The United States is notorious for having a low savings rate, a challenge that is becoming more prominent as baby boomers start hitting retirement age. One of the biggest financial questions today is whether the nation can avoid a looming retirement crisis. To better understand possible solutions to this problem, Knowledge at Wharton interviewed Roger W. Ferguson Jr., CEO of TIAA-CREF, a top provider of retirement plans for workers in the education, research, medicine and culture fields with more than $800 billion under management. Ferguson, who is also a former vice chairman of the Federal Reserve, made his comments on the Knowledge at Wharton show, which is part of Wharton Business Radio on SiriusXM channel 111.
An edited transcript of the conversation appears below.
Knowledge at Wharton: Before we get into the retirement angle, your background includes a stint as the vice chair of the Federal Reserve. How much of an increase would you expect to see the first time or two that the Fed moves interest rates?
Roger W. Ferguson: Well, the Fed tends to move things historically [in increments of] 25 basis points, [a quarter of a percent]. And that’s what I would expect…. I don’t think, though, that they are on a path to move rates at every meeting. I think it will be a little bit of movement, and then [they’ll] watch and see how the economy reacts.
Knowledge at Wharton: What are the real points of interest that [Fed Chairwoman] Janet Yellen and the Federal Reserve Bank presidents are watching in terms of the economy? Everybody talks about the number of jobs that are added to the economy each month; the labor participation rate; the actual unemployment number, which is skewed because of the numbers of people that have left the work force. Are there two or three data points that they really focus on when they’re thinking about making this decision?
Ferguson: I think the reality is they’re trying to get a broad gauge of how the economy is doing. And so, you’ve put your finger on the labor market indicators. Those have been ones that they have talked about a great deal. I think they’re also interested in businesses as well — so, [they’re] looking at things like industrial production, looking at the service sector to see how that’s holding up. They’re also interested in some softer things: measures of consumer confidence and business confidence. And finally, I think, they take a little bit of a signal from the financial markets themselves. They probably are well aware, for example, that stock markets in the U.S. have been doing quite well. And that leads to something called the wealth effect. So, they’re looking at many, many indicia.
The other thing is, they are certainly interested in inflation. The Fed has a dual mandate around maximum employment and low and stable prices. I think part of the challenge for them is that inflation has been relatively low and has been running below their 2% target. That disconnect, if you will, between labor markets that seem to be doing much better and inflation that still seems to be relatively low is I think one of the major points of discussion….
“There’s a recent Federal Reserve report that showed that one-third of Americans have no retirement savings at all.”
Knowledge at Wharton: Let’s talk about retirement savings. People in many cases are either unable to save enough or not thinking about the process. You have said in other contexts that retirement savings needs to be something you start thinking about even while you’re still in college, and certainly as soon as you graduate.
Ferguson: This country is facing right now a retirement challenge, and if we don’t respond to it, it could become a retirement crisis. There’s a recent Federal Reserve report that showed that one-third of Americans have no retirement savings at all. And some observers say that for the first time, America’s saving deficit may send a majority of Americans to a retirement in which they are worse off than their parents.
Retirement should be an issue that people start to think about at a very, very young age. In our society, much of retirement depends on individual savings — as defined benefit plans are, for many people, a thing of the past. And what we’ve seen is, you can never start saving at too young an age. Indeed, if you haven’t started saving, you’re never too old to start saving either. So, this is an issue that really cuts across all generations. Gen Ys, millennials should be interested, Gen Xs for sure, and all of us aging baby boomers as well should be very focused on retirement.
Knowledge at Wharton: Financial literacy ends up being a big piece to this puzzle. The OECD’s PISA Study on global financial literacy came out a few months ago, and the United States is only in the middle of the pack. The report drew a lot of attention to the fact that we are not providing adequate financial literacy education to our kids, whether it’s in grade school, high school or college.
Ferguson: I think that’s absolutely right. And you make a number of very good points that I want to echo. First is to start thinking about financial literacy as we think about all other sorts of literacy and numeracy, if you will. There’s a role to play in elementary school, perhaps, but absolutely in high school. And it turns out that, at this stage, only half the states require some sort of financial literacy to get a high school diploma. So, certainly if the other half came along, that might be helpful. Having said that, one of the things that we know is that in high schools, the high school teachers often don’t feel they’re qualified to teach financial literacy courses. So, we have to educate the educators.
Once you get into college I would say the same story holds true. We at TIAA-CREF, in partnership with the Council of Graduate Schools, have launched a program called Enhancing Student Financial Education, in which we’ve given grants to 15 universities across the U.S. to implement financial literacy curricula. And we will be gathering data to find out what works, what doesn’t work, and hopefully, over the next year or so, be able to roll out some best practices to really try to crack the nut of financial literacy, at least at the college and graduate school level.
Obviously, it should just continue going past that. But this focus on financial literacy is one that I would absolutely say is very important to the future health of the United States.
Knowledge at Wharton: You said the percentage of states that require some type of financial literacy course in high school is about 50%. Why isn’t the other 50% doing this? Resources? Teachers who don’t feel qualified? Whatever the reasons, wouldn’t that be something state legislators would want to bring up immediately to try and push through?
Ferguson: I think that’s right. There’s a role for government to play in this. At the state level, [it could be] legislators asking questions of local boards of education as to why it is they do not have a financial literacy requirement. Frankly, we should probably go to the federal level as well. And there, the major issue is around Social Security, in particular, as well as Medicare and Medicaid. But Social Security is the bedrock saving program for the vast majority of Americans. And there’s no doubt that the government can play an important role in thinking about how to reform Social Security so that it can remain financially viable for the indefinite future.
Knowledge at Wharton: How viable do you think Social Security will be as an entity over the next 20, 30, 40 years?
“Some observers say that for the first time, America’s saving deficit may send a majority of Americans to a retirement in which they are worse off than their parents.”
Ferguson: We have to be very balanced around this. Social Security — if we did nothing — starting in about 15 years would be in a situation where it could still pay out about 75% of the expected requirements. So, in that sense, it’s viable. But 75% is not nearly as good as 100%, obviously. And so, the challenge for the current set of legislators in Congress and [for] the administration is to think about changes that we can make to Social Security today to put in the trajectory to be able to pay out 100% of requirements as opposed to falling to 75%.
Knowledge at Wharton: Stocks have been on quite a run over the last couple of years, but you allude to there being a false sense of security in the strength of the markets … [and] that you can invest in the markets, but you can’t rely on that as being your only way of saving.
Ferguson: The reality is the markets offer most people the core of their savings. And the markets have been doing very, very well of late. The most important point I think for most people is they should not try to be market timers. They should follow a very disciplined approach to their investments. They should be broadly diversified. And I think those are some of the major principals of investing.
Having said that — since we’re talking about retirement — the other side is not just this focus on accumulating a big pot of money — we call it “asset accumulation.” The other side of the issue for those who are thinking about saving for retirement is in what’s called the payout phase, which is how do they take all those assets that they’ve accumulated? One, have they saved enough? But then, how can they create for themselves a pension plan? And the answer for most individuals is to combine Social Security with some form of an annuity contract.
I think the retirement discussion has to be about both savings and asset accumulation, and then developing, if you will, a pension through Social Security and the annuity.
Knowledge at Wharton: Do you think that, in the wake of the recession, people are taking more control of their retirement planning and thinking about it more realistically than they were 10 or 15 years ago?
Ferguson: I think there’s no doubt that the recession — combined with the fact that the baby boomer population is that much closer to retirement, and some of them [are] already in retirement — has worked to raise the question of retirement to a much higher level. Just the number of interviews that I am giving [demonstrates that]. I suspect the number of interviews that you are holding around this topic of retirement shows that it has become a big topic.
But having said that, in recent surveys we see that, for example, 40% of Americans say they’re not familiar with the investment options in their retirement plans. And so, even though the level of concern has gone up, and nearly half of Americans are concerned about running out of money in retirement, that’s not to say that their knowledge, their education, their understanding has necessarily gone up commensurately with their degree of concern.
Knowledge at Wharton: We could probably have you on every week for the next 10 years to talk about this issue of retirement savings, because it has become one of the most important, if not the most important, financial topics out there.
“I think anything the government can do to encourage the private sector to incent good behaviors and encourage the right level of savings is a positive thing.”
Ferguson: There’s no question about it. And I think that’s a good thing. The other point I think we need to make about retirement is that, retirement for this generation is going to be quite different from the retirement for our grandparents, for example. Longevity has increased…. At this stage, the life expectancy in America is around 79 years of age. So, many people can expect to live in what we think of as retirement for 20 or even 30 years. That’s quite different from what it was a generation or two ago.
I think the second thing that we have to understand is the nature of retirement may have changed. And in this way, in a good sense, more and more people I think will still have health for a longer period of time. And therefore they can have what’s being called a second act, a second kind of career, perhaps, to supplement their retirement savings. But you put those two things together, and what it does mean is that we still have to encourage people to save, save, save and to plan, plan, plan in order to have the possibility of at least an acceptable retirement.
Knowledge at Wharton: Illinois is trying to make a retirement saving plan almost mandatory for people who work in the state. Do you think that’s a good thing going forward, at least for the short term?
Ferguson: Well, I think another thing the government can do is help to encourage both the government itself and the private sector to create better, more holistic, retirement plans. You put your finger on something that’s very important, which is giving people an incentive to save the right amount of money. What we know is that individuals, during their working lives, need to save something like 10%, maybe 15% of their income in order to have the kind of assets accumulated to pay for a very good retirement. And so, a match from an employer that covers part of that 10% to 15% could be a very important tool to incent the right kinds of behaviors for individuals.
I think anything the government can do to encourage the private sector to incent good behaviors and encourage the right level of savings is a positive thing.
Knowledge at Wharton: Obviously, employers can encourage retirement saving, and many companies want to give employees that opportunity. But companies can probably do even more to help this process out, can they not?
Ferguson: Oh, absolutely. I think companies have to ask themselves the question: Are their employees appropriately literate and informed? Back to what we talked about with respect to financial literacy: We work here at TIAA-CREF with some of the country’s leading academic institutions. And I’ve seen on campuses very big programs around the science of benefits, for example. They have sponsored seminars. One that we’ve seen that’s worked really well is tailoring seminars to different groups.
So, a women-to-women financial program [designed] to encourage women to take more action is quite important. And the women as a segment are very, very important because they are likely to live longer. They’re more likely to have been in and out of the workforce, and therefore maybe saved a little less. They are the ones who perhaps have earned less.
Targeting special groups, and meeting them where they may be when it comes to financial literacy and saving for retirement, is something that businesses can do. And we’ve seen it done very well by some of our leading institutions of higher education.
Knowledge at Wharton: It makes sense that having a segmented approach — women with women, men with men, college kids with recent college graduates — might be the best way to reach people.
Ferguson: We think so. And you talked about recent college graduates. One of the things that we have seen is [that] college students and recent college graduates are very curious to learn more. They don’t want a heavy sell. They do want to have these questions answered. But a point that you’re implying, they seemed very intrigued to have their peers — individuals that they may know or respect — tell real life stories, as opposed to having someone lecture them.
I think there is an absolute need to have this segmented and tailored, to meet each group where they may sit.
Knowledge at Wharton: You’ve done a variety of interviews about this over the last few months: It’s clearly a very important topic for you as the CEO of a major company.
Ferguson: It’s absolutely very important. First, my company is almost a hundred years old. We were created to provide for the retirement security and, more broadly, the financial security of people in the not-for-profit sector. We in some ways created the first retirement system. We pre-date Social Security, for example. So, this issue of retirement is for me bread and butter, if you will. It’s what I think about, and it is the mission of my company. And I’m very proud to say that we have managed to do this, I think, quite well for folks in the not-for-profit sector coming up on a hundred years.