Jacob Hacker and Teresa Ghilarducci:
An Email Exchange on Retirement
Part Three

Today we bring you Teresa Ghilarducci (who just published When I’m Sixty-Four) in conversation with Jacob Hacker (author of The Great Risk Shift). These two experts have been debating how to ensure retirement for future generations. This is the final part the exchange. Read part one and part two.

Teresa Ghilarducci taught economics for twenty-five years at the University of Notre Dame and now holds the Irene and Bernard L. Schwartz Chair of Economic Policy Analysis at the New School for Social Research. She is also the 2006-2008 Wurf Fellow at Harvard Law School. Her most recent book is When I’m Sixty-Four: The Plot against Pensions and the Plan to Save Them.

Jacob Hacker is a Professor of Political Science at Yale University and a Fellow at the New American Foundation. His most recent book is The Great Risk Shift: The Assault on American Jobs, Families, Health Care, and Retirement And How You Can Fight Back.

Dear Teresa,

I would never throw you out of the reality-based policy community. But I would encourage you to be flexible in the debates over retirement security our nation is surely going to have. 401(k)s are more embedded, I think, than you acknowledge. And while they are indeed a practical failure and thus must be overhauled, “clever psychological jujitsu with automatic this and thats” might be the best we can do.

Moreover, this jujitsu approach wouldn’t be as bad as you suggest. I would universalize 401(k)s — everyone has them automatically, with a standard government contribution that is inversely scaled to income. If employers want to set up their own plans and match their workers contributions, bully for them. And yes, I would have all those “automatic this and thats” — default investment options with annual balances into the federally sponsored plan when you lose or change jobs, and so on.

In any case, you and I mostly agree on what needs to be done; we mainly differ on political strategy. The big controversy is not going to be between folks like us; it’s going to between folks like us and those who don’t actually live in the reality-based policy community and continue to insist that 401(k)s (perhaps with small tweaks at the margins) work splendidly — and, indeed, should be the model for reforming Social Security, and just about everything else. There are proposals for private accounts in Medicare, unemployment insurance, employment-based health insurance, and on and on. Heck, my guess is that somewhere at the Cato Institute they are formulating a plan for 401(k)-style reform of the post office. (“With individual mail accounts, all Americans can build their own personal postal service, not rely on a top-down, one-size fits-all, big-government system built for the 19th century!”)

You ask, “Who did this? Who brought old age income security under attack?” Well, employers and 401(k) providers are good places to start, and leading members of Congress, like the late William Roth of Delaware (of “Roth IRA” fame), have been making things worse for some time. But I think there’s something else going on. We are living in an increasingly unequal society in which those who make and comment on policy are, for the most part, insulated from the dominant economic trend faced by the middle and working classes: rising economic insecurity. You know the numbers, so I won’t inundate you with them. But I will quote one recent analysis by the Congressional Budget Office. Average income more than doubled among the top 1% between 1979 and 2005, after accounting for inflation, taxes, and public benefits. What about the middle fifth of Americans? Their average income rose by just over 20 percent during this quarter century, and most of that rise was because of increased family work hours. Meanwhile, private health insurance coverage, guaranteed pension protection, and personal savings have all headed sharply South.

So I have my own question: Who’s going to push back against these trends? I am reminded of the importuning question of a working mom I interviewed for The Great Risk Shift:
Where is the AARP for families? I feel like we need the equivalent of the Million Mom March to let candidates know that parent with young children are hurting. How can busy, overwhelmed parents be educated and motivated? How can we have our voice heard above those of huge PACs and corporations? I know this is nearly a rant, but I am angry and frustrated and don’t know where to turn to be effective in getting the leadership this country needs.

It’s a good question. What’s your answer? And where doesm the struggle for retirement security fit into this larger challenge?

I’ve enjoyed our exchanges; thanks for writing When I’m Sixty-Four and letting me talk with you about it.

Best,

Jacob

Dear Jacob:

Jacob, I share your frustration and near shock that, since 1979, incomes for middle class families grew at a fraction the rate enjoyed by the top one percent and wages for middle class men actually fell. I am also appalled that tax breaks for pensions and health care have skyrocketed, while pension and health insurance coverage erodes. Tax breaks are going to people who need help the least. That we are both angry is a good sign; we are not alone, political change is possible.

In this conversation (and in our books) we have crafted, for the next President, a practical, affordable way to solve health and retirement insecurity. Such confidence – unusual for academics– comes from both of our work in the history of social policy and the knowledge about modern labor markets and policy failures.

About retirement security: my GRAs are your universal 401(k)s. Every worker would have a 401(k)-type account in which 5% of their income is contributed each year. The government would deposit $600 into everyone’s account (up to the Social Security cap) that would count towards that 5% contribution. The best thing about GRAs is that the government would guarantee the return and fees would be very low.

This means for people earning $12,000 per year the government would pay all of the workers’ contribution.

For people earning $40,000 per year the government would pay 40% of the required contribution and for people earning near the Social Security cap, at about $100,000 per year the government would pay 20% of the required contribution.

You aren’t alone urging me to be flexible, we costed out keeping some of the current 401(k) contributions up to $5000 (instead of the $46,000 maximum now) That would cost $25 billion.

The only difference is that you would make universal 401(k)s voluntary and I would make them mandatory. A reasonable reality-based path would be to phase in mandatory GRAs. Yet, Jacob, I am convinced, the $600 contribution might be so fetching and attractive that a mandatory plan may never be required.

About health insurance security: you have a plan that gives everyone more security. You would pay for it through a transparent, straightforward payroll tax. Maybe people will balk but you can make the argument we all pay anyway for the uninsured but the cost is hidden, passed through in the form of higher prices. And, we all pay more than we have to because of the inefficiency and high insurance and pharmaceutical profits.

Thank you for writing The Great Risk Shift and entering in this coversation about When I’m Sixty Four. We should not be shy insisting our books promote income security for American workers, which when implemented, will dampen anxiety and bitterness, enhance productivity and help the new president and Congress move away from a foreign policy based on fear and toward economic policy based on a healthy working class.

Teresa