“There needs to be a holistic solution to the retirement crisis.”
Roger W. Ferguson, Jr. is president and CEO of TIAA-CREF, the leading provider of retirement services in the academic, research, medical and cultural fields. He began his career as an attorney in New York City, and is the former vice chairman of the Board of Governors of the U.S. Federal Reserve System. Currently, Ferguson is a fellow of the American Academy of Arts and Sciences; is a member of the Academy’s Commission on the Humanities and Social Sciences; and serves on the boards of the American Council of Life Insurers, the Institute for Advanced Study and Memorial Sloan-Kettering Cancer Center. He spoke with State Legislatures magazine at the 2013 Legislative Summit.
STATE LEGISLATURES: Why is the country facing a retirement crisis?
FERGUSON: The existing systems—Social Security, Medicare and Medicaid—that are focused on aging populations will be under great stress soon as the aging baby boomers retire. They will need to be supported in their retirement years by fewer workers. This will bring to light the need to rethink, repair and restart the retirement system in America to deal with this new reality. The other big concern is that not only are we aging as a society, but we also are living longer, making health care issues even more important.
SL: How long should individuals realistically expect to work?
FERGUSON: It depends on individual circumstances, in terms of the kind of job one does, the physical nature of the work. But for many people approaching retirement, I think it is really important for them to consider working a little longer. Having a longer work life means two things. One is you get to save more, and second, you get to delay when you have to dig into your retirement nest egg. With longer life expectancies, people need to plan for a retirement of maybe 20 years, maybe even 30 years. I think many individuals have not factored in the increase in longevity as they’ve thought about what their retirement might look like. A longer work life is one option individuals should consider.
SL: Is planning for retirement the same for men as it is for women?
FERGUSON: There are some differences for men and women, and some similarities. Women tend to have smaller retirement nest eggs. That’s partially because they tend to be out of the workforce for maybe a dozen years taking care of children or elderly parents. And when they are in the workforce, women still tend to earn on average only 77 cents to 81 cents for every $1 a man earns in a similar job. The second challenge for women is that they tend to live about four years longer than men. So while everyone is dealing with a similar set of challenges, they may be a bit more acute for women.
SL: What happens to public employees when pension promises are broken?
FERGUSON: Many folks go into the public sector expecting the pension to be an important part of the benefits. They may, in fact, take a slightly lower salary in order to have a solid pension. We have to respect the promises that have been made. On the other hand, we have to recognize that, if promises are not sustainable, it creates stresses in the system. Making evolutionary changes from the current systems to a more sustainable system is really very important.
SL: Who should bear the risk for public employees—the employee or the employer?
FERGUSON: We need to recognize that this is a shared responsibility. We think plans are much more sustainable if both the employer and the employee feel they are active participants and bear the risk evenly.
SL: What can state legislators do to address these concerns?
FERGUSON: The first and most important thing is to recognize there needs to be a holistic solution to the retirement crisis. Once legislators move beyond the unfunded or underfunded liability issue, they will need to determine the next step. They also have some obligations to consider. How do they effectively educate their citizens about the challenges? Should they require that financial literacy be taught in schools? How do they ensure enough flexibility to tailor solutions to specific circumstances in each state and locality? They’ve got to be wise; they’ve got to recognize there’s not just one perfect solution for all.
SL: What role does financial literacy play in resolving the retirement crisis?
FERGUSON: Financial literacy in the United States is woefully inadequate. The reason is that very few states require any sort of financial literacy class, even in high school. Folks who have more financial literacy training tend to have more wealth and fewer debt problems. They know more about mutual funds and mortgages, and they plan for retirement. Consequently, it’s important for us to overcome this financial literacy challenge.
SL: What is the most common trend in pension reform?
FERGUSON: The big trend in response to underfunded or unfunded liabilities is to shift toward a hybrid plan. These plans combine the best of defined benefit plans (programs that guarantee retired employees a specific benefit for life) with the best of defined contribution plans (programs that draw contributions from both the employers and the employees). Many local government, are moving toward a hybrid plan.
SL: What are some of the features that a successful retirement plan should have?
FERGUSON: A few features are seen consistently across successful plans. One is that everyone is enrolled; participation rates are at 100 percent. Second, good plans have an option for lifetime income in the form of an annuity or another defined benefit. A third is that employees save about 10 percent of their income, if not more, for their retirement. Next, investors have about 10 options to choose from—more than 10 can be overwhelming and fewer than five fails to give enough viable options. Last, good plans offer retirees educational opportunities and professional, objective advice.
SL: Are you aware of NCSL’s work on pension and retirement issues?
FERGUSON: What NCSL is doing is really important—providing opportunities for legislators to talk about these issues, to hear from experts, to share best practices across different states. Each solution has to be tailored to each state’s needs. The approach NCSL takes—bringing in experts, allowing conversations and having people learn from each other—is really a model for how an institution can help legislators deal with some tough and challenging issues.