yet too many Americans don't know whether their current savings level is sufficient to maintain a comfortable lifestyle after they stop working. McKinsey & Company projects that the average household will find itself $250,000 short of what it needs to retire securely.

Public policy changes can improve this situation. One of the biggest hurdles to spurring retirement savings is that half of workers don't have access to a retirement account through their employer. Many work for small businesses, which often lack resources to navigate the relevant regulations. To help these workers, the federal government should provide "off-the-shelf" options that businesses can offer to workers with limited regulatory burdens.

Workplace retirement plans should also enroll workers automatically. The Government Accountability Office reported last fall that auto-enrollment increased participation in employer-sponsored plans to as high as 95 percent. But only 16 percent of employer-sponsored plans feature auto-enrollment.

Of course, reforming employer sponsored plans alone is insufficient. We must also ensure that Social Security remains a sustainable program, and encourage workers to supplement employer and government retirement subsidies with personal savings. This is especially crucial for young people, who tend to invest too little money too conservatively. With another forty years to weather market storms, younger workers should save as much as possible and try to earn higher returns by accepting higher levels of risk - to let time be their ally.

Policymakers can nudge individuals toward saving more. The federal government should analyze whether the nearly $170 billion in tax subsidies for 401(k), IRA and other retirement accounts are as effective as they could be in promoting savings, particularly for people with low and moderate incomes. President Obama's proposal to expand the Saver's Tax Credit is a sensible way to help lower- and middle-income workers increase their savings.

Congress should also expand tax-advantaged savings for other purposes, including health care and education, to help ensure that retirement savings are used for retirement.

Finally, Americans need to reframe how we think about retirement. Today most retirement accounts emphasize wealth accumulation, with little thought to how that wealth will translate into retirement income. Instead, we should think backwards about retirement - determining how much income we'll need, and then working backwards to determine how much we should save today and how those savings should be invested.

The Lifetime Income Disclosure Act, sponsored by Senators Jeff Bingaman, Herb Kohl, and Johnny Isakson, is a useful step toward this reframing. It would require 401(k) plan account statements to show projected future monthly income and give workers a clearer idea of how much income they could receive in retirement.

Retirement needs and expectations are moving targets, and it's difficult to focus on priorities that may be decades away, but a few practical policy changes now can improve the financial security of countless Americans for all their remaining years. The alternative is an anxious status quo where many who work all their lives are denied a measure of financial security in their retirement. The time to remedy the situation is now. After all, none of us is getting any younger.


Roger W. Ferguson, Jr. is chief executive of TIAA-CREF, which manages retirement savings for 3.6 million Americans. He is a member of the President's Economic Recovery Advisory Board and a former Vice Chairman of the Board of Governors of the U.S. Federal Reserve.