Jack J. Davis (
Spencer Williams (Persumma Financial): There’s something like 90 million workers in
Arthur Gensler (M. Arthur Gensler Jr. and Associates): The generational thing is the big issue. You clearly have young people who don’t seem to know or care about saving. And we have a group of people who may live to be 100 in today’s environment. And so what does that mean? If you retire at 65, and you’ve got 35 years to support yourself, is that a feasible thing? I think that’s an issue.
Allen J. Lauer (Varian): The issue, the unanswered one, is what is the role of government? First of all, our younger employees just roll their eyeballs when you talk about Social Security. It’s a tax to support today’s retirees. They believe that it won’t be adequate. And might or might not be there. Their biggest annoyance is the $10,500 limit on their own personal pre-tax contributions. Raising those limits would be a very popular move.
Thomas Hagan (Volex, Inc.): I am more pessimistic than you guys in that I have a factory workforce. My opinion is based on a 50 percent or less 401(k) participation rate in the factories, which I think is typical across the
Michael Tanner (CATO Institute): The median income in the
Douglas C. Rhodes (Cexec): Back to the original question of where we stand philosophically, I think the consensus is that it’s a joint responsibility of the government, the companies, and the individual. Most of the new jobs being created are minimum wage jobs. So, if we have full employment at those wage rates, what are companies to do? There is a limit to how much we can participate.
Thomas J. Garrity (AdvancePCS): Is Social Security a relevant concept in light of what retirement’s likely to be 30 years from now? I guess where I come out is that the individual has to be the CEO of his or her own retirement. And yet, I think government always, as in all Western democracies, has the responsibility as the insurer of last resort.
Gensler: It seems to me that the biggest fear that everyone has is medical expenses and the cost of drugs. The one terrible fear is, “What if I really get sick? Do I drain my family and everything else?” I’m violently opposed to taking that on, but somehow I do believe that government will have to have a fail-safe protection on that piece of the retirement expense.
J.P. Donlon (CE): Spencer, you promised some best practices.
Spencer Williams (Persumma Financial): Just a couple. There is a thing called automatic enrollment. In the first generation of that, you usually put everybody into a plan, and you give them the benefit of a 50-cent match. That’s a 50 percent return on the dollar. You are seeing more and more of that in business, which is kind of a twin to a profit-sharing plan. You use your mature workers to educate the younger workers. It’s a different angle on education.
Another is putting after-tax savings in the plan. It’s a great way to get a consolidated account and start building.
And last, but not least, one company actually had kind of a reverse signing bonus. After a three-year tenure, the company contributed $5,000 to their 401(k) account. It was part of the contract when they came on board. They found that saving is a learned experience and a joyful thing. And the tip point was $5,000. When somebody had $5,000 it became meaningful, and it encouraged future savings. So, those are some of the best practices today.
Donlon: What sort of things can we reasonably expect in the near future?
Williams: Last year was the first time that elements of portability, not full portability, were introduced in legislation. In a sense, it fulfills our ethical responsibilities to people to allow them to save continuously. Kind of a clear, unobstructed path to and through retirement. That’s a good thing. On the other hand, they get to run faster.
The other thing that was in legislation this year was not only raising the pre-tax limit, but also for the first time a look-back provision. And the look-back provision was essentially for someone who was 55 who hadn’t made a full, or hadn’t the opportunity to make a full, contribution in earlier years. You can certainly anticipate those issues being resurrected. The big one is the universal 401(k) and the privatization of Social Security.
Tanner: There was a veto threat on expanding the limits on 401(k)s. I assume that’s gone now that we have a new administration. But you don’t know how much Democratic support there is going to be. There were objections that this is another tax break for the wealthy.
Williams: At the last minute some parties came in and basically raised enough objections to put it back out into the hinterland.
Gensler: Does anybody really believe that the government would ever let Social Security go? In other words, not deliver.
Tanner: I don’t believe it will. But, the two questions are: What will it deliver? And at what cost to you and your employees?
Today, if you took a vote inside the beltway the retirement age would get raised very quickly. You would have to raise the current age to about 72 in order to make Social Security solvent. It’s not going to happen. It’s the least politically popular of all proposals for Social Security reform. Privatization, higher taxes, all these things are more popular. In fact, a lot of people want to retire younger.
You also have serious problems. I am going to push papers until I probably keel over at my desk. However, there’s a very big difference when you say to a longshoreman or a coal miner, you’ve got to raise your retirement age. You also have to deal with the racial disparity in life expectancy. So, you are going to have those sorts of issues when you get into raising the retirement age.
And it’s just a bad deal. Especially for a sophisticated group. Your younger employees understand more about investment. They know that when they collect Social Security, the best they can hope for would be about a 1 percent rate of return on their money. Most young people would get a negative rate of return.
The rest of the world is recognizing this. That’s why countries in
Lauer: 100 percent?
Tanner: About 87 percent of Brits have moved into the defined contribution system.
Tanner: Much higher benefits and much higher rates of return.
Donlon: That’s a key element. Social Security in countries like
Tanner: You actually have a property right in it that you don’t have under Social Security. The Supreme Court in the
Donlon: Which would shock most average American workers if they knew that.
Tanner: That’s right. Congress can take away their benefits or change them anytime they want. And they do. We have raised Social Security taxes 38 times since the program began. We have reduced benefits. With a privatized system, you own that account. That’s a huge difference.
Barry A. Fromberg (Suiza Foods): So what’s the problem?
Tanner: There are two problems. One real and one political. The real problem is that you do have to find a way to fund the transition from one system to another.
Pollard: Other countries have faced similar problems.
Tanner: That’s right. It can be done. But, it can’t be done painlessly. And that’s always a problem for politicians. The fact is if we are going to allow young people to take a part of their payroll tax and invest it, then you’ve got to continue to pay the current beneficiaries their benefits. That means finding money somewhere else. Money is available. You have a $6 trillion surplus projected. You could borrow money. You could raise taxes. You are going to have to do all those things to keep the current system going. The problem is that you have to do it today, rather than tomorrow.
The second political issue is what happens when you don’t have a division between labor and capital anymore. Many politicians in
I will say this year there is a real opportunity. Exit polls show that Americans came out 57 percent in support of some form of privatization. You have people in both political parties who are supportive.
Pollard: When it comes to hard political choices in this country, 99 percent of the time, politicians wait until there is a crisis that strikes fear in the hearts of people and makes the majority at least appreciate that something has to be done. And it holds their feet to the fire and forces the issue.
Tanner: I fear that’s a distinct possibility. And the danger is that the longer you wait the harder it becomes to do. Right now you have the baby boomers at their peak earning years. If you wait until they pass into retirement, you have less money available with which to do anything and more people you’ve got to take care of. What you are liable to end up with again is 1983, when the checks weren’t going to go out and they said, “Oh God, we have to raise taxes.” And you had a huge payroll tax increase. I can see that happening again in 2015.”
Donlon: This issue that Bush had favored is reportedly now drifting off his first agenda. Is that true or false?
Tanner: It has for a couple of reasons. One is that there is no point person in the administration who is dealing with this right now. The second is that they are spending a great deal of effort on this tax cut plan. The tax cut and this are not mutually exclusive, but right now that’s where they are focusing their energy. Which means that people have to tell them to get back to the Social Security issue.
Gensler: Can I go back to Medicare? Isn’t it part of this thing?
Tanner: I wish I had a good answer on Medicare. I love to talk Social Security, and I hate to talk Medicare. Social Security politically is difficult. Economically, you can do the numbers very easily. Healthcare costs are a function of so many other issues that it becomes very difficult. But, we are going to have to have major Medicare reform in the next few years. The unfunded liability for Social Security is $21 trillion dollars. Medicare’s unfunded liability is probably close to double that.
There’s a huge international competitiveness issue. There’s a reason Mercedes Benz builds plants in
Second, think of the capital forward issues when you have these savings regimes in some of these other countries. What is that going to mean for world capital flows? We could get very much left behind on those issues.
Lauer: There is an economic issue here, too. Because to solve these problems really requires an increase in savings. And we know what the savings rate is these days in the
Tanner: Our savings rate is actually higher than the published rate. But still, among the lowest in the world. There are two ways to move to a privatized system. One is that you increase that national savings, which leads to greater investment and growth. The second is you have in effect a marginal tax cut on labor, which leads to greater productivity. So, you also increase economic growth in that way as well.
To compare two countries,
Donlon: Is there a headline answer as to how this issue will play out, in terms of either getting resolved or muddling through? And what actions should business be taking?
Lauer: My general feeling is that there is not enough consensus in the present political atmosphere to get us very far. I think without the Democrats coming over to this issue, we are just not going to get there. We will continue to demagogue the issue. As far as my own actions, every time I have a discussion like this it shows that we must really work with our employees to make sure that they’re knowledgeable in 401(k)’s and investments.
Gensler: I’d say it will be an evolutionary versus revolutionary change. We will make some progress, but not what we should. I really believe that we have to look at the redefinition of retirement and how to address the medical thing, which is almost as important as the Social Security issue. I have been thinking that I have been doing such a fabulous job with my ESOP and profit sharing. But I have not done a very good job at explaining wealth creation, and that is something on which I’ve got to spend a great deal more time. That’s a sea change for me.
Fred Healey (Feature Films for Families): I agree that it will be evolutionary, not revolutionary. Americans by nature like crisis management more than we like planning ahead. What we need to do is spend more time educating our people on wealth creation and also creating some additional incentives. There are some unique vehicles we can create that will motivate people to save and plan for the future.
Fromberg: I have always been somewhat of a pessimist when it comes to how Capitol Hill works and the ability to get things done. I personally am going to try to become more active and talk about this issue and try to move the agenda more toward this issue.
Thomas Furst (SRI International): I have a hard time seeing enough people quickly mustering the courage to deal with this.
Jack J. Davis is president and chief executive of City of Industry, CA-based Ventura Foods, a $634 million manufacturer of edible oil related products.
Barry A. Fromberg is chief financial officer of Dallas, TX-based Suiza Foods, a $4 billion dairy products processor and distributor.
Tom Furst is chief financial officer of Menlo Park, CA-based SRI International, a leading research and technology development organization.
Thomas J. Garrity is chief financial officer of Scottsdale, AZ-based AdvancePCS, a $619 million health improvement company.
Arthur Gensler is chairman of San Francisco, CA-based M. Arthur Gensler Jr. & Associates, $265 million architectural services firm.
Thomas Hagan is president of Fremont, CA-based Volex, a leading producer of electrical and electronic cable assemblies.
Fred Healey is chief financial officer of Murray, UT-based Feature Films for Families, a distributor and producer of motion pictures.
Allen J. Lauer is president and chief executive of Palo Alto, CA-based Varian, a $598 million leading manufacturer of scientific instruments and equipment.
Douglas C. Rhodes is president of Dulles, VA-based CEXEC, a software development and services company.
Rick Shoff is executive vice president of Newton, MA-based Persumma Financial, a full service 401(k) provider.
Michael Tanner is a senior fellow of Washington, DC-based CATO Institute, a nonpartisan public policy research foundation.
Spencer Williams is chief executive of Newton, MA-based Persumma Financial, a full service 401(k) provider.