Remarks by Blackstone President Tony James at Center for American Progress Long Term Value Event
The theme of today’s conference is short termism.
While America can deal with short term crises pretty well sometimes, when it comes to slowly unfolding long-term problems, we are hopelessly short-sighted.
So I want to talk today about a huge, looming problem that almost no one is focused on - fixing our broken retirement system.
The problem isn’t just with current retirees or people who are nearing retirement. It looms particularly large for people in their 20s and 30s.
Most of these young people no longer have access to pension plans and have to depend exclusively on personal savings and anemic 401ks. At the same time, they are struggling with years of stagnant incomes and heavy student loans.
As a result, they are increasingly dependent solely on Social Security. But Social Security alone will not provide enough income for these people to maintain anything like their standard of living in retirement.
And it is not just an issue for low and middle income workers.
Inadequate savings and retirement worries are shared by many who are thought of as having high incomes.
In other words, this issue cuts across society.
If we don’t do something about it, when virtually the entire next generation retires at 65 and doesn’t have enough to live on, we are going to ask “Oh my God, what happened?”
There is good news, though.
We can solve this problem. And we can solve it relatively painlessly for everyone.
But we have to start now.
Unaddressed, this problem will mushroom into a true fiscal crisis that will tear a hole in our social fabric.
30% of Americans will not have enough savings to maintain their standard of living, and 15-20 million additional retirees will be poor - poverty rates not seen since the Great Depression.
And our aging demographics mean this burden will fall crushingly on a shrinking group of younger workers.
I believe we need to take our current Social Security system as a given and build on that.
But we need more.
Most experts advise targeting a 70-80% replacement rate in retirement to have adequate income.
Social Security provides about 40 points of that, so retirees need to accumulate another 35% from other savings.
The problem is most Americans cannot, have not and will not save that much.
The average balance of retirement savings in America today of people between 40 and 55 is only $14,500.
For people nearing retirement, the median balance is only about $80,000. But for a person in their mid-60s, this would provide income of only about $2000 per year for the rest of their life.
They should really have 6 or 7 times this much.
Roughly 15% of workers today, mostly government employees, are fortunate to have a defined benefit pension plan. Even with the chronic underfunding of state pension plans, their beneficiaries are generally in good shape.
Of the remaining people working in the private sector, about 60% have access to an employer sponsored 401k plan.
But up to one-half of employees don’t take full advantage of these plans. And those who do participate contribute too little, withdraw funds too early, and earn sub-par investment returns.
Then there are the other 40% of private sector workers who have no retirement plan at all.
In short, our current system is a mix of inconsistent programs that are simply not capable of providing basic retirement security for the American people.
I’d like to offer a fundamentally different approach, which I have worked on with labor economist Teresa Ghilarducci.
I call it the Retirement Savings Plan.
Under the Retirement Savings Plan, everyone in America who works without a pension plan, no matter how little or how much they make, from Uber drivers to CEOs, would have their own Guaranteed Retirement Account.
We would simplify our current patchwork system by rolling everything else into it - 401ks, IRAs, Keogh plans, MyRAs, etc.
How can we make this happen? There is really no alternative; it has to be mandated.
I know that can be a politically loaded word these days, but I assure you that nothing short of a mandate will provide future generations of Americans enough income for a secure retirement.
The Retirement Savings Plan will, and it is not another government entitlement program.
Social Security represents a savings of about 12.5% of an average worker’s income.
To get retirement safety we need them to save another 3% each year if – and this is critical - if these savings are invested correctly and earn a good return for the retiree.
This is a much smaller gap to fill than most people assume.
To make this 3% savings contribution affordable, I propose it be split evenly between workers and their employers: 1.5% each.
Right now, the government spends over $120 billion per year by allowing deductions of retirement contributions.
This hasn’t helped our retirement crisis at all. Because it is a deduction against income, it heavily benefits the most affluent Americans who already have enough retirement savings.
And it is unavailable to the poorest, who desperately need the help.
Instead, I want to take that same money and give every individual participant in the
Retirement Savings Plan a government tax credit equal to their annual retirement contribution, up to a maximum of $600 per worker per year.
This $600 will fully defray the retirement contribution for people earning up to $40k per year.
For a median income earner, the net annual cost of the Plan would be only $75 per year.
For employers, the 1.5% of wages will be offset, to a greater or lesser degree, by their no longer having to contribute to and bear the administrative costs of 401k or other retirement plans.
Their obligation to contribute (and the employee’s) would be capped at 1.5% of only the first $250k of compensation for high earning employees.
With corporate profits at an all-time high in relation to GDP, this should be a manageable burden, and it will forestall the otherwise compelling need for higher corporate taxes down the road.
Now that we have established and funded the Guaranteed Retirement Accounts, we come to the next critical component of the Retirement Savings Plan.
The capital in people’s Guaranteed Retirement Accounts must work harder for them over a long period of time.
It has to be invested well in pooled plans run by professional investment managers and earn a solid return, just like pension plans do.
The structure of today’s 401k plans makes this impossible.
They have excessive liquidity, lots of volatility, and high administrative costs.
Where defined benefit plans expect to earn 7-8% annual returns, 401k accounts typically earn only 3-4% per year.
This differential is huge!
For a 25 year old who puts aside $1000 per year, it is the difference between having $75,000 and $200,000 when she retires at age 65!
Managing the Guaranteed Retirement Accounts in a pooled fashion would let them leverage that scale to pay lower fees. They would also have access to highest quality managers who could adopt long-term investment horizons and invest in less liquid, but higher returning, asset classes that are more appropriate for retirement funding.
The beauty of investing more effectively is that the higher return itself pays for a large part of the retirement gap – and it doesn’t cost anyone anything!
To the contrary, it encourages long-term capital formation and longer investment horizons which benefit the whole economy by fueling growth and getting away from the short-termism in today’s markets, helping address the issue this conference is focusing on today.
In addition, I propose that the Federal government guarantee a minimum annual return of 2% for all participants on their Guaranteed Retirement Accounts.
This would protect people unlucky enough to retire when markets tank, and would give people confidence in contributing to their retirement accounts.
We can finance this through a modest insurance premium levied on each account which would go away over time.
But overall, this guarantee can be essentially costless because the accounts are virtually certain to earn comfortably more than 2% over the long term.
The third leg to the Retirement Savings Plan is helping people make the right choices with the accumulated Account balance when they retire.
People are living longer and retiring earlier.
This means that retirement savings have to last longer than ever. Most people aren’t able to plan for that because they don’t have the expertise to annuitize it properly. And since no one knows how long they will live, they are essentially rolling the dice and hoping their retirement savings last long enough.
But there’s a clear way to fix that, too. When someone retires, their accumulated savings would be automatically annuitized as part of the overall pool and they would get a guaranteed amount every year for the rest of their life.
A pooled system makes this possible, because you don’t just pool your savings – you pool your risk of running out.
Few of us will live to 110. But those of us who do should be able to count on a continuous standard of living for our whole lives – instead of worrying, right up to the end, that we might not have enough.
Making these annuity payments and tracking the retirement account balances would be done through the existing Social Security infrastructure.
It should be a relatively simple add-on to what is being done already, with no new government agencies or apparatus required.
Finally, I think we should help give older Americans the choice and the incentive to work longer.
Accumulating more savings by working longer and shortening the retirement period has powerful, immediate effects on financial security for retirees.
And for many, working longer has health and emotional benefits, as well.
We could facilitate this by making Medicare the primary health coverage for anyone over 65, even if they are still working. Medicare would pay this anyway if they retired, so the incremental cost to the government would be insignificant.
But that way, employers who pay health insurance will get a large break on their insurance cost for every employee past Medicare age. Instead of paying about $25,000 for an older worker’s health insurance, the employer would pay something like $3000 or $4000 for a Medicare supplement. That’s a significant incentive for them to keep older employees on the payroll longer.
As for the employee, I would give them an incentive to keep working by doubling the credit for contributions they make to their Guaranteed Retirement Accounts and Social Security in any year worked over the age of 65.
We know a system like this can work – because we’ve seen it work all over the world. Broadly similar plans have been adopted in countries like Australia and Chile – and every time they’ve been implemented, they’ve worked as promised. In fact, they haven’t just provided retirement security, they’ve helped drive overall economic growth and significant capital formation.
These steps will allow millions of individuals to have a stronger, more stable retirement. And that’s not just good for retirees. It’s good for their families, our communities, and our nation’s economy as a whole.
Achieving retirement security is going to require us to look beyond the next election cycle – beyond the next fiscal quarter – and toward the stronger nation that we can build together.
Thank you very much.