Achieving retirement readinessA way forward for state and local governments

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2 Achieving retirement readiness

State and local governments have spent recent years grappling with the issue of pension reform, with varying degrees of success. There has been heated debate on all sides about the efficacy of various retirement plan structures for current and future government employees.

But the issue of retirement readiness has an impact on state and local governments that goes beyond employee pension plans. Their budgets could potentially be devastated by the needs of an overall population that is largely unprepared for retirement. In Illinois, for instance, 63% of workers participated in a retirement plan at work in 2000. By 2012, that number had dropped to 48%. The prospect of a generation of both public and private workers who cannot fund their own retirement will have budgetary impacts across the spectrum of social services, and the problem will only become more acute as the elderly population swells.

The urgency and severity of this challenge have brought many stakeholders to the table with a new resolve to focus on solutions. That spirit of collaboration was very much in evidence at a recent roundtable hosted by Governing magazine and sponsored by TIAA-CREF. The event gathered a broad group of representatives from state and local government, public policy organizations, unions, and pension funds to focus on the critical question: Where do we go from here?

Over the course of the day, several themes emerged:

W There is an urgent need for reconciliation to foster change.

W No retirement plan model is perfect, and the good and bad elements of both DB and DC plans should be carefully considered in creating a new model.

W All individuals need access to retirement funding options with a lifetime income component.

Although there is no quick fix for the challenges that state and local governments face, the roundtable gave experts with various perspectives a chance to share their views and learn from each other.

Coming together to foster changeRichard Hiller, Senior Vice President Government Market, TIAA-CREF, opened the session with a reference to the 150th anniversary of the Gettysburg Address, which inspired a war-weary nation to rise above differences for the greater good. He noted how important it was for everyone in the room—and the industry at large—to do the same, looking past ideology to focus on solutions. “Americans’ ability to retire with dignity is one of the biggest public-policy issues facing us as a society,” he said. “The impact that this will have on government resources remains to be seen, but there are major challenges ahead in terms of the economy and the healthcare system. The discussion must focus on how to prepare the broadest group of Americans to retire in a sustainable manner.”

“At TIAA-CREF, we’re for lifetime income. If it’s from DB—great. If it comes from DC—great. From some combination—that’s great too. Outcomes are the key.” —Richard Hiller

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He went on to discuss TIAA-CREF’s model for government retirement plans. “No plan is perfect, but none should be demonized,” he explained. “We provide a hybrid defined benefit/defined contribution plan, with a focus on lifetime income, as an effective proven structure that builds savings while recognizing the mobility of the workforce.” Hiller urged all stakeholders on this critical issue to change the tenor of the conversation and focus on how to provide lifetime income to public employees in a way that honors commitments and is equally sustainable for employers, employees, and taxpayers.

A universal problem

One attendee commented that the challenges of planning for retirement are not limited to a single group:

W Young people are coming into an economy with few employment opportunities and taking low-wage jobs, which now leaves them in an economically fragile state that compounds over time

W The middle class is accumulating savings, but their accumulations have been hit by the economy’s volatility

W Even the wealthy are concerned about the stability of their savings and the prospect of unexpected longevity

In every category, he said, people will be doing worse than their parents and even their grandparents.

The next speaker on the agenda, Teresa Ghilarducci, Director of the Schwartz Center for Economic Policy Analysis (SCEPA), The New School for Social Research, opened up a discussion on changing demographics and the impact they will have on state and local governments:

W First, there will be increasing waves of 65-year-olds who will retire without being sufficiently prepared. Ghilarducci is currently engaged in an exercise in New York to model what will happen when there are 10,000 more 65-year-olds who have insufficient resources, and then what happens when these people are 75 and 80 years old, and poverty rates among the elderly increase from 10% to 15%. The model has shown that the greatest impact will be to the state and local governments that provide social services.

W Ghilarducci looked also at the political consequences of having a large bloc of retirees who have less coverage. She cited Rockefeller Foundation research that shows the top issues for voters in a recent poll were retirement security, jobs, and health insurance. Politicians will need to address these issues if they hope to stay in office.

W She noted next the consequences of this trend for the labor market. When employees who are over 55 lose their job, they do not face a friendly labor market: Frequently they have to switch industries and reduce their income to keep working. People who retire and come back often take jobs traditionally held by teenagers and other younger adults. With employment already constrained in the current economy, the labor market is not prepared for an influx of people in their 60s and 70s who need to keep working because they do not have resources to retire.

Ghilarducci went on to discuss the causes underlying this widespread lack of retirement readiness. “We haven’t designed pension systems that allow people to accumulate, invest efficiently, and decumulate with lifetime income,” she said. “All three parts have to be embedded in good design. We need to make sure that everyone has a plan, a safe place to store their money, and access to an annuity.” Ghilarducci highlighted the passage of the California Retirement Savings Trust Act in California, better known as Secure Choice, as a step in the right direction to address these shortcomings.

California Secure Choice

The Act governing Secure Choice was passed in 2012 to establish a new retirement savings plan for the nearly half of private sector workers without access to a workplace plan. The plan, similar to an IRA arrangement and maintained by the State, would be a voluntary, low-risk, and auto-enrollment retirement savings plan for employees. Secure Choice would require private employers in California with five or more employees to provide access to the plan and to offer payroll deductions to the Secure Choice Accounts—the available investment options.

The passage of the legislation created the framework to establish the Secure Choice Plan, but it requires a thorough feasibility study to determine the program’s viability and appropriate structure. Currently, the Secure Choice Board is selecting vendors to conduct the feasibility study, and when the study is completed, the Board will provide a final report with recommendations to the Legislature. If the Legislature decides to move forward with the implementation of the plan, participants are expected to begin enrolling in January 2016.

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Bridging ideological differences with a common solutionAn interesting idea that arose during the discussion is that the two great themes in the story of America are equality and liberty—and the two can be at odds with each other. In the context of retirement readiness, equality would translate to mandated contributions and annuitization, to ensure that everyone has a chance at a secure retirement. The notion of liberty would manifest in mobility, liquidity, and flexibility, to ensure that every individual had a chance to get the most from his or her retirement plan. During the next section of the roundtable, two speakers—Dan Liljenquist, former Utah State Senator, and Mark Dingley, Deputy Treasurer/Special Counsel, State of Rhode Island, demonstrated how experts can lean toward one theme or the other and still come to similar conclusions about the best solution.

Liljenquist began by talking about the challenges that the state government of Utah faced when in 2008 the Utah Retirement Systems (URS) suffered losses of just under 25%. That year’s market losses reduced URS’s pension funding ratio (the ratio of expected future plan receipts vs. the expected future liabilities) from 95% to 87%. The market losses and sharp decline in pension funding ratios led the Utah legislature to change their pension approach in 2010. They passed legislation that closed the existing pension plan to new employees and offered those employees the option of participating in a hybrid defined benefit plan or a defined contribution plan. The results were more predictable liabilities, improved funding levels, and greater control and portability of retirement accounts for workers.

“We were not willing to vilify people who did nothing more than make a rational choice at the expense of other opportunities. When we were able to acknowledge that, we were able to move forward.” —Dan Liljenquist

He noted that while he comes down on the side of liberty from an ideological perspective, that can be misinterpreted when it comes to discussions about retirement. “Some people believe if you are thinking about retirement security for your neighbors that you are disloyal to the cause of liberty, and that is not the case,” he noted. “We are trying to help retirement systems come up with reforms that are fair, equitable, and meet commitments to existing employees, while moving new employees to systems with protections that people need—even if they don’t think they need them.”

As Dingley took the floor, he noted while there are a number of differences between Rhode Island and Utah, they have one thing in common: Their citizens’ life expectancies are among the highest in the U.S., making retirement planning a very compelling proposition.

When reform came on the agenda in Rhode Island, the state’s pension plan was only 48% funded, and it was clear that there was an urgent need for reform—but that the process would be difficult. “Our goal was to provide a dignified retirement for our employees,” Dingley said. “Earlier rounds of reform had affected the benefits of new and younger employees but not older employees and retirees. We wanted to look everyone in the eye and say this is going to last. This is something that will work in 20 years.”

He noted candidly that it was not a popular process, but that the state’s treasurer was careful to engage all stakeholders and to be honest about how individuals would be affected. One event in the midst of the process—the bankruptcy of the city of Central Falls, R.I., which reduced public employees’ pensions by 50%—drove home the fact that defined benefit plans do not always have the security that people assume. The bankruptcy highlighted the importance of reform.

“If you go in with a solution, it’s often difficult to show that it’s reasonable and necessary. If you go in to meet a standard, the process can get you there.” —Mark Dingley

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Subsequently, the Rhode Island legislature embraced reform and acted decisively. In 2011, after more than 29 hours of public testimony and during seven joint hearings of the House and Senate, legislators passed the Rhode Island Retirement Security Act. The Act reduced the state’s unfunded liabilities by $3 billion and focused on restoring the solvency of the pension system and the retirement security of participating workers. To achieve this, the Act established a hybrid-pension system and made a number of changes to annual cost-of-living adjustments (COLAs), retirement eligibility structures, and worker contribution rates. However, the Act still faces legal challenges from public-sector unions, and its future is unclear. On February 14th, 2014, after months of court-mediated discussions, the state and the unions announced a settlement agreement that maintains many of the original Act’s reforms, but also includes the following:

W the reduction of the retirement age from 67 to 65 for public workers with 30 years of service;

W a modification of the COLA benefit while maintaining the COLA suspension until plans achieve 80% funding; and,

W the return of a traditional defined-benefit plan for workers with 20 years or more on the job, while increasing employee contributions to 11% of salary.

The settlement—which required approval by union members, a judge, and the state legislature—was rejected on April 7, 2014 by police union members. As a result, the state and unions must resume court-ordered mediation to forge a new agreement.

The Rhode Island example illustrates the ongoing challenges of reform, but clearly both states are on the path to plans that rely on the best elements of defined benefit and defined contribution plans. Another common element between the two states was the importance of education, ensuring employees understand the need for reform and encouraging them to take an active role in planning for their financial futures.

Finding solutions for complex needs

A simple exercise at the beginning of the day highlighted the challenges that the event’s attendees are seeking to solve. The moderator invited everyone in the room to share when they are planning to retire. The diverse range of answers demonstrated the difficulty of finding solutions that will suit everyone:

W “65”

W “72”

W “Never”

W “When my son graduates from college”

W “I can think about retirement after I pay off my student loans”

W “I can’t see retiring before I’m 70, but I would like to phase into something different”

W “My wife asks every day and I don’t answer”

W “I retired once and I went back to work”

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Guaranteed income to last a lifetimeIn the final section of the roundtable, an open discussion led by Paul Yakoboski, Senior Economist, TIAA-CREF Institute, attendees discussed the most important goal of any plan—finding a way to ensure that participants in the plan have income they can’t outlive.

One attendee noted that the defined benefits system offers people lifetime income in a manner that does not require them to think about investments or how much to draw down—which is especially useful as people live longer and may get to a point when they do not have the cognitive capacity to keep making those decisions. The idea of mandatory annuitization draws on this positive aspect of the DB model and offers a way for plans to protect those individuals.

Another commenter agreed, noting, “We need a consistent, ubiquitous retirement system that follows people from job to job. I would love to have an option that builds assets that you can annuitize at the end.”

Finding the way forwardThe looming crisis in retirement readiness is an issue that state and local governments cannot afford to ignore. Its impact goes far beyond the retirement needs of public employees, reaching into all aspects of governing. This bipartisan issue requires unprecedented cooperation, with a strong focus on what’s really important: making sure employees have income to last a lifetime, wherever it comes from. The hosts of the Governing roundtable wish to thank the attendees for their insightful ideas and constructive approach to the discussion.

About TIAA-CREFTIAA-CREF is committed to helping Americans achieve retirement security. By incorporating lifetime-income products into retirement savings plans, individuals can build an income floor that cannot be outlived and, when combined with other sources of retirement income, can help them reach their retirement goals. TIAA-CREF has been providing lifetime income solutions in retirement plans for nearly 100 years and pays more than $12.3 billion in annuity payments and other disbursements per year to participants.