Money Talks: What Retirement Crisis?

0:04Andrew Biggs: Hello and welcome to Money Talks, a special extra podcast from Slate where we chat with brilliant and interesting people. I'm Emily Peck. I'm a writer at Axios and co-host of Slate Money and I'm here today with Andrew Biggs. He's an economist at the American Enterprise Institute, former deputy commissioner in the Social Security Administration, and for our purposes, most importantly, the author most recently of a book titled The Real Retirement crisis, colon, why almost everything you know about the U.S. retirement system is wrong. Andrew, welcome to Money Talks.

0:36Emily Peck: Well, thanks very much for having me. Great to be with you.

0:38Andrew Biggs: So, I mean, I'm just going to start with like a small question, which is why is everything I know about the retirement system wrong? And could you explain it in one sentence for our listeners right now?

0:51Emily Peck: Well, the short story is that nobody really has the incentive to tell you the more encouraging facts. The financial industry has a product to sell. They want you to buy more of it, which is investments. The media, they have the incentive to write stories that you'll click on and frightening stories do that. And to be honest, there are people in politics and government who also either don't believe that private savings work or want to scare you into their preferred policy solutions. So there's really nobody has the incentive to tell you a different story than what you call it here.

1:25Andrew Biggs: Okay, so we're going to get into Andrew's story, the story that you need to hear, the positive take, when we come back. All coming up on Money Talks.

1:40Andrew Biggs: So I guess we should just start kind of big, which is why I came to you in the first place a few months ago, because I had been told to write about the retirement crisis. and I called you and you were like, well, actually there is no retirement crisis. And I was like, well, shit, that's the story I have to write.

1:57Emily Peck: So what the hell?

2:00Andrew Biggs: Here's my understanding, which I think isn't right or needs more explanation. My understanding is people have 401ks now. They don't have pensions the way they used to and pensions pay you defined income in retirement and your 401k, you're just saving. You don't know how much income you're going to actually have in retirement, it's scary. And you'll see a lot of stories that say most Americans don't have enough saved in their 401ks to make it through retirement. And you're saying that's not true.

2:28Emily Peck: It's just basically not true at all. It's not often that I quote Stalin, but he had a saying, he says, quantity has a quality all its own. And so some people will compare a 401k where you have your account can go up and down with the risks of the market and say, Well, clearly that must be worse than traditional defined benefit pensions where you're a guaranteed monthly benefit for life. But that doesn't tell you the whole story. I mean, part of the story is a lot more people have 401ks today than ever had defined benefit pensions back in the day. If you go back to 1975, when coverage from traditional pensions peaked in the private sector, less than 40 percent of private sector workers were ostensibly participating in a plan.

3:18Emily Peck: Meanwhile, a congressional study at the time found that literally nine out of 10 workers who were supposedly covered by a defined benefit pension never actually collected a benefit from it because they had these very, very strict vesting requirements. So it's a pension that very few people are covered by and even fewer collected benefits from. As we've moved into 401ks today, about 72, 73 % of private sector workers are offered a retirement plan. About 55 % participate. But with a 401k, both the employer and the employee contribute to it. With the old defined benefit pensions, only the employer did.

3:58Emily Peck: So if you look at total contributions to retirement plans today, they're much, much higher than they were in the past. More people have 401ks, and both employers and employees are paying in. As a result of that, retirement savings are far higher today than they were back in this golden age of pensions. So you really have to look past this sort of simple narrative of 401k versus pension and actually get into the data, which are not hard to find. And it just tells you a very different story.

4:29Andrew Biggs: Let's go into the data. First, if what you're saying is accurate and not as many people had pensions as we think that they did, how were people affording retirement back then?

4:43Emily Peck: Well, part of the answer is they weren't. If you go back to the 1970s or 1980s even, retirees were a disproportionately poor part of the population. The stereotype of seniors eating cat food and all that kind of stuff. It was never quite true then, but they were more likely to be poor than working age adults were. If you went to 1980, there was a survey done by the Social Security Administration where they used to work where they asked new retirees or sources of retirement income, only around a quarter had any benefits at all from any sort of private pension. That was mostly right at the top of the income distribution.

5:21Emily Peck: People below that, they had Social Security. Some might have had a government pension, the military or the working state and local government. But very, very few had these traditional pensions. That's one reason why they were poor. The whole economy was smaller then, but the retirement system was not working as well. Today, retirees are a disproportionately rich part of the population, not just in wealth, but in income. Their incomes over the past 40 years have grown much faster than those of working age adults. Partly it's because social security benefits are, in fact, higher. They're substantially higher in real dollars than they were in the past.

5:59Emily Peck: But on top of that, many more retirees are getting benefits from a private retirement plan, whether it's a 401k, an IRA, a traditional pension. Around two-thirds of retirees today are getting private pension benefits, far higher than the past. We're also working longer, which gives us either additional income in retirement, or it lets us delay spending down our savings. So retirees' incomes today are at record highs. They've never been higher. And I'm not just talking the average retiree driven up by a few very wealthy people. It's just across the board, incomes are very, very high.

6:40Andrew Biggs: Just to keep going back to that old-timey comparison, and you raised this, but people are living longer now. So even though retirees have more money, don't they need more money? Because life expectancy has gotten so much, you know, people are older, so the needs have changed. So even though perhaps people have more money, perhaps they need the more money and there's still gonna be an issue once they cross the 80-year threshold or things like that. I've seen some arguments like, well, things are okay until you hit 80 and then once you hit 80, it's gonna get bad. And I sort of remember you saying, well, once you get 80, you don't need as much money because you're 80 and you're not doing as much.

7:19Andrew Biggs: You're not as active. To which I say, look at the president.

7:22Emily Peck: Well, sure. Okay. There's a variety of different things going on there. Yes, we are living longer today than we did in the past on average. Not everyone is. So if you're thinking about lower income retirees, that's the people where there's a claim they're not saving enough. Well, for reasons that we regret, they are not really living much longer today than they did in the past. So they don't, in fact, need more retirement savings. That's dark. It'd be great if they did, but you have to look at the facts of it. But it's also retirement savings today are much higher than they were in the past, even when you account for the increase in longevity.

8:01Emily Peck: You know, total retirement plan contributions in the private sector here today are a bit over 9 % of wages. If you go back to the 1970s when we were working with traditional pensions, there were less than 6 % of wages. So we're essentially putting aside 50 % more, you know, 9 divided by 6, 50 % more towards retirement than we were back then. We're not living 50 % longer. So total retirement savings are just dramatically higher today than they were in the past. So yes, longevity is a challenge. And it's certainly a challenge for something like Social Security, which hasn't really fully prepared for it.

8:41Emily Peck: But on the household savings side, we're simply saving a lot more than we used to. We're also retiring about two years later today than we did in the 1990s. So people are adjusting to this. And that's why you don't see what people have been predicting for 20 years, this retirement crisis. They keep saying it's going to happen. And instead of things getting worse, things just keep getting better.

9:05Andrew Biggs: Right. I've also heard the argument that, yes, there's more savings now. But because of changes in how we pay for things like health care or housing, both costs have gone up a lot for older Americans. Like more of them have mortgage payments into their later years now. And health care costs have also gone up. The argument is, yes, there's more money in the retirement accounts, but they need more money to just meet these basic needs, housing and health care.

9:33Emily Peck: Well, if you look, think about health care. If you look in a consumer expenditure survey, which looks at the spending patterns of U.S. households, seniors today spend around 11 % of their incomes on health care. If you go back to the first year that that survey came out, 1984, seniors spent around 11 % of their incomes on health care. And so essentially, yes, health care costs have increased. Retirees' incomes have increased just as fast or faster. Again, this isn't super hard to figure out. It's very easy to paint a dire picture. Oh, you're going to end up in a nursing home. It's going to cost you$200 ,000 a year.

10:18Emily Peck: Okay, how often does that happen? Answer, very, very rarely. So it's just a lot of times the discussion of retirement that you get, either in the news media or in public policy circles, it has just enough data to be dangerous, but not enough data to be accurate.

10:38Andrew Biggs: Okay. I want to talk about what I think is perhaps a real crisis, and maybe you'll disagree also, but I think you won't. 2030, that's the year that social security benefits would have to be cut by a lot. I didn't write down the number, unfortunately.

10:53Emily Peck: The best estimate that we have now is 2032 is when the trust funds would run out. And the benefits have to be cut by around 23%. Okay.

11:03Andrew Biggs: So 23 % to social security benefits. I think it's fair to say that the retirees who get social security checks will freak out about that. And also fair to say that even if there are a lot of things you can do policy-wise to sort of address this coming cliff, that there's no political will to really do the hard things, either raise taxes or cut benefits. So that seems like an actual retirement crisis to me.

11:33Emily Peck: That would be, as the title of my book hints, the real retirement crisis in the sense of, and it's not just the US, you can look at countries around the world at what they call retirement savings gaps. The amount of money by which countries are short of what they need to provide retirement for their populations. In nearly every country, those retirement savings gaps are overwhelmingly on the government part, whether it's social security, or here in the US, you have state and local government pensions, they're underfunded. I mean, Social Security is underfunded by something like$26 trillion. State and local government pensions, I don't know, about$4 trillion maybe.

12:13Andrew Biggs: Wait, just to stop you, what does it mean when you say it's underfunded by$26 trillion? That's an enormous amount of money.

12:20Emily Peck: What that means is Social Security's finances are traditionally measured over 75 years. The idea is, let's say you're a 20-year-old kind of entering the workforce today. You're probably not going to live past 95. So they measured over a 75-year period. What the$26 trillion figure means is over the next 75 years, Social Security has promised $26 trillion more in benefits than it will collect in taxes under the current sort of tax formula. That far exceeds even the most dire estimates of the retirement savings gap on the household side. And I think in the book, I say quite a reasonable amount by which households have undersaved is maybe$2 trillion, something like that.

13:08Emily Peck: It's difficult to measure, but it is nowhere close to the amounts by which Social Security is underfunded, other government pensions are underfunded. That is where the real crisis is. Now, nobody thinks we're in fact going to cut Social Security benefits across the board by 23 % in 2032. That's not what the law would require. The administration, the president at the time, would have some leeway on what they had to do. Even if Congress said, we're not giving you a penny more of tax revenues, which is unlikely. But even if they said that, the president could say, okay, we're going to reallocate money to prevent people falling into poverty and sort of cushion the blow.

13:50Emily Peck: I wrote a paper in the past year with a lawyer in DC, and we calculated that even if the trust fund ran out, you could pay 50%, the bottom 50 % of retirees, every penny they've been promised, cap benefits at around$2 ,200 a month per person. You wouldn't throw anybody into poverty. The system will be balanced without tax increases. I'm not saying this is the solution you want to have. What I'm saying is that this is a more survivable kind of thing than people think. The real problem, as you said, is not the finances. It is the political will. If we look around the world, countries very much like our own, whether it's the UK or Australia or New Zealand or Canada, they face the same challenges of population aging that we do.

14:40Emily Peck: They've more or less gotten on top of these problems. The reason we haven't is our political system, it's very hard to get things done. It's extremely hard. If you're in Canada, the parliamentary system, you have the majority say, this is what we're going to do, and we do it. It's the same in the UK or Australia. Here, you have to get a social security reform bill through the House. Then you have to have 60 votes in the Senate. Then you have to have the president sign it. Then probably you'll have to go to the Supreme Court for some reason or another. It's just, If you look at big reforms, even something like the Affordable Care Act, Obamacare, he had massive majorities in the House and Senate, and that got through by the skin of its teeth.

15:22Emily Peck: They're still fighting over it. Yeah, it's very hard to do things here. And so it's partly as our political setup, the structures of what it takes to get things done, but it's also political polarization. that members of Congress would rather attack each other or just kick the can down the road than actually try to solve these problems. It's not an easy financial problem to solve. I mean, if you're a fixed Social Security just by raising taxes, that's the largest peacetime tax increase in U.S. history. At that point, especially if you hit high earners, they're tapped out. You're not going to get more money out of them.

15:57Emily Peck: So then you have to say, well, what about all the other things we want to do. If you want Medicare for all, work and climate change or whatever, you don't have any money left. So it's not a small amount of money, but it's not that complex a problem to solve. It's really a lack of leadership, a lack of political will.

16:14Andrew Biggs: And the choices that make the most sense, I feel, are the least politically palatable. You don't want to tell upper middle class retirees or people who are about to become middle class retirees that, oh, we're capping your benefits so that these other people don't fall into poverty. Like traditionally, that's not what Americans want to hear at all. But at the same time, there's so much support. It's so interesting, Andrew, to think about it because there's so much support for Social Security at the same time when you look at like the polling, young people under 30, especially they don't believe that the program will even exist when they retire.

16:52Andrew Biggs: So I feel like for politicians, that might even represent an opportunity to do something quite drastic.

16:58Emily Peck: Sure. I think the most unhelpful myth about Social Security is the idea that we've all earned our benefits. I can find quotes from Joe Biden saying this. I can find quotes from Donald Trump saying it. And clearly, we all pay into the system. So in that sense, you've contributed towards your benefits. But if you look at Congressional Budget Office data for people retiring in the 2030s, right when the trust fund is going to run out, those people are projected to receive about a third more in lifetime benefits than they paid in taxes over their careers, including interest on their taxes. In other words, you're simply promising people far more in benefits than they paid into the program.

17:42Emily Peck: Now, you don't have to be that sophisticated a mathematician. That can't continue forever. But everybody thinks they've paid for their benefits. So they have this moral claim, this feeling that is not simply, I want the money or I need the money. It's, I deserve the money. And I don't blame people for thinking that because that's what they've been told, but that's not what the data tell you. And unfortunately, the numbers are sort of intractable. You can't just, through rhetoric, convince the numbers to be different than what they are. So we do have to have a more honest conversation with people and say, look, we can't continue paying people dramatically more in benefits than they paid in taxes.

18:23Emily Peck: Now, I mean, Social Security is a social insurance program. So within any sort of birth cohort of people or any group of people, some people are going to get more, some people are going to get less. Because we do want to supplement the people at the bottom to keep them out of poverty. But we can't pay everybody more. The two ends have to balance out. You can't be promising people as a group a third more in benefits than they paid in taxes. Because then the younger people, they do have a justifiable fear. I mean, the system is not going to go away. As long as we're collecting 12.4 % of people's wages in payroll taxes, we will have money to pay out.

18:59But when you keep paying people or keep paying retirees more in benefits than they paid in taxes,

19:07Emily Peck: that's like the toothpaste tube. You squeeze on one end, it comes out the other. And the way that plays out is that the deal for younger Americans is going to have to be worse because they're going to have to pay for their own benefits, but all these excess benefits that were paid to today's retirees. It's not supportable financially. It's just not fair either.

19:25Andrew Biggs: I want to talk about Trump accounts. We are taping on a day where the Treasury Department announced more details about these accounts, which are savings accounts created by Treasury that parents can put money into and that the White House is going to put money into for the next, coincidentally, ha ha ha, four years. They'll give$1 ,000 to every baby born from 2025 to 2028. They're billing this as like, I mean, I think Scott Besson said it was the most consequential policy announced ever or something really along those lines. And he said before, and he walked back the statement pretty quickly, but he said, this is something that could be a backdoor way to privatize social security.

20:07Andrew Biggs: And it's something I've been sort of wondering about because you have a lot of conversation about the cliff coming in 2032. You have the reality of like, we can't keep going this way with Social Security. Then you have these new accounts, which are really meant for people to get when they're babies and can be held until they retire. And, you know, they're promoting them not as a safety net per se, but like as a way to discover the magic of compound interest and to get invested in the stock market. And Besson did say that before he rolled it back. So I have been thinking, and I wonder what you think, like, is that something that's like out there people are talking about?

20:44Andrew Biggs: Is it a possibility when the time comes to reform Social Security that someone will say, well, we have these accounts. Maybe we should change the way we, you know, make those bigger for people.

20:54Emily Peck: The accounts are interesting. I mean, philosophically, I believe in an ownership society. I think there's a lot of evidence to suggest that people becoming owners, whether it's of retirement savings or a homeowner, that is healthy for people. But at the financial level, I mean, in my book, part of the argument I make is that there really isn't very much evidence that low-income Americans need to save more for retirement. If those low earners should save more for retirement, what you would see is that as people retire, the poverty rate would go up because people discover they hadn't saved enough, their incomes aren't enough.

21:31Emily Peck: What you see is, in fact, the poverty rate declines pretty significantly as people shift from work into retirement. So that just undercuts the idea that they haven't saved enough for retirement.

21:41Andrew Biggs: I actually don't understand your point. So if people save more when they're working, they will have less when they retire? I don't understand.

21:47Emily Peck: If you just look at the poverty rates of people just before they retire compared to just after they retire. Now, if they hadn't saved enough for retirement, you would expect poverty increase, right? Because they discovered, hey, I've stopped working. I'm not getting any wages or salaries, but I don't have any savings left. So therefore, poverty would increase. What you see is, in fact, the opposite of that.

22:11Andrew Biggs: Isn't that Social Security doing its job?

22:14Emily Peck: Sure, it is. But it's not just Social Security. It's a variety of things. But the point is that if these people were not saving enough, poverty would go up. In fact, poverty is going down. So the idea they need to save more is just weak. And yes, the Social Security replacement rate for somebody at the bottom of the income distribution is pretty high. They'll get the Social Security benefit equal. They're at 80 % or so of their pre-retirement earnings. So they really don't need to save more, which is why they don't save more. But then you have to say, OK, we're going to have these Trump accounts.

22:50Emily Peck: Well, high-income people can save. They already are saving. So presumably at the margin, the beneficiaries, the Trump accounts will be low-income people. I'm fine on making them into investors and giving them this start. What I suspect you're going to see is people are not going to hold it for retirement because they're not under saving for retirement. They will use it, say, for a home purchase, for college tuition, things like that. And I guess it's fine. But the idea to say this is the most consequential policy, it's very hard to – if you set these retirement savings accounts up today along with a plan saying, yeah, we're going to reduce Social Security in the future, that would be consequential.

23:33Emily Peck: Because we're saying, look, we're going to make an effort to save more for retirement to make up for the fact that Social Security benefits are going to have to be lower.

23:40Andrew Biggs: But don't you think that's sort of like what is happening? It's setting up a mechanism where that could be something that happens, I guess, is what – the setting up the infrastructure to kind of find this like private market way to solve this coming social security crisis.

23:55Emily Peck: And maybe they're thinking that, but I suspect that's not in fact how this plays out. Because you can't just pull the rug out from underneath people.

24:02Andrew Biggs: Right.

24:03Emily Peck: Any changes to social security benefits have to be very gradual. Just as, for instance, the social security retirement age today is 67 to get full benefits. when the program started in 65. The increase from 65 to 67 was legislated in 1983. It started, I believe, in 2000, and it's just reached 67 today. So you've gotten an over 40-year kind of warning on this thing. Nobody really complains about it today. Everybody's adjusted. We're working longer. You can't set up these accounts and then say, oh, surprise, it's 2032. we're taking away your social security benefits. These things have to work together.

24:44Emily Peck: So I think if they think this is going to fix the social security problem, I think they're kind of deluding themselves.

24:50Andrew Biggs: Okay. I want to break. I have one more policy wonk question, and then I want to just talk about things people can do and all of the personal finance-y stuff. That's always fun. And you have great advice, I think.

25:10Andrew Biggs: So the policy question, I read your recent sub stack on this. The president recently talked about how the Australians do retirement. I don't think anyone in America actually knows what he's talking about, but you did. So I was reading your posts and what Australians do is actually really interesting. I feel like their program, the way you've described it, addresses some of the big flaws with our retirement system, especially for poor people, especially, who didn't work enough to really pay into Social Security at all and wind up on supplemental social insurance, which is not a lot of money. But I'll just stop talking.

25:49Andrew Biggs: Explain the Australian system.

25:51Emily Peck: Think about it just sort of in qualitative general terms. If everybody was saving for retirement as they should, then the burden on Social Security would be lower. You'd still need it to help protect poverty against poverty in old age, but you wouldn't need as high benefits to be paid to middle income and upper income people. Everybody would be saving. That's essentially where Australia started. And this is around 1990. They set up a system, they call it superannuation, where every worker is offered a retirement plan on the job. Every worker signed up for that retirement plan, and their employer contributes about 12 % of their wages to that retirement plan.

26:33Emily Peck: So you've got everybody virtually saving for retirement. At the same time, they set up a program to prevent poverty in old age, and that's called the Age Pension. And that provides, it's a means-tested minimum benefit for seniors that is designed to guarantee you will not fall into poverty. For a single individual, I think the minimum benefit is around$20 ,000 per year, but it's means-tested. So if you're a higher income person, your benefits from this age pension are reduced. If you're a lower income, you still get it. So I think around two-thirds of Australian seniors are currently getting part of this means-tested age pension, and then they have their retirement savings on top of that.

27:18Emily Peck: The key is that as the Australian system becomes fully mature, it's been running for 30 years or so, but that's not quite a full career. What's going to happen is people's retirement savings through the superannuation system, these universal retirement plans, they're going to increase. And so they're going to depend less upon this means-tested age pension when they retire. The upshot of it, I mean, there are a couple of upsides. One is you're having the retirement savings done by the part of society that is good at saving for retirement, which is households and the private sector. As I said, retirement savings in 401ks have never been higher.

27:58Emily Peck: Governments are terrible at saving for retirement, whether it's in the U.S. or around the world. They promise things they don't pay for them. So you're shifting more of the burden of saving to the place that's good at saving for retirement. You're having government focus on what government does best, which is transferring resources to help people who really need them to prevent poverty and old age. So Australia has a much stronger minimum benefit, a much stronger anti-poverty benefit than Social Security does. So you're doing what I think in common sense is efficient, this division of labor where government does what only government can do.

28:36Emily Peck: It doesn't try to do things it's bad at, like saving. We just simply have more of that going on by individuals, households, financial firms. But we're making sure everybody has the opportunity to do it on the job. And we're making sure that people are signed up and the contributions are made. Just to give you just quick numbers. Right now, the Australian government for this age pension, this anti-poverty benefit, costs about half as much as the Social Security retirement plan. If you go into the future, it's going to cost about a third as much. So people will say, oh, well, it doesn't pay as much as Social Security.

29:12Emily Peck: Sure, but it leaves a lot more money on the table to fix Medicare, to avoid a debt crisis, to do whatever you want those federal resources to do. So I just think it's a much more elegant system. If we were inventing Social Security from scratch today, we would almost certainly do something like this.

29:32Andrew Biggs: And so to be clear, so if I'm someone who makes$100 ,000 a year, my employer is paying an additional$12 ,000-ish a year into a retirement account. And then I can also decide I want to contribute, you know, whatever it is,$2 ,000.

29:48Emily Peck: You can contribute on top of that. And most Australians do when they have a tax incentive. But the core part from a sort of public policy standpoint is the combination of these mandatory contributions, which come from employers, along with this means-tested minimum benefit. That covers most of what Social Security does. And the way the benefits are paid out, the levels of benefits to people at different income levels are very similar to Social Security, but they're just more of it is coming from private savings at the top end. At the bottom end, more of it is coming from this government age pension, the anti-poverty benefit.

30:22Andrew Biggs: I think that's super interesting. Also, because in this scenario, I have my$100 ,000 income, 12 % of my salary is going into paid for separate. I don't pay for it. They're paying for it. The boss is paying for it. I'm not paying a 6 % social security tax anymore out of my salary. So I feel like that's great. Also, I don't see American employers agreeing to paying that much into people's retirement accounts. That's why we wound up with 401ks in the first place. They wanted to stop contributing to pensions.

30:55Emily Peck: But just the historical correction is employers contribute about the same amount to employers 401ks today as they did to pensions back in the day. The employer contribution hasn't really changed very much.

31:07Andrew Biggs: And it wasn't - I mean, my employer contributes, I think, 3%, not 12%. Oh, sure.

31:13Emily Peck: No. The Australian system, they'd be paying much more. My point is, it's important to get the transition historically - Oh, the pensions weren't that much. From pensions to 401ks. It didn't happen for the reasons people thought. Pensions started to go way before 401ks were even invented. And the reason for that is in 1974, the federal government decided we've got to regulate these private pensions because they were terribly funded. Employees weren't getting paid benefits. So they increased the financial supervision. Once businesses had to actually fully fund these things, that's when they started to decline.

31:48Emily Peck: 401ks came in really 10 years later and kind of picked up the slack and made up the difference. and I think they did it successfully. But this dynamic that employers wanted 401ks to get rid of the pension, just the timing and the history doesn't work. But just to go back to Australia, I mean, if you're a lower income person, it's the employer is making a contribution. The age pension, this means tested anti-poverty benefit, that's paid out of general tax revenues, income taxes. So lower income, people are not paying very much of it. So this is a pretty progressive system. And it simply has much stronger guarantees against poverty.

32:26Emily Peck: I mean, it's one thing that bothers me about the way the social security reform debate works in the U.S. is as soon as you mention change to social security, you get some overheated rhetoric about poverty and old age, social security safety net, and so forth. Keeping retirees out of poverty is inexpensive, and it's really a very minor part of what Social Security does. If you look at people who are in the bottom 10 % of the income distribution among seniors, these are the people who would be in poverty. They receive somewhere around 2 % of total Social Security retirement benefits. What is going on is, let's say if you have a middle-income couple retiring today, they will receive somewhere around$58 ,000 in combined benefits.

33:11Emily Peck: A high-income couple will get somewhere around$98 ,000 in benefits. That is far more than other countries pay. And if you were in Canada or Australia or UK, the maximum benefits in those countries are one third to one half what we pay. So the funding problem we face is not keeping people out of poverty. It's running a pension system with increasingly generous benefits for middle and high-income retirees who literally are the richest retirees on earth. So if we focus reform and say, look, we've got to guarantee people that they're not going to retire into poverty. That's something the Australian system does do, which Social Security doesn't.

33:52Emily Peck: That's very inexpensive to do. It really would not cost very much money at all. Once you do that, then you can have a more rational conversation about what the rest of Social Security reform should look like. How much more Or do we want to raise taxes to keep paying more and more benefits to middle and upper income seniors? Or do we want to scale that down and say to them, look, you're going to have to save more for retirement on your own and set up the means for them to do that. So it's just the understandings of what Social Security does and where its cost drivers are. If people don't understand that, it's really hard to have a very productive conversation about Social Security reform.

34:31OK.

34:32Andrew Biggs: Well, first, Andrew, I have to ask you this, because I was emailing with you recently, and I was just like, can you just tell me in the next hour what people need to do to get ready for retirement if they're worried they won't have enough money? And you said a lot of people have too much saved for retirement. I, Andrew Biggs, have too much saved for retirement. Is that true? Am I making this up? Did I hallucinate that you told me this?

34:53Emily Peck: No, no. Yes, by any objective measure. It's a funny sort of dynamic over the course of your life. When you're younger, you're like, I'm never going to have enough money for retirement. And again, I'm telling this from the point of view. I mean, I work at a think tank. So this is not sort of Jeff Bezos territory, but clearly upper middle class. But when you're young, you're like, I'm never going to have enough money for retirement. I haven't saved enough. Then there's like one nanosecond where you're like, yeah, I've got it. I'm on track now. And the rest is you just keep saving like that because it's a habit and you end up with more money than you really need.

35:31Emily Peck: And then you start thinking, how do I avoid taxes on this thing? Your focuses get to be different. I mean, it's when I've done some work on this in the past, and you have a lot of Americans who have, in fact, oversaved for retirement. And that's one reason why you don't see seniors really spending down their retirement savings. This idea we're all going to run out of money, the typical household's net worth increases as they get older. It doesn't decrease. They just kind of hold on to their money. That said, there are people who have undersaved and they're getting on in their careers and they're saying, what do I do about it?

36:11Emily Peck: And I think there's really a couple things you can do. One is, and this also holds if you're concerned that Social Security benefits might be cut. We don't know how the trust fund problem is going to get resolved. So there's some risk there. Just increase the amount you're saving out of your paycheck by a couple percentage points, you know, two or three percent more into your 401k. You will get used to the loss of income very quickly. And that will help cushion things, say, if Social Security benefits are cut. Now, if Social Security reform is resolved, they say we're going to raise the payroll tax rate to keep paying full benefits.

36:45Emily Peck: Well, you can dial back on the amount you're saving. But the basic point is to try to ensure against some of that uncertainty about how Social Security is going to get fixed. The second thing you can do is simply work an extra couple of years. And I understand not everybody can do it. But back when I was getting into the sort of the social security reform policy area, you know, late 1990s, at this point, people were claiming social security age 62, labor force participation among older Americans was really at record lows. And there was this idea, oh, Americans can't work longer. A lot of people were saying, we need to raise social security retirement age.

37:19Emily Peck: But you had others saying they can't work longer due to health problems, lack of available jobs, age discrimination, and so forth. One nice thing about getting older is you can look back and you know how that question was answered. The labor force participation rate for people aged 55 to 64 is today at the highest level on record. Compared to the 1990s, on average, we're claiming Social Security benefits two years later. The average claiming age is 65. That increases your benefits by around 13 % for the rest of your life. Delaying retirement doesn't just help you with Social Security. It also gives you an extra year or so to save for your savings to be grown by compound interest.

38:02Emily Peck: And it shrinks the number of years those savings have to cover. Now, I know there's people out there saying, oh, this will never work. It can't happen. I just say, look back on the last 30 years or so, and you can see the evidence that it has in fact worked. And it's not just college professors teaching until they're 80 or something. This is a fairly widespread phenomenon. So if you can manage to work another couple of years, if you can increase your retirement plan contributions by a couple of percentage points, that can have a pretty dramatic effect on your prospects for retirement income security.

38:34Andrew Biggs: Right. Because if you wait till 70, I know you said the average age was 65, but if you wait till 70, the social security payments are even higher, and then you've got those extra years with your money in the stock market growing and the contributions?

38:46Emily Peck: It's just worth pointing out to people that the incidence of real financial want among seniors is really quite low. If you look in survey data, Gallup generally asks people, and the question is, do you have enough money not just to survive, but to, quote, live comfortably? About eight in 10 seniors say they do. When seniors are asked, would you consider your financial situation a retirement crisis? Are you finding it difficult to get by? Less than 5 % say that's what they're facing. So again, it doesn't mean we should ignore the 5%. We should be trying to fix that. But if you think we're all going to hell in a handbasket, it's not just a harder problem to solve.

39:26Emily Peck: You're misunderstanding what the problem is. We do not have widespread savings shortages or widespread shortages of income among retirees. They've literally never been better off than they are today. We do have pockets of it, though, and we want to address those by looking rationally at what the data show us.

39:44Andrew Biggs: Incredible. So the advice usually is, or that I heard when I was in my 20s and getting my 401k for the first time, it was like, take advantage of your employer match and also max out if you can. And your advice is not to do that.

39:58Emily Peck: I mean, if you feel up to it, it's fine. I believe the maximum 401k contribution individual can make this year is about$23 ,500. And the median wages for an American are somewhere, I think, around$68 ,000. Nobody making$68 ,000 needs to save$23 ,500 for retirement every year. If you did that, your retirement income will be so far above your standard of living when you're working. It just, it makes no sense.

40:26Andrew Biggs: I mean, that's great. I mean, it'd be nice. It's not great.

40:29Emily Peck: Our point in life is not to maximize our retirement income. Our goal in life, as economists would have, is you want to have essentially a smooth standard of living from year to year and from work into retirement. I mean, every economist sort of assumes this. So sure, it's bad if you reach retirement and your income drops a lot because then your standard of living drops a lot. But if you've oversaved for retirement, that means you had a lower standard of living during your working years. You might have said, hey, I can't send my kid to college or I can't buy a home. I can't start a business. Those are real costs as well.

41:01Emily Peck: We're not just here to maximize retirement savings. So the idea that we should be maxing out the contribution doesn't make sense. For very young people, they've got other debts, they've got low incomes. There is research from a collection of economists at Stanford. They concluded even with the government match, it often does not make sense for these young Americans to save for retirement. And the reason is because their incomes are so low, they're at a point in life where a dollar is really valuable to them. It's buying them the essentials. If you fast forward to when they're in their 40s, their incomes are a lot higher, well, then they can afford to save more.

41:41Emily Peck: And you see this exact pattern. Young people don't save very much for retirement. Once people get into their 30s, they start saving more. And they tend to save more as they approach retirement. That's exactly what an economics textbook says they should do. But we're often chiding younger people or chiding low-income people for not saving for retirement when they're in fact doing kind of what economics says they should do. So it's a, it's this sort of weirdo conversation we have.

42:09Andrew Biggs: It's an interesting point to make, especially to go back just briefly to the Trump accounts, which the whole point is like, start saving right away for retirement. In addition to college, obviously they're for that as well. But the message really is start saving now, discover the magic of compound interest, et cetera, et cetera. But

42:24Emily Peck: if people want to do it, I'm, I think they should have the vehicle for doing it. I think everybody should have the availability of, say, a 401k at their workplace. The coverage gap, as people call it, is a lot smaller than it's claimed. But there's no reason why everybody shouldn't have that option. The same as if, look, if you want to save money for your child, that's great. I'm not against it. But the idea that this is some sort of magic, it becomes this kind of spreadsheet exercise. Well, take$1 ,000, compound it at 10 % per year, and then there you go. Well, look, we're borrowing the money to fund these accounts.

42:58Emily Peck: This is not new savings. We are essentially, the federal government is borrowing money with which it is purchasing stocks that belong to Americans today, and then they're being put in these accounts. This is not increased saving on a national level. It's kind of redistribution of saving. And yeah, maybe that's good, maybe not, who knows. But it's just the idea that this is some revolutionary policy I just think doesn't hold up. Something like what Australia is doing is saying everybody is going to be saving for retirement. Everybody's going to be offered a retirement plan of work. That's revolutionary policy because that has the potential really to fix the Social Security problem, to fix retirement income security problems, and to free up the resources so we can fix Medicare and not have a federal bankruptcy.

43:45Emily Peck: That's revolutionary policy.

43:47Andrew Biggs: Before we go, last question. Do you have like a message you would send out to the people who are anxious about retirement, to the people who think, I'll never have enough, I'll never be able to stop working?

43:58Emily Peck: Well, the basic message is don't panic. I mean, you should think rationally about how much you're going to need in retirement. Get an estimate of how much you're going to get from Social Security. Often it's more than people think it will be. Inform yourself on how much the cost of living tends to drop in retirement. And instead of getting all worked up about it, just work kind of rationally or methodically in thinking about it. And, you know, you might have to adjust things a little bit. But if I'm correct, most people will not. They may fear that they're going to not have enough in retirement, but they actually will be OK.

44:33Emily Peck: And look, we know this from the data. If you go back 25 years ago, say in Gallup's survey, at that point, around 60 % of Americans

44:45Emily Peck: comfortably. Now Gallup is asking retirees themselves, do you have enough money to live comfortably? And 80 % say they do. When you match that up, those people 25 years ago who thought they weren't going to have enough money, they're retired today and they're doing fine.

44:59Andrew Biggs: They did it.

44:59Emily Peck: So half of those people who thought they weren't going to have enough, it turns out they did have enough. So I'm not saying you shouldn't worry at all, but you should understand that retirement is something that's inherently worrying because you have to plan ahead for decades. You have to think about how long you're going to live and what kind of rate of return you're going to get your savings and so forth. And there's a lot of people out there who want to worry you. Headlines, a retirement crisis, this and that, I see them every day, but they're really not supported by the data. They're really just not.

45:30Emily Peck: The analogy I put it is if some pharmaceutical ad comes on the TV and they say, you may have so-and-so problem, guess what? We have the cure. You recognize this This is a product they're selling. And it doesn't mean the product is bad, doesn't make them dishonest, but they're going to product to sell. Similarly, if you hear, well, you're not saving enough for retirement, you should be saving more, just understand that's a product they're selling too. There is a tendency to err on the side of, they would see it as caution, I would just see it as pessimism. And you can see it consistently in these studies that predict a retirement crisis.

46:06Emily Peck: There's always something, you pull up the string and the whole thing falls apart. So just understand that there's a tendency to be scared. You should do your due diligence, but there are much bigger problems for us to worry about than us.

46:20Andrew Biggs: Andrew, thank you so much.

46:21Emily Peck: Oh, it's my pleasure. Thank you very much for having me.

46:24Andrew Biggs: Okay, that's our show for this week. Thanks to Jessamyn Molle and Shana Roth for producing. Ben Richman is Senior Director of Podcast Operations. Mia Lobel is Executive Producer of Podcasts. And I will be back in your feed on Saturday along with Felix and Elizabeth. for a regular episode of Slate Money. And until then, thanks for listening.