1150 Seventeenth Street, N.W., Washington, D.C. 20036
The deflated credit bubble has brought huge losses and tensions to retirement finance. It has caused severe underfunding of corporate pensions and a deepening crisis among state and municipal pension plans. In addition, in an ill-advised move, the Pension Benefit Guaranty Corporation shifted its asset allocation toward equities just in
Download Audio as MP3 time for the market crash, and Social Security's annual surplus has all but disappeared.
Are the 1950s ideas of "retirement" and its financing viable fifty years later? What long-term reforms are required? These and other questions will be discussed by retirement finance experts, including former Social Security Administration principal deputy commissioner Andrew G. Biggs, now at AEI; labor economist Gary Burtless and Douglas J. Elliott, former principal researcher for the Center on Federal Financial Institutions, both from the Brookings Institution; and David C. John of the Heritage Foundation, codeveloper of the automatic individual retirement accounts proposal. AEI's Alex J. Pollock will moderate.
|2:00||Panelists:||Andrew G. Biggs, AEI
|Gary Burtless, Brookings Institution|
|Douglas J. Elliott, Brookings Institution|
|David C. John, Heritage Foundation|
|Moderator:||Alex J. Pollock, AEI|
American Enterprise Institute
1150 Seventeenth St., NW
Washington, DC 20036
American Enterprise Institute
1150 Seventeenth Street, N.W.
Washington, DC 20036
WASHINGTON, MAY 11, 2009--This recession and the accompanying stock market losses may lead us to rethink the nature of retirement financing--and even the very idea of retirement itself. On May 6, AEI and the Brookings Institution cosponsored an event to explore the implications of the financial crisis on pension funding and Social Security. AEI's Alex J. Pollock, who moderated the discussion, observed that the investment losses of retirement plans have added to already-existing problems in retirement finance. The combination of these forces has led to significant underfunding of many pension plans, particularly certain state and municipal pension plans. Given this scenario, he asked, should we reconsider the way in which we think about retirement?
According to AEI resident scholar Andrew G. Biggs, we should be careful not to overstate our current situation as a crisis but instead recognize that we have manageable problems that can (and should) be addressed. Biggs thus cautioned against overstating market risk and social insurance protections. What may be of greater concern, he said, is the complexity of the Social Security benefits formula, which "contains quirks that can result in differing benefit levels for households with identical [lifetime] earnings." He also suggested that cutting Social Security taxes in later years would encourage individuals to work longer, a point he made in a recent Retirement Policy Outlook.
Gary Burtless of the Brookings Institution suggested that the current crisis represents a "stress test" for the retirement system. Prudent reforms are necessary, he argued, but these reforms should not reduce Social Security protections. One effect of the crisis has been the exposure of some of the shortcomings of defined contribution plans. We have been reminded that employer-based pension systems, like all pension systems, entail risk. The risks associated with defined-contribution plans are tied to risks in the financial system, while the risks associated with defined-benefit plans are tied to the risks of unemployment.
Douglas J. Elliott, also of the Brookings Institution, addressed the impending problems related to the Pension Benefit Guaranty Corporation (PBGC). Elliott posited that the PBGC will be of greater interest in the near future, particularly if its deficit dramatically increases, as he expected it to do. "Financial institutions are far from being out of the woods," he claimed. There are often delayed negative reactions after a crisis is thought to have bottomed out. Furthermore, there is a strong historical tendency for pension deficits at individual firms to get much worse in the two to three years before those deficits become claims on the PBGC. A necessary portion of retirement finance reform, therefore, will be reforms specifically aimed at the long-term viability of the PBGC.
The Heritage Foundation's David C. John stressed the need to harmonize disparate parts of the defined-contribution system. Participation is crucial, he argued, and automatic enrollment is both effective and popular. Coverage is another cause for concern, as only about half of the U.S. work force is employed by firms with pension plans. Women, young people, and members of minority groups are disproportionately affected by this lack of coverage. John raised the ideas of automatic escalation of contributions and short-term automatic annuities upon retirement to address the issues of sufficiency and unwise consumption of lump sum payments. "In the end," he concluded, "there is simply no such thing as a risk-free retirement plan."
Andrew G. Biggs is a resident scholar at AEI, specializing in Social Security and retirement policy. He previously served as the principal deputy commissioner of the Social Security Administration (SSA), where he oversaw SSA’s policy research efforts and led the agency’s participation in the Social Security Trustees working group. In 2005, he worked on Social Security reform at the White House National Economic Council, and in 2001, he was on the staff of the President’s Commission to Strengthen Social Security. Mr. Biggs has written about Social Security reform for numerous publications including the Wall Street Journal, the Washington Post, and the Christian Science Monitor. He is also the author of AEI’s Retirement Policy Outlook series.
Gary Burtless holds the John C. and Nancy D. Whitehead Chair in Economic Studies at the Brookings Institution. He does research on issues associated with public finance, aging, saving, labor markets, income distribution, social insurance, and the behavioral effects of government tax and transfer policy. Mr. Burtless is the coauthor of four books, including Can America Afford to Grow Old? Paying for Social Security, with Henry Aaron and Barry Bosworth (Brookings, 1989), and the editor and contributor to several publications, including Aging Societies: The Global Dimension, with Barry Bosworth (Brookings, 1998); Work, Health and Income among the Elderly (Brookings, 1987); and Retirement and Economic Behavior, with Henry Aaron (Brookings, 1984). He is also the author of numerous scholarly and popular articles on the economic effects of Social Security, public welfare, unemployment insurance, and taxes. Before coming to Brookings in 1981, Mr. Burtless served as an economist in the policy and evaluation offices of the secretary of labor and the secretary of health, education, and welfare. In 1993, he was a visiting professor of public affairs at the University of Maryland, College Park.
Douglas J. Elliott is a fellow in economic studies and a member of the Initiative on Business and Public Policy at the Brookings Institution, where he focuses on the federal government’s role in dealing with the current financial market crises. He was previously president and principal researcher for the Center on Federal Financial Institutions (COFFI), a nonpartisan think tank that he founded in 2003. Many of the analyses published by Mr. Elliott at COFFI were focused on the Pension Benefit Guaranty Corporation and the defined benefit system. The New York Times described his pension work as “refreshingly understandable” and “without a hint of dogma or advocacy.” The bulk of Mr. Elliott’s career since 1985 has been as a financial institutions investment banker, most recently as a managing director at J. P. Morgan, where he worked for fourteen years. Mr. Elliott has also worked as an investment banker with Sanford Bernstein, Sandler O’Neill, and ABN AMRO. He has testified before both houses of Congress and participated in numerous policy forums as an expert. His analyses have been frequently quoted in major publications and he has often participated as an expert on The Newshour with Jim Lehrer and other news shows.
David C. John is a senior research fellow at the Thomas A. Roe Institute for Economic Policy Studies at the Heritage Foundation. He is Heritage’s lead analyst on issues relating to pensions, financial institutions, asset building, and Social Security reform. In 2006, Mr. John worked with Brookings Institution scholar J. Mark Iwry to come up with the automatic IRA, a “third way” to promote retirement self-reliance. He has testified before a number of House and Senate committees about Social Security and retirement issues. Mr. John has been published and quoted extensively in many major publications, including the Wall Street Journal, Financial Times, the Washington Post, the New York Times, Forbes, BusinessWeek, and USA Today. He has also appeared on CBS News, NBC News, CNN, MSNBC, the Fox News Channel, BBC radio, and many other national and syndicated radio and television shows. Before coming to Heritage, Mr. John worked on Capitol Hill for various congressional offices. While there, he was the lead author of Representative Mark Sanford’s (R-S.C.) plan to reform Social Security by setting up a system of personal retirement accounts. In the private sector, Mr. John has been a vice president at the Chase Manhattan Bank in New York, a director of legislative affairs at the National Association of Federal Credit Unions, and a senior legislative consultant for Manatt, Phelps & Phillips.
Alex J. Pollock has been a resident fellow at AEI since 2004, focusing on financial policy issues, including government-sponsored enterprises, retirement finance, housing finance, corporate governance, accounting standards, and issues raised by the Sarbanes-Oxley Act. Previously, he spent thirty-five years in banking, including twelve years as president and chief executive officer of the Federal Home Loan Bank of Chicago, while also writing numerous articles on financial systems and management. He is a director of Allied Capital Corporation, the Chicago Mercantile Exchange, the Great Lakes Higher Education Corporation, the International Union for Housing Finance, and chairman of the board of the Great Books Foundation.