Jun 27, 2019, 1:40 PM ETPanel

Can America Afford to Retire?

The session "Can America Afford to Retire?" examines retirement affordability across individual, institutional, and public sector levels.
Key areas of analysis include defined benefit (DB) vs. defined contribution (DC) gaps, Social Security sustainability, and individual risk exposure during market downturns.
Panelists include Marcy Frost (CEO, CalPERS), Jarvis Hollingsworth (Chair, Texas Teachers Retirement System), Andrew Biggs (Resident Scholar, AEI), and Dan Houston (CEO, Principal Financial Group).

Current Retiree Welfare: Today's retirees are the wealthiest in history, with asset levels at record highs and retirement poverty rates dropping by approximately one-third over the past 20 years.
Self-Reported Financial Health: Only 6% of current retirees report having real financial trouble, contradicting narratives of an imminent individual crisis.
Savings Growth: Contributions to retirement plans are 30% higher relative to wages compared to the 1970s; total pension assets are six times larger than at the peak of traditional pension dominance.
Defined Benefit Decline: Only 25–27% of Americans retiring today possess any form of a defined benefit pension; the vast majority rely on defined contribution (DC) plans combined with Social Security.
The Working Poor Gap: A significant portion of the "working poor" today have not saved sufficiently for retirement, necessitating policy interventions like auto-enrollment and auto-escalation.

Funding Gaps: Most state and local governments acknowledge a gap between promised benefits and set-aside assets, often exacerbated by declining market returns.
Assumed Rate of Return (ARR) Disparity: U.S. state and local plans typically assume an 8% ARR, whereas international peers (e.g., the Netherlands) use ~3%, resulting in U.S. plans setting aside roughly half the assets per dollar of future liability.
Investment Risk: CalPERS and Texas Teachers rely on high-return assumptions (7–8%) to bridge funding gaps, requiring significant exposure to risky assets like private equity to meet targets.
Political Constraints: Unlike private sector plans regulated by ERISA, public sector pensions lack federal funding mandates, allowing legislatures to use pension funds as "piggy banks" to balance budgets.
CalPERS Reforms: CalPERS reduced its discount rate from 8.5% (1970s) to 7.5% (2016) and shortened amortization periods from 30 to 20 years, forcing employer contribution increases.
Texas Teachers Strategy: The system maintains ~80% funding via a favorable demographic ratio (25% retired vs. 75% active), benefit cuts (30% lower than peers), and recent legislative efforts to close remaining gaps.
Legal Rigidity: In California, the "California Rule" legally prohibits altering accrual rates or benefit formulas for existing employees, creating long-term unfunded liabilities when new, generous tiers are added.

Longevity Risk Management: DC plans historically fail to manage longevity risk; DC participants face high volatility and the risk of outliving assets.
Target Date Funds (TDFs): The adoption of TDFs has improved financial literacy by automating risk adjustment and asset allocation for non-expert investors.
Lifetime Income Solutions: Proposed legislation (like the SECURE Act) aims to allow employers to offer institutionally priced annuities within DC plans to convert lump sums into guaranteed lifetime income.
Early Withdrawal Controversy: Panelists debate banning pre-retirement withdrawals for those under 60; constraints may deter low-income participation, though most withdrawals are loans rather than permanent draws.
Small Employer Access: Small employers face high administrative burdens; "Multiple Employer Plans" (MEPs) and auto-enrollment are cited as key mechanisms to extend high-quality DC access to smaller firms.
Risk Transfer Mechanisms: Large employers are increasingly transferring DB liabilities to insurers via "pension risk transfer," a model potentially adaptable to DC plans for employer matches.

Social Security Reliability: Contrary to Census data suggesting 1/3 of retirees rely entirely on Social Security, AEI analysis suggests the true figure is closer to 15%; 80% of retirees report sufficient funds for comfortable living.
Replacement Rates: For the poorest income quintile, Social Security replaces approximately 90% of pre-retirement earnings (inflation-adjusted), making additional savings irrational for many.
Political Stagnation: Andrew Biggs notes that while the Social Security gap has been known for 30 years, political incentives prevent necessary adjustments (tax increases or benefit cuts).
Funding Arithmetics: The assumption that governments can bear risk "for free" is flawed; risk is redistributed to other stakeholders, such as taxpayers in education or healthcare budgets (e.g., Oregon PERS impact).

Federal Regulation: Experts suggest the federal government should impose private-sector-style funding rules on public pensions to prevent state-level destabilization, though this could force plan closures.
Risk Sharing Models: There is a push for explicit risk-sharing mechanisms in public DB plans (e.g., benefit boosts in good years, clawbacks in bad years) rather than ad hoc benefit cuts.
De-risking Liabilities: A proposed long-term solution involves discounting liabilities at the risk-free rate rather than the ARR, necessitating higher upfront funding or safer asset allocation.
Annuity Pricing: Institutional pricing for annuities currently implies an implicit rate of return of 7–8% over 30 years, though panelists debate the attractiveness of this cost to individuals versus current DC accumulation.
CalPERS Liquidity: With recent cash-flow improvements, CalPERS is exploring private equity strategies to exceed the 7% return target, though this increases portfolio volatility.
Sustainability Timeline: CalPERS aims to ensure system sustainability for the next 10 years, while Texas Teachers hopes to achieve full solvency within the next few months following legislative action.