MEET OLIVIA MITCHELL:
Dr. Olivia S. Mitchell is the International Foundation of Employee Benefit Plans Professor of Insurance and Risk Management, and the Executive Director of the Pension Research Council, at the Wharton School of the University of Pennsylvania. Concurrently Dr. Mitchell is a Research Associate at the National Bureau of Economic Research. Her extensive publications analyze public and private pensions and healthcare systems, as well as links between work, wealth, health, wellbeing, and retirement.
She served on President Bush's Commission to Strengthen Social Security (www.csss.gov), and the US Department of Labor's ERISA Advisory Council. Dr. Mitchell co-chaired the Technical Panel on Trends in Retirement Income and Saving for the Social Security Advisory Council; and she was a Board member for the Committee on the Status of Women in the Economics Profession as well as the GAO Advisory Board. She has spoken for groups including the World Economic Forum; the International Monetary Fund; the White House Conference on Social Security; and the President's Economic Forum.
Dr. Mitchell's coauthored study on Social Security reform won the Paul Samuelson Award for "Outstanding Writing on Lifelong Financial Security" from TIAA-CREF. She received the MA and PhD degrees in Economics from the University of Wisconsin-Madison, and the BA in Economics from Harvard University.
For more info see www.wharton.upenn.edu.
With the first Baby Boomers eligible for retirement in January 2008, warnings abound about this generation's lack of retirement savings. By 2020, most boomers will be 60 or older and there will be just two workers paying Social Security and Medicare taxes for every retiree. For Our Grandchildren's Tim Penny recently visited with Olivia Mitchell. Author of more than a dozen books on retirement and head of the Pension Research Council at the Wharton School of Business, Mitchell knows about the boomers' future prospects. Read their exchange as Mitchell discusses what she calls the, "’spend now, save whenever - mentality of the Credit Card Generation."
Interview
Penny: In a recent Money magazine article, you discussed the impending retirement of the Baby Boom generation. Are Boomers ready for retirement?
Dr. Olivia S. Mitchell: The number of retirees in the United States will double over the next thirty years. As this 77 million-strong group born 1946-1966, known as Baby Boomers, transitions into retirement, it will have unprecedented impacts on healthcare systems and pensions, housing markets, social safety nets, and indeed the entire economy. My new book, entitled Redefining Retirement: How Will Boomers Fare? (Oxford Univ. Press, 2007; www.pensionresearchcouncil.org) draws on a unique new dataset to show that some Boomers expect to be better off in old age, compared to their predecessors. This is because they have benefited from the decades-long run-up in housing prices, dramatic improvements in healthcare, and a prosperous economy. But this generation's sheer size and anticipated longer life expectancy also means that retirement assets will have to be stretched farther than ever before. Wealth is also less equally distributed than for earlier generations. And the nation?s Social Security and Medicare programs face serious solvency problems. For all these reasons, many Boomers are facing financial insecurity in retirement.
Penny: What do we know about Boomers expectations regarding retirement? Are they being realistic?
Dr. Olivia S. Mitchell: One way in which Boomers are remaking retirement is by reinventing their relationship to the work world at older ages. Our book shows that many people in their 50s say they will never retire, while others indicate they want to move to part-time work. Still others believe they will start a new business, go into consulting, or change careers completely. As long as the paychecks keep coming, this helps build financial security and delays the asset drawdown phase. Nevertheless, many Boomers failed to plan and save adequately for retirement; our research shows that those who say they plan for retirement accumulate much more wealth and are more financially literate than those who never tried to plan (www.pensionresearchcouncil.org) . Accordingly, differences in planning patterns help explain why some people approach retirement with little or no wealth. Another problem we see is that Boomers are not necessarily healthier than their parents' generation. Though they smoked less over their lifetimes, many more of them are now obese. Boomers also indicate they have more pain and chronic health problems, and they report having more drinking and psychiatric problems than earlier generations. As a result, there is concern that some Boomers will not be able to work or return to work after retiring, when the money runs short. And few Boomers are doing anything to prepare for staggering retiree healthcare costs.
Penny: What more needs to be done to enhance incentives for workers to save for retirement?
Dr. Olivia S. Mitchell: The best way to help people save for retirement is to automatically enroll them into a tax-qualified retirement saving account where workers defer a portion of their salary on a regular and predictable basis from the moment they start working. Some countries such as Australia and Sweden mandate individual retirement saving accounts; in the US, the Pension Protection Act of 2006 now allows employers to automatically enroll workers into a 401k plan. Of course not all US companies offer pensions, so there are still coverage gaps for workers. A viable alternative might be a national individual accounts system. And it must be noted that an 'autopilot' approach to individual saving is very effective, but at the national level, it is essential to eliminate government budget deficits so that individual efforts to save are not undone by profligate government expenditures.
Penny: To what degree are Boomers relying on Social Security? Are they counting on Social Security to do more than it can do to support their retirement needs?
Dr. Olivia S. Mitchell: More than half of today's retirees rely on Social Security for more than half their income. This status quo will not hold in the future, since when the Boomers retire, there will be an inevitable cash crunch. Future Social Security taxes cannot cover scheduled benefits; the shortfall is estimated at about $11 trillion in today's dollars. Most Boomers know that Social Security benefits are not guaranteed, though we have yet to see a reform plan that can garner a majority vote. Experts project that Boomers may receive some two-thirds of scheduled Social Security benefits, and many financial planners are using an even smaller percent for planning purposes. A big problem is that Medicare is currently facing a cash crunch, with almost certain increases in premiums and copays soon to come. As a consequence, retirees' dollars are going to be stretched even further once Social Security and Medicare shortfalls are factored in.
Penny: What can and should be done about the structure of Social Security going forward?
Dr. Olivia S. Mitchell: Workers and retirees will do a better job at managing retirement risk if the Social Security system is returned to solvency. This will require politicians and voters to first acknowledge the massive unfunded liability of the current system, and then to close the funding gap in a systematic, gradual, and transparent manner. The Commission to Strengthen Social Security (www.csss.gov), on which I served, had a number of useful proposals to bring revenues and benefits into line, mainly by tapering the growth rate of benefits - without cutting benefits. To ensure political honesty, the Commission also proposed allowing workers to invest a portion of their payroll taxes in exchange for a benefit offset, which would not harm the system financially. Most important, however, is the need to get started on the necessary reforms immediately. Every year of delay is a year of greater risk.
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