Our Retirement System Is Broken. We Don’t Have to Rip It Up to Fix It.

But unlike some economists and researchers who want to rip up our retirement system, Munnell believes the problem can be solved by fixing what’s already in place. She says that the government should shore up the finances of Social Security by raising taxes, not by cutting benefits. She says that retirement savings plans should be made available to all workers, and that all workers should be automatically enrolled in them when they start a job. Finally, Munnell says a growing number of Americans are going to have to work longer to save more retirement money and maximize their Social Security benefits.

The 79-year-old professor might seem an unlikely advocate for working-class Americans, having grown up on Park Avenue in Manhattan and earning her Ph.D. in economics at Harvard University. But a job as a researcher at the Brookings Institution when she was 23 showed her that there were people tackling important problems and she wanted to be among them. She worked at the Federal Reserve Bank of Boston and was an economic official in the Clinton administration before joining Boston College in 1997 and starting the retirement center a year later. 

We reached Munnell at her office in Boston. Her comments have been edited.

Barron’s: How bad is our retirement problem?

Alicia Munnell: It is really quite serious. For people in the upper 40%, the system works fine. For those below, it really doesn’t. 401(k) plans have turned out to be good mechanisms of accumulation for those who have constant coverage and earn substantial amounts. 

How could it be fixed?

Any of us could go and design an ideal system, a better system. But I’m very much of the school that we have what we have. And the test is to make that system work as well as possible.

The problem is twofold. One, not everyone has this second tier of retirement income, which is characterized by 401(k) plans. And, two, people don’t put as much in their 401(k) plans as they could.

How would you make retirement savings plans more effective?

You need to automatically enroll people, and you need to have default contribution rates that increase automatically. But most importantly we need to expand coverage so that everybody has a workplace savings plan.

My colleagues and I have done a lot of work encouraging state plans, where state governments have introduced a requirement that employers that do not offer a plan have to automatically enroll their employees in a Roth IRA. The employee can always opt out.

What states are using them?

So we have these auto IRA program up and running in Oregon, in California, in Illinois. I think Connecticut has just come on board, and Maryland is about to come on board. 

But the idea to have 50 separate programs through the United States doesn’t make any sense at all. What we really need is a federal program.

It has to be a Roth?

It has to be a Roth. First of all, being able to deduct contributions [as with plans like 401(k)s and traditional IRAs] is not very important to low-income people. And second, a Roth allows people to take out the money they have contributed when they need it. It gives them to a piggy bank that they can turn to. It means that they have money if they have an automobile accident, if their roof needs fixing, or they have some other emergency.

How much of a tax increase would it take to make Social Security solvent?

If it were totally financed through a payroll tax on the current base, it would take a 3.5% increase, half of that paid by workers, half by employers. The rate would be lower if we increased the maximum taxable earnings for Social Security, and even lower if we financed some of the costs through income tax revenues.

Why do you think working longer is a good thing?

Retirement is a relatively new phenomenon. People in the old days, before Social Security, really worked until they could no longer work physically. 

Work provides structure. It provides social interaction. It provides money. It provides all sorts of good things for people who have relatively attractive jobs.

I’m very sensitive to the fact that the prescription for working longer is not applicable to everybody. Not all people are healthy enough to keep doing it. But for anybody who can work longer, it is definitely the way to assure that you have a secure future.

It’s secure because you’ll save more money or have fewer years in retirement?

All of the above. And you get your biggest Social Security benefits if you work until age 70. Anything less and your benefit is reduced. 

You’re still working at 79. Do you plan to retire?

Yes, I’m actually getting ready to just have fun and do nothing serious at all. I look forward to handing over the reins of this successful institution to somebody else. But of course it won’t be for a couple of years.

How did you end up at Boston College?

After five years in the Clinton administration, I came back to Boston. I was at that point 55 years old. I had irritated the banks because I had done a really big study on discrimination in mortgage lending that got a huge amount of attention. I had annoyed the insurance companies because I wrote on changing the taxation of pensions. 

So three people from BC came and said, Would you like to have the Peter F. Drucker chair in management sciences? So, I said, ‘Yes, I don’t have any other alternatives. It just sounds wonderful.’

The more I said I don’t have any other alternatives, the more they said, ‘She’s so modest.’ I wasn’t being modest. I didn’t have options.

Your retirement center has done a lot of work on retirement assets. How much savings should a retiree have?

That depends on when you retire. For an average person, maybe 10 times their earnings. 

How many Americans meet that test?

What we find is that roughly half of today’s current working population is prepared—meaning they have enough to maintain their current standard of living in retirement—and 50% are not prepared.

How much is the system to blame and how much are Americans to blame for undersaving? 

It’s all the system. People need to have automatic savings mechanisms. And they don’t have them. Without that, it’s just unrealistic to ask people to save. 

Was moving to 401(k)s and ditching private pensions a mistake?

Oh, I think it was a natural evolution to move away from defined-benefits plan. But no one would ever have designed a supplementary system that looks like 401(k)s because it leaves so much discretion to the individual. But the old-fashioned defined-benefit plan, I don’t think it would have continued to have worked. Because it really presumes that you stay with your employer throughout your work life, and the labor force has just become substantially more mobile. And with a defined-benefits plan, you really do forfeit benefits when you move midcareer. 

Home prices are soaring. Could that be a retirement bailout for some?

For most middle-class people their house is their largest asset after their Social Security wealth. People could make their lives a lot easier by tapping their home equity in retirement. But people do not think that way. They want to preserve their home value either to leave as a bequest to their children or to have some protection in the case of expensive late-life long-term care. So they’re just very, very reluctant to touch their home.

How can that be changed?

Massachusetts and other states have property-tax deferral, but it needs to be made easier and available to everyone. And then when you die or you move the money that is deferred gets paid back with interest. If that were up and running for a broader swath of the population, that would be a way for people to use some of their home equity to provide for heat and medicines and things like that during retirement.

I was a fan for a long time of reverse mortgages, but that just seems to be too complicated for people. They don’t know how they work and they hate them simultaneously.

Fifteen years ago, you were worried a lot of baby boomers would not have enough money in retirement. Now a lot of them have retired. How has it worked out?

Just like we thought. They don’t have enough money in retirement. 

So what are they doing? 

You do what you have to do. You scrimp. 

You’ve been talking about the retirement problem for a long time and, by some measures, it has gotten worse. Do you remain hopeful?

Yes, I’m always hopeful. Because it’s really not that hard to make things quite a bit better. We need to fix Social Security, and we can do that. That’s not rocket science. It’s just some political will.

We need to fix the 401(k)s. We know how to do that. We need to continue to get people to retire later. They’re already doing that. 

We need to extend coverage, and we can do that through the auto IRA. So all this stuff can be done. It just needs someone to pay attention and do it.

Thank you, Alicia.

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