February 19, 2024 • 38 mins
Academics are on the march, coming for the defined contribution retirement savings system with policy prescriptions that would fundamentally change employer-sponsored plans and what they’re designed to do. The system is failing; it only benefits the wealthy and doesn’t produce adequate retirement income, which is the chorus of commonly heard criticism.
American Retirement Association CEO Brian Graff is joined by Peter Brady, a senior economist for retirement and investor research at the Investment Company Institute, to counter the claims. Brady brings the data to dispute the latest attacks and discuss what’s driving the attacks.
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Transcript
Episode Transcript
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Speaker 1 (00:00):
It's the idea that there's a massive retirement
(00:01):
crisis as well.
Way overstate it.
I'm not saying there aren'tissues.
There are many issues goingforward, DC.
Speaker 2 (00:07):
Pension Geeks brings you exclusive conversations with
top retirement policymakers andregulators in and around
Washington DC, hosted by BrianGraff, an attorney, accountant,
former Capitol Hill staffer andCEO of the American Retirement
Association.
If you're looking for aninsider's view of all the twists
and turns that Washington takeson the road to ensuring a
(00:27):
secure retirement for millionsof Americans, you're in the
right place.
Welcome to DC Pension Geeks.
Speaker 3 (00:33):
Hello everybody, welcome to another podcast of
the DC Pension Geeks podcastseries.
I'm very fortunate today tohave Peter Brady from the
Investment Company Institute.
Some of you may remember Ithink we had Eric Pan, peter's
boss, a while back to talk ingeneral about what ICI is
(00:56):
focused on.
Peter has a very long historyworking on economic issues in
the finance area.
Actually, peter, just a quicksecond.
How did you end up?
Obviously, you've got aneconomic background, of course,
but how did you end up focusedon financial services, the
(01:18):
economic policy as it applies tothe finance area?
How did you?
Speaker 1 (01:25):
end up here.
Sure Well, the short version isI came to DC in the mid-90s
after getting a PhD from theUniversity of Wisconsin.
I spent nearly a decade as agovernment economist, so at the
Federal Reserve Board and thenthe Treasury Department.
Then I came to ICI in 2005.
Now I can flesh it out a littlebit, tell you a little bit more
about my background in ICI andmy research.
(01:46):
My background is a publicfinance and tax, so that's my
specialty.
I focus on capital taxationunder the income tax.
That's my link to the financialmarkets.
I've covered in my job before,covered issues doing housing,
dividends, capital gains andpensions and retirement policy.
Obviously, my job in thegovernment was to analyze data,
(02:10):
look at policy issues,legislation, regulation and do
my own long-term research.
I got a call from ICI in 2005.
I was a bit intrigued.
I was really out there looking.
What intrigued me is that so ICIas a trade group, as you know,
represent regulated funds likemutual funds and ETFs, but sort
(02:30):
of as a historical accident oras a historical background,
we're kind of a strange tradegroup and that we've always had
a large research department.
For example, right now we haveeight PhDs on staff.
Essentially, I came over,because I was able to do
essentially the same things Iwas doing for the government,
that is, analyze data, work onpolicy issues and do my own
(02:52):
long-term research, but just doit outside the government, also
with a little more direct focuson pension issues, which is
where my pensions and retirementpolicy, which is where my
research was going.
Anyways, I've researched thingslike pension coverage, income
that retirees get, how do youmeasure retirement adequacy and
(03:12):
the tax treatment of employerplans in IRAs.
Speaker 3 (03:16):
We're certainly grateful that ICI has committed
so much energy and resources toresearch, because obviously
there seems to be and it'sreally a someone who represents
the retirement plan system thereseems to be this sort of huge
(03:39):
number of folks on the academicside economists who are in
academia and even in some of theother think tanks that are
constantly attacking the privateretirement plan system.
I've been doing retirementpolicy for over 30 years now and
(04:00):
it's pretty much the samechorus that the system is only
benefiting the wealthy.
The system is failing mostworkers.
The system doesn't produceadequate retirement income due
to the shift from definedbenefit to defined contribution.
(04:25):
You've really been one of thefew voices that have been
countering that with actual data.
What do you think is drivingthis constant barrage of attacks
on a system that really hasbeen the only way we've ever
gotten middle income Americansto build wealth and invest in
(04:49):
the markets?
Speaker 1 (04:51):
Yeah, that's a good question.
I think there's a couple issuesgoing on.
One is, I think unfortunatelypeople try to examine employer
plans in isolation and in fact,the US retirement system has two
major components.
You've got a mandatory pensionthat has a progressive benefit
schedule, which is socialsecurity, and then you have a
voluntary pension system whereworkers can supplement social
(05:14):
security benefits in retirement.
What matters is not how muchyou get from either one of those
two components, but what youget from the combination of the
two In a lot of times, becausepeople don't understand the US
social security system wellenough or don't accurately model
it.
When you just look at whatpeople get from employer plans,
(05:35):
it is you can look at the dataand it may not make sense.
When you pull in a socialsecurity system, I think the
system makes a whole lot moresense and that's what a lot of
my work has tried to do.
I think the other thing goingon is we actually have a
mis-measurement in a lot of ourdata.
The typical way we getinformation on plans are large
(05:58):
household surveys done by thegovernment and, for whatever
reason, they've under-measuredthe amount of resources people
get from employer plans and IRAswhat they hold in terms of
assets in plans.
Speaker 3 (06:11):
I guess they don't see it as something that they
have if it's in Some of thesurveys are.
Speaker 1 (06:20):
The SCF is probably pretty good on some of it, cps
not so much.
Yeah, it's mainly we're missingthe income the SCF actually
shows.
Most households, by the timethey hit retirement, have
accumulated resources fromemployer plans and IRAs either
(06:41):
benefits in DB plan, assets in aDC or IRA or both.
There was a puzzle about we sawall these people with these
assets but then we didn't seethe income in retirement, and
it's a puzzle of why that occurs.
It occurs in multiple things,but in particular where we get
our national statistics from thecurrent population survey.
Our national income statisticshas been really bad and so early
(07:04):
on through joint work.
So there's a.
Once I left, I worked with TaxState, obviously while I was at
Treasury, but after I left theIRS Statistics of Income
Division has a joint researchprogram where you can put in
proposals for studies and if youget approved you can actually
use the raw tax data and so inthere there's a whole lot more
(07:28):
income from these plans than yousee in the household surveys.
And then it wasn't just myresearch did it that actually
the Census Bureau has a specialdivision where they take the
survey data and they're able tolink it with the tax data.
They can't talk to any otherpart of the census, by the way.
They can just put out thegeneral report, but they confirm
that it's missing a whole lotof it.
(07:48):
So retirees were missing a hugeshare of their income.
Most of that under measurementis coming from measuring
retirement plan income.
Speaker 3 (07:58):
So why, given what you just said, you made the
statement most Americanhouseholds actually have a
reasonable amount of resourceswhen they reach retirement, that
the income that they're gettingfrom retirement is under
measured, and we've got now datathat shows that it's much more
than what people have perceived.
(08:20):
Why are we consistently gettingthese studies over and over
again by academics?
There was one last week thatwas released by MIT, which you
probably saw again showing thatthe system is failing most
American workers.
Speaker 1 (08:36):
Yeah, so I don't want to specifically come out on the
latest proposal or latest paperbecause it's 130 pages long and
I've skimmed it.
But in general I think.
Speaker 3 (08:49):
But it's part of the same thing.
Speaker 1 (08:52):
Yeah, some of the best academic research actually
does show it.
I mean, I think the best paperin the area was a 2006 AER paper
that my researchers at my almamater and they showed that most
Americans seemed to be preparingproperly for retirement.
(09:13):
It's a very complex paper.
It went into a very complicatedlife cycle model, so a lot of
it is perhaps not the deepacademic research, but certainly
look, when you look at averagebalances and you look at a lot
of things.
It's easy to put simplestatistics up and say this is
(09:35):
nuts.
People don't have enough.
You have to really look at thewhole system.
You got to look at what theyget from social security and
from employer plans.
Social security has a veryprogressive benefit schedule.
It actually is designed toreplace most of the income at
the very bottom of the.
For people with low lifetimeearners, it is supposed to be
the only full replacement oftheir wages and as it goes up,
(09:59):
the replacement rate goes down.
But the assets some peopledon't even understand that the
higher you earn, the more youget from social security.
It goes up slowly and that'swhat makes it progressive, but
it goes up, and so even formiddle income and higher income
people a lot of times it'sdismissed how important social
security system is and you haveto look at it in common, so I
(10:20):
think.
And then the other thing ismaybe not a good awareness of
what typical income is.
So the people look at retireesand go, oh, this is the median
income.
I mean I saw one paper saidthis terrible, this median
income of retirees.
Now they probably undermeasured it because of the
(10:41):
reasons we've talked about, butit wasn't that different from
median income of people who wereworking for a living.
So I think, particularly inWashington, which is not exactly
a poor area, people may look atsome numbers and go, oh my gosh
, how do those people live?
And the fact of the matter is alot of people live that way,
(11:01):
most people live that way andthey live, but before and after.
But from my research again, asyou said, I find most people are
able to maintain a standard ofliving when you look at the data
.
Speaker 3 (11:12):
So a lot of the focus of these papers, peter, is
around tax incidents.
And then what I mean by thatand I know you understand what
I'm saying is that there tendsto be an over emphasis on the
current tax incentives and thefact that they're structured and
because they are represented,generally speaking, either well,
(11:33):
a deferment of taxes in thecurrent year, whether it's a
employee contribution if they'redoing a pre-tax contribution or
an employer contribution in theform of a match or other type
of either defined benefitcontribution on their behalf or
defined contribution, profitsharing contribution on their
behalf.
(11:53):
The benefit to any particularworker is predicated on what
their marginal tax rate is, andobviously we have a progressive
tax system.
So for more moderate incomeworkers, their marginal tax
rates are lower.
For higher income workers,their marginal tax rates are
(12:15):
higher.
So the economic analysis focuseson the fact that we're giving
wealthy people a higherincentive because their marginal
rate is higher.
We're giving lower people,lower income people, a lower
marginal rate, and that'sbackwards and it's sort of go on
and on about that.
(12:37):
Obviously we have a progressivetax code.
That's just the way the systemis.
What's behind those arguments?
Speaker 1 (12:46):
Okay, so I wrote a very long paper and actually a
book on the topic, and part ofit is is understanding the
benefits of tax deferral isactually kind of difficult.
It's difficult fornon-economists to understand,
it's difficult for economistswho aren't tax economists to
understand, it's difficult fortax economists who don't focus
(13:09):
on it to understand, and it'seven difficult for us who focus
on it if we haven't thoughtabout it for a few months.
So it can get, but what I'vetried to do is work on trying to
explain it, and so I think oneof the issues is there's a
confusion of people understanddeductions and exclusions pretty
well.
So you get a deduction for yourmortgage interest payment, you
(13:30):
get exclusion for healthcare,you get a or even credits where
you get money to buy electriccars, and those are easy fairly
easy to understand because theyonly affect your tax liability
this year, and the basicintuition is absolutely correct
that you just take how much youdeduct and you multiply it by
your marginal tax rate and thus,for every dollar you deduct you
(13:53):
get more benefits the higheryour income tax rates are.
So one of the issues that I'vetried to explain is that
deferral is much morecomplicated than that because it
affects taxes over yourlifetime.
So let's take a tax deferredcontribution, lower your taxes
when you put it in, all right,because you exclude it from your
income, and so you don't paytaxes today.
(14:16):
While it's growing over time,you get earn capital gains,
dividends, and those aren'ttaxed, but at the end you do pay
taxes on everything youwithdraw.
And so it's a combination ofthree different effects.
And so the point I try to makeis deferral is different.
Okay, so I have two kids.
One isn't better than the other, they're different.
(14:38):
Okay, this is like different.
I'm not saying tax deferral isbetter or worse.
Some cases it's better, sometypes it's worse.
It's just different from adeduction, and what it turns out
is your marginal tax rateactually has less to do with it
than you think.
Okay, so essentially let'sassume a simple case just to get
the understanding is if yourtax rates don't change over time
(14:59):
, tax you pay at the endbasically is paying back with
interest the tax you saved whenyou put the money in.
So what's left over is youwould have paid taxes on
interest, dividends, capitalgains along the way, and that's
your benefit.
Well, it turns out.
Speaker 3 (15:14):
So just to interrupt, I mean the deferral in the long
run costs the governmentsignificantly less than a pure
deduction.
Speaker 1 (15:26):
Generally, yes, I mean.
So I can come up with exampleswhere you have a long deferral
period and it can actually bemore, but for generally over a
lifetime.
And that's why I wrote to onepaper just on doing the benefits
per dollar, because it's verycomplex, and then doing over a
lifetime.
And, yes, it is much lower thangenerally, than what you would
get from the index.
So it turns out, particularlyfor higher income people,
(15:49):
deferral has a bigger effect onwhen taxes are paid than the
total amount of taxes over yourlifetime.
Now, it does lower, it doesreduce the taxes you pay over a
lifetime, but it has more effecton are you paying it when
you're working or you paying itwhen you retire?
And so I think it's hard tounderstand these things.
And so, for example, it turnsout your age may have a bigger
(16:12):
effect on your benefits thanyour marginal tax rate, because
what's really important is howlong you defer the taxes.
And so I think that's complexand I'll stop there and then you
overlay the fact.
Speaker 3 (16:26):
That way, there's something that Congress
considers that you hear it'swritten about in these papers
the idea around something calledtax expenditures.
It's something that the JointCommittee on Taxation puts out
every year and that there's anenormous number attached to the
(16:46):
tax incentives associated withretirement savings, but that
what they don't do is take intoaccount the point that you're
making, that that's a deferral,because Congress uses this
10-year budget window thatignores the fact not in all
cases, but in a lot of casesthat people are going to quote
(17:08):
pay that tax back or partiallypay that tax back when the money
comes out of retirementsolution.
Speaker 1 (17:16):
Yeah.
So it's even more complex thanthat because there's a
distinction between what a taxexpenditure is and what a
revenue estimate is.
And so the tax expenditureswere conceived back after the
war.
Basically it started to buildand there was actually a
gentleman at Treasury Surrey whobasically pushed the idea of
(17:38):
having a tax expenditure budget,and the idea at the time
actually had nothing to do withfairness or distributional
analysis or anything like that.
The only point was look, everyyear Congress has to pass
appropriations.
So if we have a program thatsay assists housing, if every
year you have to, if it's anexpenditure you got to look at
(17:59):
every year, if it's in the taxcode it's never looked at.
And basically what he wanted todo is say look, we give, there
are things we encourage throughthe tax code, and at that time
it was a much different tax code.
There were a lot of different.
I mean 86, we really winnowedthe tree of the different
deductions that were there.
We've been putting theornaments back on that tree over
(18:20):
time, but the idea there was toput this under the same
scrutiny.
And so the tax expenditureconcept is not a revenue
estimate.
The idea is suppose we changeone item in the tax code didn't
change anything else, how wouldrevenue change?
And that's the estimate.
(18:44):
So tax deferral has itsdifficulties because there are
two different estimates for taxexpenditures for deferral.
The main estimate actually is avery strange content to think
about distributionally, becausewhat it's doing is taking the
money you lose fromcontributions made in the
current year, the money you loseon any investment gains in the
(19:05):
pension, plus the deductions,minus the deduction or the taxes
you collect on the people.
It's not even the same people.
So the idea of distributingthat doesn't make sense.
Then they do another one whichis a present value, which says
from here until eternity, whatare the things Then?
The other issue is the tax.
The revenue estimates, andcertainly the revenue estimates
have an issue that if you say,got rid of deferral, the amount
(19:28):
you raised in the window isprobably going to be much higher
than the long term becauseagain what you're doing is
shifting.
Speaker 3 (19:34):
You're going to be collecting a lot more taxes on
workers today, but when theyretire, you do a lot and we see
that now with a lot of thisideas to Rothify things.
Right, I know that's not a word, but to allow for things to be
on a rock or require, in thecase of catch up contributions,
them to be Roth in realityprobably raises more money quote
(19:58):
in the window than in the longterm.
Speaker 1 (20:01):
Yeah, so I mean you get proposals that are Roth,
that say, expand the amount youcan put away, that actually
raise money in the window.
Yes, because it doesn't takeinto account the money you're
not collecting later.
Speaker 3 (20:15):
Exactly, so there's this distortion in policy that
is a result of that, but there'salso this distortion in terms
of the perception that wecontinue to have through.
The press picks up on thesepapers that talk about the
failure of the 401K system, andit sounds like there's a lot of
(20:40):
actual, real evidence that showsthat what is being claimed is
inaccurate either in terms ofwho's benefiting, the amount
that they're accumulating andthe amount of income it's
producing.
So what is the industry doingwrong, peter, in your view, in
terms of communicating thesuccess of the 401K system?
Speaker 1 (21:05):
Well, I mean, I think first of all, we have to
communicate the success.
I think there are too manyvoices, so I have to be careful
on this, but there is a no, it'sa podcast.
Speaker 3 (21:21):
No one listens to this.
Speaker 1 (21:24):
So look, there is a great.
I think there is a this ideathat there's a massive
retirement crisis as well.
Way overstate it.
I'm not saying there aren'tissues, there are many issues
going forward, and particularlythe funding of Social Security
is a huge problem.
We have to take care of that.
We've been avoiding, thecountry has been avoiding, but I
(21:48):
think in some sense.
Look, I think financialservices firms are used to
trying to get people to save asmuch as possible.
That's their business, and so Idon't blame them for sitting at
a table and say you need tosave more, and I'm okay with
that too, because I also thinkthat Well for the most people.
(22:08):
They're not going to over, I'mnot too worried.
Speaker 3 (22:12):
Yeah, for the most Americans, that's the right
advice.
Speaker 1 (22:17):
And so there's this.
But Overstating how much moresavings we need and all this
stuff I don't think isparticularly productive, because
mainly because I don't see thatin the data.
I'm not saying everyone isdoing great and everyone's
behaving rationally, but onaverage people seem to be doing
(22:39):
what I would predict they woulddo from a model on average.
Speaker 3 (22:46):
And so I'll tell you what I'm going to make it easier
.
I'm going to say what I thinkyou're saying.
I think what you're saying is,as an industry, we have this
tendency, because we're in thebusiness of accumulating assets,
to constantly be messagingyou're not saving enough, you're
not saving enough.
And that feeds into thisnarrative that some of these
(23:09):
economists are pushing out, thatthe system is failing.
Speaker 1 (23:13):
I think so, and I think it's counterproductive
bait because it's not true, andI don't think it's particularly
so.
I worked in the government andmy job was to tell them what
they couldn't say.
But if people want to saythings, the worst to me were
(23:33):
things that were both untrue andnot useful, and so I think it's
counterproductive in the policydebate, because what you're
saying is the current system isfailing, and it's an.
If the current system isfailing, it's not too
unreasonable response to say,well, then throw the whole
system out, and I think that'swhat's happened in some cases.
Speaker 3 (23:57):
Yeah, and I think I do think perhaps we need to
rethink as an industry how we'retalking about the 401k system
and doing a better job oftouting that success and just to
transition over to the throwingit out idea.
So there are some of youreconomists.
Speaker 1 (24:16):
Let me take a step back.
I can do research on the data,but what's convincing are
anecdotes.
So you can have the best day inthe world and you have a story
that is best, and so it would behelpful.
Now I don't have the anecdotesbecause I don't have the data on
an individual basis, butcertainly we should talk about
this.
Speaker 3 (24:36):
Oh, there's plenty of great stories about the success
of the 401k, without question.
So two of your economistscolleagues, Alicia Monal, Annie
Biggs, again in the same vein ofthrowing the system out and in
connection with Social Security,toss this idea somewhat like a
(25:00):
hand grenade to let's just getrid of all the incentives for
401k plans and use that quotemoney in the budget window to
shore up Social Security funding, which you know, but some of
the listeners may not realize,the Social Security trustees
(25:22):
report recently indicate orthink it was Congressional
Budget Office in this case thatthe expectation is that Social
Security will go into deficitspending by in 2033, which would
result in automatic cuts andbenefits something in the order
(25:45):
of 24%, I believe.
So what's your reaction to thissort of Pretty am I?
I think I called itpreposterous idea.
Speaker 1 (25:58):
Well, I have to say I'm not a big fan of it.
And look, both social securityand employer sponsored plans are
really important components tothe US system, and what this
proposal essentially does isit's willing to sacrifice
employer plans to help shore upsocial security, and I don't
think that's very productive.
But let me dive a little deeper.
Social security is in a balanceand, depending on your
(26:20):
particular point of view, youcould say taxes are too low or
benefits are too high.
But as an economist who veryadvanced math, all I can tell
you is they don't add up right,they're not equal to each other.
And so we can discuss how wegot here and what happened, but
the fact of the matter is goingforward.
Something unpleasant has tohappen, and that's either we
(26:43):
increase taxes on workers, welower benefits that retirees get
, or some combination of the two.
And understandably, there's agreat desire for a solver bullet
, right?
So people want to fix thesystem, but avoid pain, right?
Because who wants to inflictpain on people?
And I think this is an exampleof a supposedly painless
(27:04):
solution because it raisesrevenue, and they basically say
well, no one's hurt, becausethese plans don't work, they
don't do anything, right?
But, as we've already discussed.
I think that's a false premise.
The plans do work.
In fact, by the time they hitretirement, most workers have
accumulated something from theseplans, and in retirement, most
workers get a plan.
Speaker 3 (27:25):
And without a plan they don't save.
That's the point that's beingmissed here.
There's this argument I thinkthat's implicit in the paper
that people will save otherwise,and I think that's completely
false based on the evidence.
Speaker 1 (27:38):
Yeah, so I'll give you the economist's view.
So the reason that this is adebate is that theoretically we
can't actually tell you whetherincreasing the returns to
savings will increase savings orreduce it, and the reason is
not to get too technical or goback to your undergrad econ.
But there's a substitutioneffect and an income effect.
(28:01):
So the substitution effect saysfuture consumption is now
cheaper, right, because the rateof return is higher, and so I'm
willing to forego moreconsumption today, ie save to
consume more later.
So the substitution effectincreases savings.
But then there's an incomeeffect which says now I'm
(28:22):
wealthier over my lifetime andso that's going to cause me to
consume more in retirement, butalso more now because I'm
wealthier, and so we can't signwhat the effect is.
And then if you go to theempirical work, it's mixed.
Now they point to some workthat I am not as convinced by.
This is the Denmark study.
(28:45):
Yeah, we can go into why, butit is, I mean.
Speaker 3 (28:50):
It's completely non-transmitable to the United
States in my opinion, but that'smy opinion.
Speaker 1 (28:56):
I mean there are differences.
I discussed this paper once andsaid Denmark is, you know, just
like, is very similar toWisconsin, but less diverse.
I'm sorry, because I went toschool in Wisconsin.
I was the yeah, very few peoplehave brown hair.
So in any event there are that,but it's more complex to that.
(29:19):
So they do a series of thingsthat they say this should have
happened and then and it didn't.
And in my mind theymischaracterize again some of
the tax benefits.
So one of the things they didis in the.
So the typical system was likethe US where you had a deduction
, you know, for contributions init's not included in income,
(29:41):
not to either exclusion orreduction, and then they taxed
it on the way out.
But when they introduceddefined contribution plans,
right, they said, well, theyexpected everyone to just take
out a lump sum, right, or forcethem to take out a lump sum and
said, well, since you're takingout that big lump and we have
very progressive tax system,we're going to tax you at a
lower rate going out, right.
(30:02):
So you had a top rate.
I don't know the exact numbers,but let's just say the top rate
was 60% marginal tax rate andthe tax on the way out was a 40%
.
Well, that sets up an incentiveto people that are near
retirement.
You just put it in and take itout the next day and you say tax
money, all right, they got ridof that differential.
And then they said, well, noone really reacted.
(30:24):
Well, actually, some peoplereacted, and it's the people you
would expect to react, whichare people right near retirement
, because for them it wasn'treally savings, it was just a
way to save on taxes.
But the reason a lot of peopledidn't reduce their savings is
it still was a very good dealbecause they went to the proper
tax treatment, like realdeferral.
They just got rid of a windfall.
(30:45):
But I don't want to go down tothe weeds too much, just to say
the data isn't consistent.
But again, I do agree.
I have a hard time thinkingthat.
What I do know is right now,when you look at retirees, we
have a fairly successful system,which is most, if you follow
them from before they work intoretirement, most replace a
(31:09):
fairly high share of theirincome they had while working,
and they do it through acombination of the two, and so
it would be a very riskyexperiment to get rid of.
The one thing that we know isworking on the hope Exactly.
Speaker 3 (31:21):
And I think there's data that your colleague, jack
van der Heij, who was at EBRY,now at Morningstar, has done
work on that shows that moderateincome workers who have a
workplace savings program are 12times more likely to save than
on their own in an IRA.
So the incentives are the sameright.
(31:44):
But the fact that you have thatworkplace program, the culture
of savings, the match incentive,the payroll deduction, those
mechanisms are criticallyimportant.
And if you take away theincentives for the employer,
particularly small businessemployers, to have a workplace
(32:06):
plan, then they're just notgoing to do it and then those
workers are empirically likelyto be saving quite a bit less.
Yeah.
Speaker 1 (32:17):
So I think the way that the employer system has a
lot of benefits, regulardeduction from payroll, like
we've designed a system, andwhat I mean we so essentially
all the government really did issay, look, we allowed deferral
and we don't care whether thisis DBRDC and this is from the
(32:41):
beginning of the tax code backin the 1910s and 20s.
But basically all it says islike, if you're wage earner, we
have this high marginal taxrates.
You can take some of the moneyyou have while you're working
and shift it to years whenyou're not working and then
we'll tax you.
Then very simple system andfrom that without a whole lot of
you know.
(33:01):
You know we developed thissystem that is 401k, which has a
lot of great features, whichwasn't really necessarily part
of the design.
But you had employercontribution, employee
contributions, you did itregularly, paycheck to paycheck,
and has all these things.
Auto-enrollment, yeah, and now Ido think I'm not as convinced
by the evidence of the IRAversus the employer plans, and
(33:23):
the reason is is that it turnsout Whether you have a plan at
work or not.
It is not random, so A lot ofit has to do with who your
co-workers are, so it's thecomposition of the workforce at
where you work.
That will determine whether itmakes sense for the employer To
go through all the expensiveoffering a plan, because the
(33:44):
benefits have to be high enough,and so Most people that are
really focused on saving willhave an employer plan and the,
and so we'll likely use thatbefore they'd use an IRA.
I Just I'm not saying that itdoesn't increase savings, but
it's not perhaps.
Well, I think.
Speaker 3 (34:04):
I think you know you ought to take a look at, you
know, what's happening in thestates where they're requiring
to have a plan and with theminimum being a payroll
deduction IRA, because I dothink that the incidents of more
, you know, the marginalincreases and savings are real
and those people would not havesaved even though they could
have saved on their own, absentthe employer based structure.
(34:27):
So you know, I think you know,listen.
Speaker 1 (34:34):
With you that I think employer plans.
I think an employer plays ahuge role in the system and he's
very important.
But you know, I do think peopledo respond to the tax I'm a tax
economist or, when you look atthe data, people do respond to
incentives and I think, yes,yeah.
Speaker 3 (34:50):
I think we'd both agree, I think is we're just.
I think the employer systemjust makes it easier for for
most, most workers to do it.
And, to your point, this is asystem that has created, you
know, when we are over 11, closeto 12 trillion dollars.
I'm talking about the DC systemand retirement savings, you
(35:15):
know, immensely successful,based on the actual data.
And this isn't, this is not thetime to be throwing it all out
and using that money to pay forSocial Security, or just
throwing it out all out for someother reason.
And so, you know, look forwardto your continued work, peter,
(35:36):
thank you.
Speaker 1 (35:37):
Yeah, I think I think I Mean.
I write in my book that a taxdeferral is a very Fair form of
taxation, not unlimited taxdeferral, which we don't have.
There are limits to how muchyou can defer, but the ability
for workers to what it does isthe income.
(35:58):
Income taxes Penalized savings.
They reduce the incentive tosave by taxing returns and by
what these plans do is removethat, that Disincentive to say
that's inherent in a tax.
Turn tax income tax andBasically it allows workers to
supplement Social Security andyou have the system that I think
(36:18):
has more support.
You know the if we just had oneor two of the components, maybe
it wouldn't make sense, butwent together.
It's a progressive system.
But taking away the ability ofmiddle and upper middle income
people to try to maintain theirstandard of living through these
plans, I don't think would behelpful to the whole system.
Speaker 3 (36:36):
Completely agree.
Why don't you plug your book?
It's a podcast.
You're supposed to do that.
Speaker 1 (36:41):
Okay, so I Don't make money off it because it's
available free online on ourwebsite, but it's called how
America Sports Retirement wrotea few years back and the idea
behind it is Again, I didn'tlike the analysis that was done.
It looked at a lot of thesethings in isolation and I try to
(37:02):
look at the retirement systemas a whole, inclusive of Social
Security and retirement plans,and show how it works and it's
also, and where can people findit online?
So if you go to, I think it'sICIorg who benefits.
Okay, there's a landing pageand it's.
I was actually surprised, youknow.
I knew it'd be a small audiencein the US.
(37:24):
People like yourself, a pensiongeek, might be interested, but
it actually got translated intoChinese and Japanese that people
like it.
Speaker 3 (37:33):
So awesome.
Well, thank you again, peter,appreciate your time and look
forward to your continued workto help defend the import based
retirement plan system.
Speaker 1 (37:43):
Thanks again.
Great to see you again, brian,and good luck you.
It's the idea that there's a massive retirement
(00:01):
crisis as well.
Way overstate it.
I'm not saying there aren'tissues.
There are many issues goingforward, DC.
Speaker 2 (00:07):
Pension Geeks brings you exclusive conversations with
top retirement policymakers andregulators in and around
Washington DC, hosted by BrianGraff, an attorney, accountant,
former Capitol Hill staffer andCEO of the American Retirement
Association.
If you're looking for aninsider's view of all the twists
and turns that Washington takeson the road to ensuring a
(00:27):
secure retirement for millionsof Americans, you're in the
right place.
Welcome to DC Pension Geeks.
Speaker 3 (00:33):
Hello everybody, welcome to another podcast of
the DC Pension Geeks podcastseries.
I'm very fortunate today tohave Peter Brady from the
Investment Company Institute.
Some of you may remember Ithink we had Eric Pan, peter's
boss, a while back to talk ingeneral about what ICI is
(00:56):
focused on.
Peter has a very long historyworking on economic issues in
the finance area.
Actually, peter, just a quicksecond.
How did you end up?
Obviously, you've got aneconomic background, of course,
but how did you end up focusedon financial services, the
(01:18):
economic policy as it applies tothe finance area?
How did you?
Speaker 1 (01:25):
end up here.
Sure Well, the short version isI came to DC in the mid-90s
after getting a PhD from theUniversity of Wisconsin.
I spent nearly a decade as agovernment economist, so at the
Federal Reserve Board and thenthe Treasury Department.
Then I came to ICI in 2005.
Now I can flesh it out a littlebit, tell you a little bit more
about my background in ICI andmy research.
(01:46):
My background is a publicfinance and tax, so that's my
specialty.
I focus on capital taxationunder the income tax.
That's my link to the financialmarkets.
I've covered in my job before,covered issues doing housing,
dividends, capital gains andpensions and retirement policy.
Obviously, my job in thegovernment was to analyze data,
(02:10):
look at policy issues,legislation, regulation and do
my own long-term research.
I got a call from ICI in 2005.
I was a bit intrigued.
I was really out there looking.
What intrigued me is that so ICIas a trade group, as you know,
represent regulated funds likemutual funds and ETFs, but sort
(02:30):
of as a historical accident oras a historical background,
we're kind of a strange tradegroup and that we've always had
a large research department.
For example, right now we haveeight PhDs on staff.
Essentially, I came over,because I was able to do
essentially the same things Iwas doing for the government,
that is, analyze data, work onpolicy issues and do my own
(02:52):
long-term research, but just doit outside the government, also
with a little more direct focuson pension issues, which is
where my pensions and retirementpolicy, which is where my
research was going.
Anyways, I've researched thingslike pension coverage, income
that retirees get, how do youmeasure retirement adequacy and
(03:12):
the tax treatment of employerplans in IRAs.
Speaker 3 (03:16):
We're certainly grateful that ICI has committed
so much energy and resources toresearch, because obviously
there seems to be and it'sreally a someone who represents
the retirement plan system thereseems to be this sort of huge
(03:39):
number of folks on the academicside economists who are in
academia and even in some of theother think tanks that are
constantly attacking the privateretirement plan system.
I've been doing retirementpolicy for over 30 years now and
(04:00):
it's pretty much the samechorus that the system is only
benefiting the wealthy.
The system is failing mostworkers.
The system doesn't produceadequate retirement income due
to the shift from definedbenefit to defined contribution.
(04:25):
You've really been one of thefew voices that have been
countering that with actual data.
What do you think is drivingthis constant barrage of attacks
on a system that really hasbeen the only way we've ever
gotten middle income Americansto build wealth and invest in
(04:49):
the markets?
Speaker 1 (04:51):
Yeah, that's a good question.
I think there's a couple issuesgoing on.
One is, I think unfortunatelypeople try to examine employer
plans in isolation and in fact,the US retirement system has two
major components.
You've got a mandatory pensionthat has a progressive benefit
schedule, which is socialsecurity, and then you have a
voluntary pension system whereworkers can supplement social
(05:14):
security benefits in retirement.
What matters is not how muchyou get from either one of those
two components, but what youget from the combination of the
two In a lot of times, becausepeople don't understand the US
social security system wellenough or don't accurately model
it.
When you just look at whatpeople get from employer plans,
(05:35):
it is you can look at the dataand it may not make sense.
When you pull in a socialsecurity system, I think the
system makes a whole lot moresense and that's what a lot of
my work has tried to do.
I think the other thing goingon is we actually have a
mis-measurement in a lot of ourdata.
The typical way we getinformation on plans are large
(05:58):
household surveys done by thegovernment and, for whatever
reason, they've under-measuredthe amount of resources people
get from employer plans and IRAswhat they hold in terms of
assets in plans.
Speaker 3 (06:11):
I guess they don't see it as something that they
have if it's in Some of thesurveys are.
Speaker 1 (06:20):
The SCF is probably pretty good on some of it, cps
not so much.
Yeah, it's mainly we're missingthe income the SCF actually
shows.
Most households, by the timethey hit retirement, have
accumulated resources fromemployer plans and IRAs either
(06:41):
benefits in DB plan, assets in aDC or IRA or both.
There was a puzzle about we sawall these people with these
assets but then we didn't seethe income in retirement, and
it's a puzzle of why that occurs.
It occurs in multiple things,but in particular where we get
our national statistics from thecurrent population survey.
Our national income statisticshas been really bad and so early
(07:04):
on through joint work.
So there's a.
Once I left, I worked with TaxState, obviously while I was at
Treasury, but after I left theIRS Statistics of Income
Division has a joint researchprogram where you can put in
proposals for studies and if youget approved you can actually
use the raw tax data and so inthere there's a whole lot more
(07:28):
income from these plans than yousee in the household surveys.
And then it wasn't just myresearch did it that actually
the Census Bureau has a specialdivision where they take the
survey data and they're able tolink it with the tax data.
They can't talk to any otherpart of the census, by the way.
They can just put out thegeneral report, but they confirm
that it's missing a whole lotof it.
(07:48):
So retirees were missing a hugeshare of their income.
Most of that under measurementis coming from measuring
retirement plan income.
Speaker 3 (07:58):
So why, given what you just said, you made the
statement most Americanhouseholds actually have a
reasonable amount of resourceswhen they reach retirement, that
the income that they're gettingfrom retirement is under
measured, and we've got now datathat shows that it's much more
than what people have perceived.
(08:20):
Why are we consistently gettingthese studies over and over
again by academics?
There was one last week thatwas released by MIT, which you
probably saw again showing thatthe system is failing most
American workers.
Speaker 1 (08:36):
Yeah, so I don't want to specifically come out on the
latest proposal or latest paperbecause it's 130 pages long and
I've skimmed it.
But in general I think.
Speaker 3 (08:49):
But it's part of the same thing.
Speaker 1 (08:52):
Yeah, some of the best academic research actually
does show it.
I mean, I think the best paperin the area was a 2006 AER paper
that my researchers at my almamater and they showed that most
Americans seemed to be preparingproperly for retirement.
(09:13):
It's a very complex paper.
It went into a very complicatedlife cycle model, so a lot of
it is perhaps not the deepacademic research, but certainly
look, when you look at averagebalances and you look at a lot
of things.
It's easy to put simplestatistics up and say this is
(09:35):
nuts.
People don't have enough.
You have to really look at thewhole system.
You got to look at what theyget from social security and
from employer plans.
Social security has a veryprogressive benefit schedule.
It actually is designed toreplace most of the income at
the very bottom of the.
For people with low lifetimeearners, it is supposed to be
the only full replacement oftheir wages and as it goes up,
(09:59):
the replacement rate goes down.
But the assets some peopledon't even understand that the
higher you earn, the more youget from social security.
It goes up slowly and that'swhat makes it progressive, but
it goes up, and so even formiddle income and higher income
people a lot of times it'sdismissed how important social
security system is and you haveto look at it in common, so I
(10:20):
think.
And then the other thing ismaybe not a good awareness of
what typical income is.
So the people look at retireesand go, oh, this is the median
income.
I mean I saw one paper saidthis terrible, this median
income of retirees.
Now they probably undermeasured it because of the
(10:41):
reasons we've talked about, butit wasn't that different from
median income of people who wereworking for a living.
So I think, particularly inWashington, which is not exactly
a poor area, people may look atsome numbers and go, oh my gosh
, how do those people live?
And the fact of the matter is alot of people live that way,
(11:01):
most people live that way andthey live, but before and after.
But from my research again, asyou said, I find most people are
able to maintain a standard ofliving when you look at the data
.
Speaker 3 (11:12):
So a lot of the focus of these papers, peter, is
around tax incidents.
And then what I mean by thatand I know you understand what
I'm saying is that there tendsto be an over emphasis on the
current tax incentives and thefact that they're structured and
because they are represented,generally speaking, either well,
(11:33):
a deferment of taxes in thecurrent year, whether it's a
employee contribution if they'redoing a pre-tax contribution or
an employer contribution in theform of a match or other type
of either defined benefitcontribution on their behalf or
defined contribution, profitsharing contribution on their
behalf.
(11:53):
The benefit to any particularworker is predicated on what
their marginal tax rate is, andobviously we have a progressive
tax system.
So for more moderate incomeworkers, their marginal tax
rates are lower.
For higher income workers,their marginal tax rates are
(12:15):
higher.
So the economic analysis focuseson the fact that we're giving
wealthy people a higherincentive because their marginal
rate is higher.
We're giving lower people,lower income people, a lower
marginal rate, and that'sbackwards and it's sort of go on
and on about that.
(12:37):
Obviously we have a progressivetax code.
That's just the way the systemis.
What's behind those arguments?
Speaker 1 (12:46):
Okay, so I wrote a very long paper and actually a
book on the topic, and part ofit is is understanding the
benefits of tax deferral isactually kind of difficult.
It's difficult fornon-economists to understand,
it's difficult for economistswho aren't tax economists to
understand, it's difficult fortax economists who don't focus
(13:09):
on it to understand, and it'seven difficult for us who focus
on it if we haven't thoughtabout it for a few months.
So it can get, but what I'vetried to do is work on trying to
explain it, and so I think oneof the issues is there's a
confusion of people understanddeductions and exclusions pretty
well.
So you get a deduction for yourmortgage interest payment, you
(13:30):
get exclusion for healthcare,you get a or even credits where
you get money to buy electriccars, and those are easy fairly
easy to understand because theyonly affect your tax liability
this year, and the basicintuition is absolutely correct
that you just take how much youdeduct and you multiply it by
your marginal tax rate and thus,for every dollar you deduct you
(13:53):
get more benefits the higheryour income tax rates are.
So one of the issues that I'vetried to explain is that
deferral is much morecomplicated than that because it
affects taxes over yourlifetime.
So let's take a tax deferredcontribution, lower your taxes
when you put it in, all right,because you exclude it from your
income, and so you don't paytaxes today.
(14:16):
While it's growing over time,you get earn capital gains,
dividends, and those aren'ttaxed, but at the end you do pay
taxes on everything youwithdraw.
And so it's a combination ofthree different effects.
And so the point I try to makeis deferral is different.
Okay, so I have two kids.
One isn't better than the other, they're different.
(14:38):
Okay, this is like different.
I'm not saying tax deferral isbetter or worse.
Some cases it's better, sometypes it's worse.
It's just different from adeduction, and what it turns out
is your marginal tax rateactually has less to do with it
than you think.
Okay, so essentially let'sassume a simple case just to get
the understanding is if yourtax rates don't change over time
(14:59):
, tax you pay at the endbasically is paying back with
interest the tax you saved whenyou put the money in.
So what's left over is youwould have paid taxes on
interest, dividends, capitalgains along the way, and that's
your benefit.
Well, it turns out.
Speaker 3 (15:14):
So just to interrupt, I mean the deferral in the long
run costs the governmentsignificantly less than a pure
deduction.
Speaker 1 (15:26):
Generally, yes, I mean.
So I can come up with exampleswhere you have a long deferral
period and it can actually bemore, but for generally over a
lifetime.
And that's why I wrote to onepaper just on doing the benefits
per dollar, because it's verycomplex, and then doing over a
lifetime.
And, yes, it is much lower thangenerally, than what you would
get from the index.
So it turns out, particularlyfor higher income people,
(15:49):
deferral has a bigger effect onwhen taxes are paid than the
total amount of taxes over yourlifetime.
Now, it does lower, it doesreduce the taxes you pay over a
lifetime, but it has more effecton are you paying it when
you're working or you paying itwhen you retire?
And so I think it's hard tounderstand these things.
And so, for example, it turnsout your age may have a bigger
(16:12):
effect on your benefits thanyour marginal tax rate, because
what's really important is howlong you defer the taxes.
And so I think that's complexand I'll stop there and then you
overlay the fact.
Speaker 3 (16:26):
That way, there's something that Congress
considers that you hear it'swritten about in these papers
the idea around something calledtax expenditures.
It's something that the JointCommittee on Taxation puts out
every year and that there's anenormous number attached to the
(16:46):
tax incentives associated withretirement savings, but that
what they don't do is take intoaccount the point that you're
making, that that's a deferral,because Congress uses this
10-year budget window thatignores the fact not in all
cases, but in a lot of casesthat people are going to quote
(17:08):
pay that tax back or partiallypay that tax back when the money
comes out of retirementsolution.
Speaker 1 (17:16):
Yeah.
So it's even more complex thanthat because there's a
distinction between what a taxexpenditure is and what a
revenue estimate is.
And so the tax expenditureswere conceived back after the
war.
Basically it started to buildand there was actually a
gentleman at Treasury Surrey whobasically pushed the idea of
(17:38):
having a tax expenditure budget,and the idea at the time
actually had nothing to do withfairness or distributional
analysis or anything like that.
The only point was look, everyyear Congress has to pass
appropriations.
So if we have a program thatsay assists housing, if every
year you have to, if it's anexpenditure you got to look at
(17:59):
every year, if it's in the taxcode it's never looked at.
And basically what he wanted todo is say look, we give, there
are things we encourage throughthe tax code, and at that time
it was a much different tax code.
There were a lot of different.
I mean 86, we really winnowedthe tree of the different
deductions that were there.
We've been putting theornaments back on that tree over
(18:20):
time, but the idea there was toput this under the same
scrutiny.
And so the tax expenditureconcept is not a revenue
estimate.
The idea is suppose we changeone item in the tax code didn't
change anything else, how wouldrevenue change?
And that's the estimate.
(18:44):
So tax deferral has itsdifficulties because there are
two different estimates for taxexpenditures for deferral.
The main estimate actually is avery strange content to think
about distributionally, becausewhat it's doing is taking the
money you lose fromcontributions made in the
current year, the money you loseon any investment gains in the
(19:05):
pension, plus the deductions,minus the deduction or the taxes
you collect on the people.
It's not even the same people.
So the idea of distributingthat doesn't make sense.
Then they do another one whichis a present value, which says
from here until eternity, whatare the things Then?
The other issue is the tax.
The revenue estimates, andcertainly the revenue estimates
have an issue that if you say,got rid of deferral, the amount
(19:28):
you raised in the window isprobably going to be much higher
than the long term becauseagain what you're doing is
shifting.
Speaker 3 (19:34):
You're going to be collecting a lot more taxes on
workers today, but when theyretire, you do a lot and we see
that now with a lot of thisideas to Rothify things.
Right, I know that's not a word, but to allow for things to be
on a rock or require, in thecase of catch up contributions,
them to be Roth in realityprobably raises more money quote
(19:58):
in the window than in the longterm.
Speaker 1 (20:01):
Yeah, so I mean you get proposals that are Roth,
that say, expand the amount youcan put away, that actually
raise money in the window.
Yes, because it doesn't takeinto account the money you're
not collecting later.
Speaker 3 (20:15):
Exactly, so there's this distortion in policy that
is a result of that, but there'salso this distortion in terms
of the perception that wecontinue to have through.
The press picks up on thesepapers that talk about the
failure of the 401K system, andit sounds like there's a lot of
(20:40):
actual, real evidence that showsthat what is being claimed is
inaccurate either in terms ofwho's benefiting, the amount
that they're accumulating andthe amount of income it's
producing.
So what is the industry doingwrong, peter, in your view, in
terms of communicating thesuccess of the 401K system?
Speaker 1 (21:05):
Well, I mean, I think first of all, we have to
communicate the success.
I think there are too manyvoices, so I have to be careful
on this, but there is a no, it'sa podcast.
Speaker 3 (21:21):
No one listens to this.
Speaker 1 (21:24):
So look, there is a great.
I think there is a this ideathat there's a massive
retirement crisis as well.
Way overstate it.
I'm not saying there aren'tissues, there are many issues
going forward, and particularlythe funding of Social Security
is a huge problem.
We have to take care of that.
We've been avoiding, thecountry has been avoiding, but I
(21:48):
think in some sense.
Look, I think financialservices firms are used to
trying to get people to save asmuch as possible.
That's their business, and so Idon't blame them for sitting at
a table and say you need tosave more, and I'm okay with
that too, because I also thinkthat Well for the most people.
(22:08):
They're not going to over, I'mnot too worried.
Speaker 3 (22:12):
Yeah, for the most Americans, that's the right
advice.
Speaker 1 (22:17):
And so there's this.
But Overstating how much moresavings we need and all this
stuff I don't think isparticularly productive, because
mainly because I don't see thatin the data.
I'm not saying everyone isdoing great and everyone's
behaving rationally, but onaverage people seem to be doing
(22:39):
what I would predict they woulddo from a model on average.
Speaker 3 (22:46):
And so I'll tell you what I'm going to make it easier
.
I'm going to say what I thinkyou're saying.
I think what you're saying is,as an industry, we have this
tendency, because we're in thebusiness of accumulating assets,
to constantly be messagingyou're not saving enough, you're
not saving enough.
And that feeds into thisnarrative that some of these
(23:09):
economists are pushing out, thatthe system is failing.
Speaker 1 (23:13):
I think so, and I think it's counterproductive
bait because it's not true, andI don't think it's particularly
so.
I worked in the government andmy job was to tell them what
they couldn't say.
But if people want to saythings, the worst to me were
(23:33):
things that were both untrue andnot useful, and so I think it's
counterproductive in the policydebate, because what you're
saying is the current system isfailing, and it's an.
If the current system isfailing, it's not too
unreasonable response to say,well, then throw the whole
system out, and I think that'swhat's happened in some cases.
Speaker 3 (23:57):
Yeah, and I think I do think perhaps we need to
rethink as an industry how we'retalking about the 401k system
and doing a better job oftouting that success and just to
transition over to the throwingit out idea.
So there are some of youreconomists.
Speaker 1 (24:16):
Let me take a step back.
I can do research on the data,but what's convincing are
anecdotes.
So you can have the best day inthe world and you have a story
that is best, and so it would behelpful.
Now I don't have the anecdotesbecause I don't have the data on
an individual basis, butcertainly we should talk about
this.
Speaker 3 (24:36):
Oh, there's plenty of great stories about the success
of the 401k, without question.
So two of your economistscolleagues, Alicia Monal, Annie
Biggs, again in the same vein ofthrowing the system out and in
connection with Social Security,toss this idea somewhat like a
(25:00):
hand grenade to let's just getrid of all the incentives for
401k plans and use that quotemoney in the budget window to
shore up Social Security funding, which you know, but some of
the listeners may not realize,the Social Security trustees
(25:22):
report recently indicate orthink it was Congressional
Budget Office in this case thatthe expectation is that Social
Security will go into deficitspending by in 2033, which would
result in automatic cuts andbenefits something in the order
(25:45):
of 24%, I believe.
So what's your reaction to thissort of Pretty am I?
I think I called itpreposterous idea.
Speaker 1 (25:58):
Well, I have to say I'm not a big fan of it.
And look, both social securityand employer sponsored plans are
really important components tothe US system, and what this
proposal essentially does isit's willing to sacrifice
employer plans to help shore upsocial security, and I don't
think that's very productive.
But let me dive a little deeper.
Social security is in a balanceand, depending on your
(26:20):
particular point of view, youcould say taxes are too low or
benefits are too high.
But as an economist who veryadvanced math, all I can tell
you is they don't add up right,they're not equal to each other.
And so we can discuss how wegot here and what happened, but
the fact of the matter is goingforward.
Something unpleasant has tohappen, and that's either we
(26:43):
increase taxes on workers, welower benefits that retirees get
, or some combination of the two.
And understandably, there's agreat desire for a solver bullet
, right?
So people want to fix thesystem, but avoid pain, right?
Because who wants to inflictpain on people?
And I think this is an exampleof a supposedly painless
(27:04):
solution because it raisesrevenue, and they basically say
well, no one's hurt, becausethese plans don't work, they
don't do anything, right?
But, as we've already discussed.
I think that's a false premise.
The plans do work.
In fact, by the time they hitretirement, most workers have
accumulated something from theseplans, and in retirement, most
workers get a plan.
Speaker 3 (27:25):
And without a plan they don't save.
That's the point that's beingmissed here.
There's this argument I thinkthat's implicit in the paper
that people will save otherwise,and I think that's completely
false based on the evidence.
Speaker 1 (27:38):
Yeah, so I'll give you the economist's view.
So the reason that this is adebate is that theoretically we
can't actually tell you whetherincreasing the returns to
savings will increase savings orreduce it, and the reason is
not to get too technical or goback to your undergrad econ.
But there's a substitutioneffect and an income effect.
(28:01):
So the substitution effect saysfuture consumption is now
cheaper, right, because the rateof return is higher, and so I'm
willing to forego moreconsumption today, ie save to
consume more later.
So the substitution effectincreases savings.
But then there's an incomeeffect which says now I'm
(28:22):
wealthier over my lifetime andso that's going to cause me to
consume more in retirement, butalso more now because I'm
wealthier, and so we can't signwhat the effect is.
And then if you go to theempirical work, it's mixed.
Now they point to some workthat I am not as convinced by.
This is the Denmark study.
(28:45):
Yeah, we can go into why, butit is, I mean.
Speaker 3 (28:50):
It's completely non-transmitable to the United
States in my opinion, but that'smy opinion.
Speaker 1 (28:56):
I mean there are differences.
I discussed this paper once andsaid Denmark is, you know, just
like, is very similar toWisconsin, but less diverse.
I'm sorry, because I went toschool in Wisconsin.
I was the yeah, very few peoplehave brown hair.
So in any event there are that,but it's more complex to that.
(29:19):
So they do a series of thingsthat they say this should have
happened and then and it didn't.
And in my mind theymischaracterize again some of
the tax benefits.
So one of the things they didis in the.
So the typical system was likethe US where you had a deduction
, you know, for contributions init's not included in income,
(29:41):
not to either exclusion orreduction, and then they taxed
it on the way out.
But when they introduceddefined contribution plans,
right, they said, well, theyexpected everyone to just take
out a lump sum, right, or forcethem to take out a lump sum and
said, well, since you're takingout that big lump and we have
very progressive tax system,we're going to tax you at a
lower rate going out, right.
(30:02):
So you had a top rate.
I don't know the exact numbers,but let's just say the top rate
was 60% marginal tax rate andthe tax on the way out was a 40%
.
Well, that sets up an incentiveto people that are near
retirement.
You just put it in and take itout the next day and you say tax
money, all right, they got ridof that differential.
And then they said, well, noone really reacted.
(30:24):
Well, actually, some peoplereacted, and it's the people you
would expect to react, whichare people right near retirement
, because for them it wasn'treally savings, it was just a
way to save on taxes.
But the reason a lot of peopledidn't reduce their savings is
it still was a very good dealbecause they went to the proper
tax treatment, like realdeferral.
They just got rid of a windfall.
(30:45):
But I don't want to go down tothe weeds too much, just to say
the data isn't consistent.
But again, I do agree.
I have a hard time thinkingthat.
What I do know is right now,when you look at retirees, we
have a fairly successful system,which is most, if you follow
them from before they work intoretirement, most replace a
(31:09):
fairly high share of theirincome they had while working,
and they do it through acombination of the two, and so
it would be a very riskyexperiment to get rid of.
The one thing that we know isworking on the hope Exactly.
Speaker 3 (31:21):
And I think there's data that your colleague, jack
van der Heij, who was at EBRY,now at Morningstar, has done
work on that shows that moderateincome workers who have a
workplace savings program are 12times more likely to save than
on their own in an IRA.
So the incentives are the sameright.
(31:44):
But the fact that you have thatworkplace program, the culture
of savings, the match incentive,the payroll deduction, those
mechanisms are criticallyimportant.
And if you take away theincentives for the employer,
particularly small businessemployers, to have a workplace
(32:06):
plan, then they're just notgoing to do it and then those
workers are empirically likelyto be saving quite a bit less.
Yeah.
Speaker 1 (32:17):
So I think the way that the employer system has a
lot of benefits, regulardeduction from payroll, like
we've designed a system, andwhat I mean we so essentially
all the government really did issay, look, we allowed deferral
and we don't care whether thisis DBRDC and this is from the
(32:41):
beginning of the tax code backin the 1910s and 20s.
But basically all it says islike, if you're wage earner, we
have this high marginal taxrates.
You can take some of the moneyyou have while you're working
and shift it to years whenyou're not working and then
we'll tax you.
Then very simple system andfrom that without a whole lot of
you know.
(33:01):
You know we developed thissystem that is 401k, which has a
lot of great features, whichwasn't really necessarily part
of the design.
But you had employercontribution, employee
contributions, you did itregularly, paycheck to paycheck,
and has all these things.
Auto-enrollment, yeah, and now Ido think I'm not as convinced
by the evidence of the IRAversus the employer plans, and
(33:23):
the reason is is that it turnsout Whether you have a plan at
work or not.
It is not random, so A lot ofit has to do with who your
co-workers are, so it's thecomposition of the workforce at
where you work.
That will determine whether itmakes sense for the employer To
go through all the expensiveoffering a plan, because the
(33:44):
benefits have to be high enough,and so Most people that are
really focused on saving willhave an employer plan and the,
and so we'll likely use thatbefore they'd use an IRA.
I Just I'm not saying that itdoesn't increase savings, but
it's not perhaps.
Well, I think.
Speaker 3 (34:04):
I think you know you ought to take a look at, you
know, what's happening in thestates where they're requiring
to have a plan and with theminimum being a payroll
deduction IRA, because I dothink that the incidents of more
, you know, the marginalincreases and savings are real
and those people would not havesaved even though they could
have saved on their own, absentthe employer based structure.
(34:27):
So you know, I think you know,listen.
Speaker 1 (34:34):
With you that I think employer plans.
I think an employer plays ahuge role in the system and he's
very important.
But you know, I do think peopledo respond to the tax I'm a tax
economist or, when you look atthe data, people do respond to
incentives and I think, yes,yeah.
Speaker 3 (34:50):
I think we'd both agree, I think is we're just.
I think the employer systemjust makes it easier for for
most, most workers to do it.
And, to your point, this is asystem that has created, you
know, when we are over 11, closeto 12 trillion dollars.
I'm talking about the DC systemand retirement savings, you
(35:15):
know, immensely successful,based on the actual data.
And this isn't, this is not thetime to be throwing it all out
and using that money to pay forSocial Security, or just
throwing it out all out for someother reason.
And so, you know, look forwardto your continued work, peter,
(35:36):
thank you.
Speaker 1 (35:37):
Yeah, I think I think I Mean.
I write in my book that a taxdeferral is a very Fair form of
taxation, not unlimited taxdeferral, which we don't have.
There are limits to how muchyou can defer, but the ability
for workers to what it does isthe income.
(35:58):
Income taxes Penalized savings.
They reduce the incentive tosave by taxing returns and by
what these plans do is removethat, that Disincentive to say
that's inherent in a tax.
Turn tax income tax andBasically it allows workers to
supplement Social Security andyou have the system that I think
(36:18):
has more support.
You know the if we just had oneor two of the components, maybe
it wouldn't make sense, butwent together.
It's a progressive system.
But taking away the ability ofmiddle and upper middle income
people to try to maintain theirstandard of living through these
plans, I don't think would behelpful to the whole system.
Speaker 3 (36:36):
Completely agree.
Why don't you plug your book?
It's a podcast.
You're supposed to do that.
Speaker 1 (36:41):
Okay, so I Don't make money off it because it's
available free online on ourwebsite, but it's called how
America Sports Retirement wrotea few years back and the idea
behind it is Again, I didn'tlike the analysis that was done.
It looked at a lot of thesethings in isolation and I try to
(37:02):
look at the retirement systemas a whole, inclusive of Social
Security and retirement plans,and show how it works and it's
also, and where can people findit online?
So if you go to, I think it'sICIorg who benefits.
Okay, there's a landing pageand it's.
I was actually surprised, youknow.
I knew it'd be a small audiencein the US.
(37:24):
People like yourself, a pensiongeek, might be interested, but
it actually got translated intoChinese and Japanese that people
like it.
Speaker 3 (37:33):
So awesome.
Well, thank you again, peter,appreciate your time and look
forward to your continued workto help defend the import based
retirement plan system.
Speaker 1 (37:43):
Thanks again.
Great to see you again, brian,and good luck you.
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