Alicia H. Munnell is director of the Center for Retirement Research at Boston College. Recently, the center published a new index showing that nearly half of households in the United States may not have sufficient income for retirement. She spoke with Globe staff reporter Robert Gavin.
Q. Companies are abandoning traditional defined-benefit plans in favor of 401(k)s, and the public sector is considering similar moves. Is this the end of the pension as we've known it?
A. In the private sector, this is the death rattle. It may go on for while, but the defined-benefit pension is going to disappear. It's less clear in the public sector because employees already make big contributions to their plans, so states and localities are not likely to see great savings.
Q. Why is this happening in the private sector?
A. First, with global competition, firms don't have to pay their workers as much, and cutting benefits is an easy way to cut compensation. Second, healthcare costs have gone way up and cutting pensions is a way to offset that. Third, regulatory and accounting changes mean earnings are going to get jerked around by fluctuations in pension plans, and firms don't want that. Finally, CEOs used to earn 40 times what the rank and file earned. Now they earn 400 times. The conventional pension system is really not something they relate to.
Q. What does this mean for US workers?
A. It's going to be a 401(k) world. You're going to have to roll your own.
Q. Should we be concerned?
A. Yes. People aren't very good at rolling their own. Employees have to make an enormous number of decisions: whether to join the plan; how much to contribute; how to allocate contributions; how to change asset composition over time. And then, the hardest question of all: what to do at retirement when you're handed $100,000 and told to allocate it over an uncertain lifetime.
Q. But isn't a 401(k) better suited to today's mobile workforce?
A. It is. But we could make the 401(k) work more effectively. The way it's working now is so bad that most people are going to end up without much for retirement.
Q. What are the options to enhance old-age security?
A. First, 401(k) plans need to be made easy and automatic. You need automatic enrollment, some sort of balanced portfolio, and automatic rollovers when people move from one job to the other.
A. Second, we should be very careful about cutting Social Security benefits. That means paying more, but I think it's going to be worth it. We also need another tier of retirement financing -- more private than public, more funded than pay-as-you-go. People have to think about working longer. This idea that we're going to retire at 62 or 63, and support ourselves for 20 years without working, is not going to happen.
Q. A lot of ink has been spilled on the plight of baby boomers approaching retirement. But by many accounts, this generation is healthier and wealthier than any before. Why the worry?
A. The evidence suggests things are getting worse. Surveys from the Federal Reserve show wealth-to-income ratios have stayed the same over the last 20 years or so, but these relative income ratios don't include defined benefit plans. So, people at 60 still have a wealth-to-income ratio of 4-to-1, but in 1983 they also had defined benefit pensions, which now they don't.
So, if hard numbers show the ratio of wealth-to-income hasn't changed, that's an indication things have gotten worse because the world has changed.
Q. The center recently put out a National Retirement Index to assess the retirement preparedness of Americans. Is it directed at policy makers or people?
A. Both, because everybody's got to change. In terms of government, some changes in Social Security need to be put on the table, such as should we keep benefits at age 62. Isn't that the government signaling I should retire at 62? Businesses have to figure out how to get their plans working better, like making them more automatic. They also have to address the continued employment of older workers, and whether they are going to be flexible and accommodating.
Q. And individuals?
A. Individuals can control two things: how long they work and how much they save. A couple more years of working makes a lot of difference. You're earning income, you're letting your 401(k) continue to grow, and you're shortening the period over which you have to support yourself. So at least get to 65. Then, in terms of saving, you always hear these days that people have to decide whether to pay for their children's education or put money into 401(k)s. Be selfish. In the end, your children will be happier with some student loans than with your living with them.
Q. How old are you and when do you plan to retire?
A. I'm 63 and I'd like to stop before I drool. Seriously, I think about working until 70. And then, I'll always have an opinion on one thing or another.
