00:00:00
Kent Smetters: It's going to be— the
Trust Fund is going to deplete
00:00:03
with— within a decade. And so I
think, you know, it's— there's
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partly that comfort, but also
what we hear— heard from
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a lot of low-income households— over the
last 20 years, when I was with
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the administration, the Bush
Administration and then since, is
00:00:17
that they want to leave
something that's bequeathable to
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their heirs. And so we also
especially heard this— coming
00:00:24
from Black households, and the
Black members, for example, of
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the Social Security Commission
under President Bush, was that
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there's this great need for, you
know, how do we create
00:00:34
intergenerational wealth? And
these types of accounts, they'll
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be fully bequeathable.
00:00:39
Welcome to <i>The Ripple Effect</i>, the podcast
that takes you on a journey
00:00:43
through the minds of Wharton
faculty. I'm your host, Dan
00:00:46
Loney, and in each episode,
we'll be diving deep into the
00:00:49
inspiration behind the
groundbreaking research that
00:00:52
Wharton professors have
conducted and exploring how
00:00:55
their findings resonate with the
world today.
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Well, one of the
concerns around
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retirement
savings is the gap between the
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haves and the have nots. So how
do households who are considered
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to be in lower income brackets
still secure that level of
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retirement finance that they're
going to need? It's an area that
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has been looked at and focused
on by the Penn Wharton Budget
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Model, and we are pleased to
have their Faculty Director,
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Wharton Professor Kent Smetters,
joining us here in studio. Great
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to see you, Kent.
- Great to be back.
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Why is this component,
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though, so important when we
think about retirement,
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especially to do the research
that you've done on this?
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So, about half of households in
the United States really don't
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have a lot of material savings
toward retirement. Now, one
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could argue that could be
actually optimal if you believe
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that Social Security benefits,
Medicare benefits, and believe
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it or not, Medicaid, because
that actually pays for the long
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term care component of in
retirement— if you think that
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those are going to pay as
scheduled. You know, not having
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a lot of saving may be okay for
a lot of these households. But
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those programs are under a lot
of pressure right now, and they
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are contributing to large
shortfalls in our projected
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finances for the country. And
it's always good to have your
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own nest egg as well. And so
that— I think that's why— on one
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hand, things get embellished by
some people that say that, you know,
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there's a huge, huge problem
here. On the other hand, there
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is a problem, still. Some of it
is caused by government policy
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itself, but there is a problem.
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And this is something that at
least policymakers are aware
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of, or at least they want to get
more information about so we
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know a potential path that we
need to go down. -That's
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right, and in particular— so
policymakers are certainly aware
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of— that a lot of the low-income
households in their districts
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really are not saving that much
for retirement, and that, you
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know, we ask, why is programs
like Social Security, Medicare
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and Medicaid kind of the third
rail of politics? It's partly
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because people have become so
dependent on those programs, no
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one wants to touch them. But at
the same time, there's no
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question going forward, we're
gonna have to figure out another
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approach.
- $200,000
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was the level that you used in
the research. Take us through
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why that level is important in
terms of determining that level
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of retirement savings that
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people would have. - Yeah. So the
thought experiment was as
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follows. You know, people don't
think we do, necessarily, a lot of
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direct subsidy for retirement
income in the United States. In
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fact, we do. When you
calculate your AGI, your
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adjustable gross income, the "A"
component there doesn't get a
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lot of attention, but there's a
big, big tax write-off there,
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and that's through the fact that
you can put in your— your
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contributions to a traditional
401(k) and a— on a pre-tax, or as a
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post-tax for a Roth 401(k).
Both are tax subsidies. And so
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we spend about, as a country,
about one and a quarter trillion
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dollars over 10 years for that—
that subsidy, the combination of
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that traditional and the Roth.
And if we just said, okay, we
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know who's benefiting from that
is typically higher-income
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people. We also know that it
doesn't have a huge impact on
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how much they actually save for
retirement. That's what the
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research seems to suggest. In
nerdy language, they don't have
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a big elasticity response to the
tax incentives there. And so if
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we took that money and we set up
automated retirement accounts
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for our lower-income households.
And the idea would be, we just
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simply use the current
administration of the Earned
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Income Tax Credit. No more
administration. The same—
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basically the same
qualifications, the same rules,
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different phase outs in terms of
all that, but essentially we do
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a 10% contribution of income. So
it's not like freebies here. You
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still have to work and so forth.
We could use that money to
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really boost up low-income
household savings accounts. And
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if you're a younger person, 25
years old, and you're on one of
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these, you know, low-income
paths, we could, over time, get
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you, on a risk-adjusted basis,
close to around $200,000 of
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retirement income or retirement
savings, that then can be
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annuitized or converted into some
type of income. And that could
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then top up Social Security and
things like that. And so the
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same budget costs could be
redirected toward kind of lower
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income. And ultimately totally
expand— since we know the high
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income are not going to cut back
a lot in their saving. The low
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income now are going to have
saving. The net saving in society
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is going to go up.
- What do you think that does,
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then, to debt overall,
when you have that
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component factored in to the mix
of retirement savings?
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So what we try to do is construct
it in a way that's roughly
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revenue-neutral over 10 years.
And so the idea is that, you
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know, we have these different
options, kind of small, medium
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and large, and different phase
outs, different matching rates
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and so forth. And the phase outs
are— you know, obviously we're
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not going to be subsidizing 10%
of income for really high-income
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folks, but this is for lower
income. And so the idea is that
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the medium one basically is
revenue neutral over a 10-year
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period. And so the low is, you
know, less than you actually
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will now make money as the
government, save some revenue.
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And the high is, it costs you a
little bit more than current
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revenue costs associated with
the 401(k) and 403(b) type of
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deductions. Technically
speaking, those are adjustments
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rather than deductions. And so
as a result, you know, we can
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get low-income households a pretty
nice nest egg. And that's not
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playing tricks with, like, crazy
returns. This is on the risk-
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adjusted basis.
- Is the belief that
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being able to reach
that 200,000 plateau is
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something that can provide lower-
income households not only that
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nest egg, but a level of comfort
that maybe they haven't had in
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the past?
- That's right.
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And there's a couple
things that can happen with it.
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One is that, yes, Social
Security is going to be there in
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some form. You know, exactly how
big it will be and so forth— but
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still not— you know, Social
Security doesn't even guarantee that
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you'll stay out of poverty in
old age. And so it's possible
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that your— your benefit is not
going to be that big, and so
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forth. And who knows what the
future brings, given that it's
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going to be— the Trust Fund's gonna
deplete with— within a decade.
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And so I think, you know, it's—
there's partly that comfort. But
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also what we've heard— heard from
a lot of low-income households
00:07:44
over the last 20 years, when I
was with the administration, the
00:07:47
Bush Administration, then since,
is that they want to leave
00:07:51
something that's bequeathable to
their heirs. And so we also
00:07:54
especially heard this coming
from Black households, and the
00:07:59
Black members, for example, of
the Social Security Commission
00:08:02
under President Bush, was that
there's this great need for, you
00:08:05
know, how do we create
intergenerational wealth? And
00:08:08
these types of accounts, they
will be fully bequeathable. In
00:08:11
particular, on one hand, they're
designed in a way that you can't
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tap into them before retirement,
because you can't top them up.
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These are purely non-
contribution. The government
00:08:22
does the— does the full
contribution. The idea there is
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that, therefore, there's no
right for you to tap into these
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before retirement. They are
truly retirement accounts. Other
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hand, they are fully bequeathable,
unlike Social Security. You
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can't bequeath your feature
Social Security benefit after
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you die. And so I think this
idea of being able to build up
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intergenerational wealth, helping
your kid buy a— put a down
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payment for a house, you know,
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I think that can
create a lot of value for people.
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How do you think, then, that concept
really tackles the larger issue
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of just being able to build up
retirement savings, and to a
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degree, the understanding of how
to go about doing that?
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Yeah, yeah. I mean, there's
stuff in here that I think both
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sides of the political spectrum
should really like. One is a
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much greater tilt toward low-
income houses and building up
00:09:12
wealth and so forth. On the
other hand, if I were on the
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opposite side of the political
spectrum, I would say, you know
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what? This also means a little
less pressure on Social
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Security, Medicare, Medicaid.
Some people view this as kind of
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camel's nose under the tent
strategy. There's no tent
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there. But the point is, is that
you know, why have half of the
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population rely so heavily on
those sources of income, of—
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of Social Security, Medicare and
Medicaid for long-term care
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when, you know, I think they're
looking for some more
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independence. I think people's
sense of their ability to rely
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on the government to deliver in
the future, you know— especially
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where our federal debt is
exploding right now. We are now
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making higher interest payments
than military, we're spending on
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the military. That does not bode
well in history for countries
00:10:01
that do that. And so I think it
is— given the great uncertainty
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going forward, this is kind of a
more decentralized way of
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creating comfort.
- So is this part way,
00:10:11
a path to trying to
get lower income
00:10:14
households the concept of fully—
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fully-funded retirement savings
programs?
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Well, it certainly can augment
that. You know, could you— if you
00:10:24
go into retirement— and all this
is after adjusting for inflation
00:10:27
as well. - Sure. Yeah.
And so it's like $200,000
00:10:29
in today's dollars. So
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could— you know, you live in
retirement on $200,000? You
00:10:35
probably could. It wouldn't be a
super comfortable, you know,
00:10:39
standard of living. So I think
this is more of a top up of— for
00:10:43
Social Security. But even if
Social Security, over time, really
00:10:47
focused on poverty relief,
rather than just, you know, this
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kind of image of the pension-
like type system— I mean, not—
00:10:56
that could actually be done
really slowly over time, so that
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people who are age 50 and above
today, for example, are not
00:11:04
impacted at all. But slowly
change the retirement age,
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slowly change the benefit
structure, so that it focuses
00:11:10
much more on poverty relief and
so forth. You could— you could
00:11:14
save money there, but you could
also make sure people stay out
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of poverty. But they're not
going to have a great life, you
00:11:20
know, just on Social Security.
- Sure. Yeah.
00:11:21
But this can actually give them a
00:11:23
fuller retirement. And again,
for a lot of low-income
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households, that— what they
really care about is— and I
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don't think this gets enough
attention, especially in the
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Black community, Hispanic
communities, where we've heard
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this from, is they really want
something that is that— the idea
00:11:39
of bequeathing wealth to the
next generation. That shouldn't
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just be the rich white people
thing, that should be something
00:11:46
that's universal. - What's
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the reaction that you get to
this idea from the policymakers
00:11:52
right now?
- Yeah, you know,
00:11:53
I was shocked. Some of the
policymakers were like, more—
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they actually were really gung-
ho about it. They thought this
00:11:59
was really cool. On one hand, you
know, right now they're all
00:12:03
focused on, you know, extenders
for Tax Cuts and Jobs Act and
00:12:06
things like that. And— but none—
nonetheless, the reaction from
00:12:11
both sides has been positive. It'd be—
people are often nervous about,
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you know, is there a hidden agenda
here and so forth? And it's no. I
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mean, it's just a way of trying
to secure more retirement. You
00:12:22
know, from the industry, I've—
we've gotten some feedback, and,
00:12:26
you know, some of the industry
trade groups, they always have
00:12:28
to attack every idea out there.
You know, because that's— that's
00:12:31
how they rationalize their
existence. But from the players,
00:12:34
the industry players themselves,
they've— they actually, you
00:12:37
know, agree with the statement
that higher-income people are
00:12:41
not going to really reduce their
retirement saving that much from
00:12:44
losing this tax benefit from the
401(k) deduction. And low-income
00:12:48
people that are— this is
definitely gonna boost up
00:12:50
retirement. So overall
retirement saving should
00:12:54
actually increase, and that's
something that they can— they
00:12:57
feel like they can really tap
into and provide things like
00:13:00
streams of income, annuities and
so forth.
00:13:02
Kent, great to see you again. Thanks
very much. - Thanks for having me.
00:13:05
Thank you. Kent Smetters, who is
Faculty Director of the Penn
00:13:08
Wharton Budget Model.
00:13:09
- Thank you for listening
to <i>The Ripple Effect</i>.
00:13:11
We hope you found this
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00:13:13
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00:13:17
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00:13:20
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