Measuring Retirement: Taking Aim at Secure and Comfortable

Alicia Munnell, Director, Boston College’s Center for Retirement Research

Alicia, we’re so excited to have this conversation with you. We love your story - please tell us about yourself and your work.

That’s a good intro. As you know, I'm the director of the Center for Retirement Research at Boston College. I actually came to Boston College in 1998 and at that point I thought my career was winding down. I'd had a nice career. I'd been at the Boston Fed and then I was at the Treasury and the Council of Economic Advisers. I was in my mid-fifties and I talked to my husband about the possibility of just getting a little office downtown and calling it a day. But, instead, Boston College came and said, would you like a chair? I didn't know anything about academia, but a chair seemed better than no chair. And so I got it and did some teaching. And then this opportunity arose: a big grant solicitation came across my desk to set up the Center for Retirement Research. I had never applied for any money in my life. I worked for the Fed where you just printed it, and the Treasury where you just taxed it. So I put in the application with some partners and started the Center. More than 20 years later, I'm still here doing it.

You have interesting work and many resources for folks who are working in retirement security. Because it’s so timely, let’s start with the 2020 Presidential Candidate views on Social Security.

This is on the top of everybody's mind. I wrote a popular piece – let me summarize some of it. To begin, I would say that the President's proposal for Social Security is to allow people to defer their payroll taxes from the fourth quarter of this year to the first quarter of next year. This is an option that not many employers want because they do not want to have to explain it to their employees and then remind them in January that they're going to get a tax increase. President Trump also occasionally says, ‘then we'll get rid of the payroll tax’, which is really not such a good idea because having an earmarked tax has really protected the Social Security program. If the program had to be subject to the vagaries of the annual budget process, people couldn’t be sure that their benefits were going to be there. In terms of Joe Biden, he has some proposals on Social Security. We know we have this long run shortfall and Biden’s proposals do a little bit in terms of improving benefits for the widows and widowers and a little bit for low income workers. And then there is a tax increase there that goes somewhat towards closing the gap between promised benefits and scheduled revenues.

Very interesting. What else are you seeing?

So it used to break down that Republicans were more interested in cutting benefits and Democrats in raising taxes. You don't really have that right now because the President, except for this notion of getting rid of the payroll tax, has really stayed clear of Social Security during the last four years. And he really hasn't said anything about how he would finance it going forward or what he would do for benefits. So one seems more realistic to me than the other.

Let’s talk a little bit about COVID-19. Can you share a little bit about what you're uncovering in your current work?

When the pandemic hit, we knew it was big, but we didn't know how it was going to affect people. And initially we saw this big drop in the stock market. So it seemed like we'd have a repeat of 2008-09, but then the stock market bounced back and the issue this time around is really unemployment.

We started up a couple of things right away. One was keeping a list of companies that were suspending the 401(k) match, because that was very big in 2008-09. Interestingly, it really hasn't been that big this time around. I think that's because firms are being forced to do more draconian things rather than fiddling around the edges with their 401(k) employer match. We have a long list that's comprehensive, but really affects only 1% of 401(k) participants. So that was one thing we thought was going to be big and it hasn't turned out to be so important.

What about employment and work?

The other thing we did quickly was start building on some work from the University of Chicago to figure out if older people could work from home. The UC researchers had identified occupations where ‘work from home’ was possible. We linked up those potentially remote jobs with people in the Current Population Survey (CPS). We looked by age, education and gender. What we found is that, based on the jobs they are in, older people should be as capable of working from home as younger people. And, you know, you've had this big increase in computer usage too. So the age gradient didn't seem very important this time around. What is important of course, is the education gradient – the higher your education, the more easily you can do your job. But since age is our thing, that was our contribution.

This pandemic-related research also links to our Center’s National Retirement Risk Index (NRRI), which measures the percentage of working-age households who are on track to achieve a target income replacement rate when they reach retirement age. The NRRI brings together all aspects of the retirement process because it measures how much you're going to get in Social Security benefits, how much you have in a defined benefit plan, whether you have a 401(k), and whether you have other assets. In some ways the NRRI is not well suited to this recession because it's easy to look at what happens to the value of assets and retirement plans, and the price of housing, but those have really held up. So we had to innovate and figure out how unemployment was going to affect earnings, and then the ability to save, and then resources at retirement, and therefore the NRRI down the road. We brought together the COVID perspective with the NRRI view.

Tell us – what’s the headline around National Retirement Risk with COVID?

It's pretty hard to move the NRRI a lot – but it has gone up, meaning more people are at risk. Retirement risk has moved similarly to the 2008-09 recession. But there are some aspects of the current shift that are more dramatic. This time around not only does it flip some people from being “not at risk” to being “at risk”, but it also makes all those people who were already at risk even more at risk. These tend to be lower income people. What’s happening is that their shortfall gets larger. So not every harmful aspect of this recession gets picked up by just the NRRI index number alone. But the supplementary analysis helps illustrate the size of peoples’ shortfalls, and which groups have the largest shortfalls.

The NRRI itself is just interesting. It's a number that -- no matter how you kick it or whatever you do to it -- comes out between 45% and 50%. And right now it's probably a little bit over that. And that's really a terrible number. That says that half of today's working-age households are not going to be able to maintain their standard of living in retirement. And that's really our game at the Center: after a lifetime of work we want people to be able to be secure and comfortable. We see that's true for half the population, but not true for the other half. And so everything that we do is aimed at identifying the nature and size of the problem and figuring out ways to solve it.

We've talked before about both state models and a federal model. Tell us what you're seeing and what you're thinking right now.

Defining the retirement problem has been one of the main things we've done over the last 20 years. I’ll reference a paper that Andrew Biggs and I did with my colleague, Angie Chen. This work shows that if you estimated how much money people should have in their 401(k), you get a number close to $360,000. You look at the average worker who has a 401(k) and at age 60, they have $90,000 saved.

So why is that big gap there? There are three possible contributors: coverage, fees and leakage.

It turns out that coverage explains 80% of that gap.

And there are two coverage issues. One, defined contribution programs are still relatively new. The capability to offer 401(k)s only came on in the 1980s, so there are some people who didn't have a 401(k) when they were young workers. That will solve itself over time as the system matures. But the other element is the fact that people don't have a retirement plan at each job. This means that people who are lucky enough to have a 401(k) at a given job may cycle in and out of coverage and end up with very low balances. And then of course some people end up with no balances at all and have to rely totally on Social Security.

So we've seen a few states creating opportunities for retirement account coverage at work, starting to scoop people up and get them in. Do you think that's going to work?

Before COVID, it seemed like it was working. I mean, it's just a miracle to me that you could start something brand new and actually have employers go and sign up. And they were doing it and there were no people protesting in the streets or saying, “no, I won't go!” I think maybe all of us were a little optimistic at how fast it would happen, but it has been moving forward. And I think it'll move forward after COVID. I think it's hard to do anything during COVID. I think it's hard to do anything with a mask on!

We hear you! We’ve been pleased to see that the net funded accounts, net assets, net number of employers facilitating continues to go up month after month, despite all this that's going on.

But let's turn that in another direction. Obviously, even with a lot of active states, you have many people that aren't covered and probably may never be covered by a state program. How should we be thinking about this federally?

My choice is that before all this stuff started, if you'd asked me, I'd like to have had a federal program. The thing that we know it has to include is a mandate. The employer must be told that they have to do it because we've had all these attempts with SIMPLEs and SEPs and myRA to design appealing products for small business. And employers just don't take them up. It's not a high priority. So the mandate is absolutely necessary.

And I'm a federal person. My preference from the beginning would have been for a federal program. I think the standard eventually should be federal and we will figure out how the state programs fit into that. We are learning so much because of the state programs that if Congress ever gets around to doing a federal program, that state activity will be very informative. I think it's just so wonderful that somebody, the states and you, actually brought these programs to fruition.

Thank you! To close we want to ask you the most fun question: do you have any pandemic silver linings?

Yes! It's been nice to work from home in some ways. The first four months we escaped to Vermont. During that time we had a New York City son and his family there. I never thought I'd live a block from my children again in my life and so that was a nice part of it. But I'm really looking forward to the pandemic being over and taking off my mask.

Thank you Dr. Alicia Munnell for your perspectives and the treasure trove of thoughtful work by the Boston College Center for Retirement Research! We also want to recognize some members of your terrific team with whom we have worked over time: Anek Belbase, Andy Eschtruth, Kathryn DeNitto, Laura Quinby, and Geoff Sanzenbacher. You can reach Dr. Munnell directly here, and follow the Center on Twitter: @RetirementRsrch.  

This piece was featured in the October 22, 2020 edition of Retirement Security Matters. For more fresh thinking on retirement savings innovation, check out the newsletter here.