This article is a part of EIG’s Author Series, in which we invite experts from diverse backgrounds and across the ideological spectrum to explore policy issues and ideas. Here, Teresa Ghilarducci, the Bernard L. and Irene Schwartz professor of economics at The New School for Social Research and the Director of the Schwartz Center for Economic Policy Analysis and The New School’s Retirement Equity Lab, discusses her new book, Work, Retire, Repeat: The Uncertainty of Retirement in the New Economy.
Note: The views below do not necessarily reflect the position of EIG.
Q: What is the “Working Longer Consensus” and what does the national conversation get wrong about retirement today?
The Working Longer Consensus is the idea that we can solve the retirement income crisis by having people just work a few more years. But that hope is based on the assumption that if people work a few more years they wouldn’t have to draw down on their savings and could delay claiming Social Security.
The Working Longer Consensus also assumes that employers would want to hire an older worker, keep them longer in their job, and that the worker – supposedly making this choice – is healthy enough to continue to work. But the sad fact is that all those assumptions are weak and some are just untrue.
The Working Longer Consensus is the hope that we can solve this big problem on the cheap and that workers can solve their own problem on their own. But hope is not a plan and hope is not reality-based.
So my book is about the retirement crisis, its origins, the fake solution to the crisis which is the Working Longer Consensus, and the real solution which is a strengthened Social Security system and a redesigned retirement system so that everyone can save for retirement in a safe and secure way consistently over their work life.
Q: We tend to think of retirement as a choice but your book points out that only a small share of older workers actually retire with enough savings. And many workers can’t afford to retire at all. What is the reality behind who gets to retire and who doesn’t?
Most Americans over age 62 who are working do so out of necessity.[1] At the end of their working lives, most Americans, except those at the top of the income distribution, do not have enough money to retire. Forty-four percent of households with members aged 55-64 have no savings at all[2] and will have to rely entirely on Social Security.
Social Security is the only source of significant retirement wealth for most households. In my recent research paper,[3] my co-authors (Siavash Radpour and Jessica Forden) document where Americans who are about ready to retire have placed their assets. Using data from the Federal Reserve and the University of Michigan, we found that wealth for the bottom 90 percent of households nearing retirement has fallen in real terms over the past 30 years.
The largest source of wealth supporting retirement security for the bottom 90 percent is Social Security. The median amount of retirement savings for all households is $39,000, while the present value of their Social Security is worth over $235,000.[4] You may be surprised to learn that the median amount of home equity for all Americans is just $60,000 for all households who are ages 51-64.
But the reality of what is going on with typical Americans is what households are doing by socio-economic class. So let’s look at the inequality of retirement wealth.
For households in the bottom half – remember these are households who have lived their lives and are now assessing where they stand in terms of retirement income security – they have next to nothing but Social Security. The bottom half have $188,300 in Social Security; nothing in retirement accounts, and the median home equity amount is zero. For the next highest 40% in the wealth distribution, the median Social Security wealth is $300,500, $200,000 in retirement accounts, and $128,500 in home equity. And for the top ten percent of households on the verge of retirement, they have $311,800 in Social Security; $764,700 in retirement accounts, and $305,000 in home equity.[5]
This maldistribution of wealth really adds up over time when the wealthy have access to tax-favored accounts, their employers contribute, and the stock market and financial markets yield a high rate of return. The people with pensions and stable jobs are also likely to be in situations where they don’t have to take money out for emergencies. When you don’t have to take money out for your kids or other family members, you’re going to move away from everybody else who has not had access to a stable saving system. The current system fosters inequality.
Q: Your book calls our unequal retirement system a “Tale of Two Retirements.” We see a version of this inequality in the topics academics choose to write about. For example, a large strand of the economic literature concerns the “retirement-consumption puzzle” and tries to understand why so many Americans die with considerable personal net wealth. In contrast, your book tells a story of an America in which workers have too little wealth to retire voluntarily. How should we understand the relationship between these strands of research?
Academic economists had a fairly intuitive and sensible theory about how people act to make a good life. And that sensible idea was that people would want to have stable living standards throughout their lives. A middle class worker would hope for a middle class retirement.
And therefore we would want our savings and wealth building institutions to help people behave in such a way that they could maintain their living standards throughout their lives. For instance, someone who has been a middle class worker all their life would reasonably want and expect to have an economic system that would allow them to save money in the form of an individual account or in the form of credits to a Social Security system. That way, when they retired, they could draw on that claim on income for the rest of their lives and stay a middle class retiree.
But when academics looked at the data, they found that most people didn’t have access to institutions that would allow them to smooth their consumption and maintain their relative status. It is a surprise to academic economists at first that the rich actually accumulated more money after they retired. It was as if they couldn’t spend it fast enough.
And that does happen when people have so much money that the rate of return on stocks and bonds and other assets can soar beyond any reasonable expectation. At least that’s happened in the last couple of decades.
Thomas Piketty famously pointed out that the rate of return on financial assets exceeded the rate of growth of the economy. That meant that the rich got richer faster than they expected. The academics shoehorned an explanation for this weird situation – where the rich just got richer and died with a bunch of money at the end of their life – and claimed that workers must have had motives to leave them behind to their children or charities. But that conflicts with psychological research that shows that a lot of inheritances are accidental. It’s just that people die with assets they couldn’t spend.
Q: How would you respond to an economist searching for a “scientific” basis for a retirement age?
It would be so great to have a scientific gauge for the whole nation that would indicate, “On this day – one day before this birthday – you are good to go and you can work but the day after your birthday you can no longer work.” That’s at the extreme, of course, but there are a lot of economists that say, “Hey we should look at the physical capabilities of the worker and use all the scientific knowledge we have about health and presume that this ‘health’ index is the same as a ‘workability’ index.”
But economists in the field know that “workability” and “being healthy” are not the same. And work is a market construct in which employers and employees have to be willing to meet each other. Work is a world in which the vibrant sectors are sectors that often need younger bodies and minds. In many sectors, let’s take tech and finance for example, newly-educated people are more attractive than workers in their 35th year.
And irrational age discrimination is rampant (and some is not irrational). Because we provide health care at the workplace, an older worker costs five times as much as a younger worker. So, we can say that people should just check their health and work longer if they are healthier, but they also have to get a job.
Here’s a warning. If you start deciding what the average longevity is and decide that that should be the retirement age, you’re going to miss the reality that people in the lower half of the income distribution have a lot fewer healthy years to live after 60 than people at the top of the income distribution. So, I say that in a market economy where work is about culture, productivity, and power, retirement age is about the same thing as well.
Q: Your book challenges misconceptions about the benefits of extending careers and shows that working longer can be bad for many older workers. What are some of the most pervasive misconceptions people have about working longer and what is the reality behind them?
The part of the book where I had to review the literature on the effect of work on aging bodies opened my eyes. Year after year the studies got more sophisticated, and used much better data. The overall conclusion is that for people who’ve worked their whole lives in jobs that have high levels of effort for the reward, working longer will break down bodies through a pathway of pain and stress.
I also discovered that where you are in a work hierarchy matters in terms of whether or not working longer will help your health. If you are in a subordinate position, your views don’t matter, and you don’t have much of a say on the pace and content of your tasks at work. Working longer can make you sicker faster and accelerate your death.
Q: Your book mentions that there is growing bipartisan support for reforming our retirement system. What do you see as the common ground that unites people with different ideologies around retirement policy?
It is breathtaking and positive that Republicans and Democrats realize that the growing inequality of wealth means a growing inequality of retirement dignity. Also, they recognize that Social Security needs more money and that there needs to be a decent saving system so that people can save for retirement throughout their whole life. There is nothing ideological about those realities. It’s just math.
So, for the first time in my 35-year career looking at our pension system and watching it get weaker and weaker, I am very hopeful that Congress will be full-throated in creating a system – and it has to be easy and convenient – for workers to contribute to a savings plan.
People also realize that people need help in creating an emergency fund. But it’s a disaster if people use their emergency fund for their retirement. This is because the magic of compound interest only works if you start saving early and it compounds through the rest of your life.
So, I’m in favor for practical reasons, and because it’s a bold new bill in Congress, of the Retirement Savings for Americans Act (RSAA).
Q: Your book proposes a “Gray New Deal” to replace the Working Longer Consensus. What are the main features of the Gray New Deal?
We need Social Security, we need universal pensions, we need to lower the Medicare age to 60, and my research can make the case for 55. We need to make it first-payer so that employers who have older workers can make their health care insurance a lot cheaper. We need comprehensive retirement reform. Fortunately, we can extend wealth-building opportunities to all American workers with bold changes to our retirement system – and one bipartisan proposal to do so already exists.
The Retirement Savings for Americans Act (RSAA), sponsored by Senators John Hickenlooper and Thom Tillis, and Representatives Terri Sewell and Lloyd Smucker, would expand retirement plans to private-sector workers without a plan. Modeled after the successful federal Thrift Savings Plan, the RSAA features automatic enrollment, portability, good investment options, sensible deaccumulation, and a 5 percent government match for low-income savers. The match for low-income savers mitigates the top-heaviness of retirement tax breaks, where the top 20% of taxpayers currently receive over 60% of the $267 billion spent. They will not crowd out existing plans. No existing plan will be touched.
Endorsed by experts across the political spectrum, from AARP to Charles R. Schwab, the RSAA has bipartisan, bicameral sponsorship. Other legislation that will tweak the system around the edges just doesn’t cut it. The next generation isn’t any better off than we are.
Notes
- Ghilarducci, T., Papadopoulos, M., & Webb, A. (2022). The Illusory Benefit of Working Longer on Retirement Financial Preparedness: Rethinking Advice that Working Longer Increases Retirement Income. The Journal of Retirement. Exhibit 1.[↩]
- SCEPA and Economic Policy Institute 2023 Retirement and Older Worker Chart Book https://www.epi.org/publication/chapter-2-retirement/#charts.[↩]
- Ghilarducci, T., Radpour, S., & Forden, J. (2024). No Rest for The Weary: Measuring the Changing Distribution of Wealth in The United States. Forthcoming in the Review of Political Economy. https://ideas.repec.org/p/epa/cepawp/2023-02.html[↩]
- Ghilarducci, T., Radpour, S., & Forden, J. (2024). No Rest for The Weary: Measuring the Changing Distribution of Wealth in The United States. Forthcoming in the Review of Political Economy. https://ideas.repec.org/p/epa/cepawp/2023-02.html[↩]
- Ghilarducci, T., Radpour, S., & Forden, J. (2024). No Rest for The Weary: Measuring the Changing Distribution of Wealth in The United States. Forthcoming in the Review of Political Economy. https://ideas.repec.org/p/epa/cepawp/2023-02.html[↩]
