The pensions professor
Teresa Ghilarducci is one of the most watched economists and pension experts these days. She is the Irene and Bernard Schwartz Professor of Economic Policy Analysis and the director of the Schwartz Center for Economic Policy Analysis at the New School for Social Research in New York, and the author of the book ‘When I’m Sixty-Four: The Plot against Pensions and the Plan to Save Them’. Her proposal of new guaranteed retirement accounts (GRAs) as an alternative to the 401(k) plans - which she reckons are broken and wrong - has gained a lot of attention, even at the White House. And it may be adopted by vice-president Joe Biden’s task force focused on improving the middle class’s economic conditions.
Besides, Ghilarducci is one of the trustees of the VEBA (Voluntary Employee Beneficiary Association) fund, which will be the world’s largest health care provider, with more than $50bn (€34bn) of assets and 800,000 members, all retirees from General Motors, Ford and Chrysler. IPE met her last month just after President Barack Obama’s speech about helping people to save for retirement.
“I am a big supporter of Obama but I’m not so happy about his proposals for securing American retirement savings; they are just uninspiring,” Ghilarducci tells IPE.
She says Obama is supporting a system “that has already failed because it’s voluntary, based on individual choices and commercialised”, and that individuals cannot make the right decisions in three areas: “First, they are not prepared to manage money as well as professionals; second, they cannot buy annuities on their own because they are too expensive; last, they cannot keep money in their retirement accounts when they need emergency money, for example to divorce or to cope with an economic crisis.”
She stresses that 401(k)s being “commercial accounts” means that part of the money goes to the shareholders of mutual funds’ managing companies: “Obama’s proposal pleases the mutual fund industry in contrast with his proposals of health care reform, which do not please the insurers. Maybe he does not want to tackle two big issues at the same time.”
But Biden’s task force might also focus on retirement problems. Congress may want to discuss the issue because of concerns about shrunken 401(k) balances. “It is true that individual retirement accounts have partly recovered since March,” says Ghilarducci. “But people have learnt that 401(k)s can go down and that during recessions employers can stop matching their contributions, because it’s voluntary.”
How could a reform of individual retirement accounts be technically and economically feasible? “By introducing guaranteed retirement accounts and making them mandatory as a supplement to Social Security,” claims Ghilarducci. “GRAs would remain individual accounts with each employee’s name on each account, but the rate of return would be guaranteed by the government and would match the growth rate of the economy after inflation. That’s what we can expect in the long term by the market. These accounts can be managed by trustees appointed by the government, like state pension funds.”
What about the fact that state pension funds are in trouble? “They promised too much,” replies Ghilarducci. “GRA trustees would follow a very conservative strategy investing in stocks, bonds and other assets such as real estate. An idea is to create an American sovereign fund dedicated to pension investments.”
Ghilarducci herself will have to make investment decisions after 1 January next year, when the VEBA fund starts operating: “We’ll have to invest conservatively to make it last for as many years as the fund’s members live. It will be a challenge to provide preventive health care, negotiate with doctors, and implement an electronic system.” Obama’s wealth reform could help VEBA, whose most expensive group are people who lost their jobs when they were 55 and are not covered by the public plan Medicare until they turn 65.
“The new public option proposed by Obama could give basic care to these young retirees and VEBA would give the supplement care,” concludes Ghilarducci. “Wall Street’s insurers are very nervous, but in the end they will adapt their business and remain very profitable with the supplement care, the same that happens with mutual funds’ company managing pension funds that supplement Social Security.”