Pozen: The notion of work, particularly part-time work, will change dramatically. The average age of retirement might be 62 now, but in the future you won't have another generation of workers pushing from behind for people to retire. People will also be healthier. And the nature of work will continue to be less physical. Already we've moved the age when folks qualify for full Social Security benefits up to age 65 and age 67, depending on when they were born. You'll have more folks continue working, but not full time.
FA: As you've pointed out, living longer means we need bigger nest eggs. How do we get there as a nation? How does your suggested funding change to Social Security work?
Pozen: Most people think Social Security benefits are adjusted annually based on price changes, but they're adjusted up based on wage increases. During the last 50 years, wages have gone up 1% faster than prices. That's a big increase. If from now on we said all initial benefits will be adjusted based on price increases, it would cure 100% of the problems in funding Social Security. It would also decrease the wage replacement ratio from about 46% today to about 30%. How can you justify that? You can do it for two reasons. Those people earning $100,000 or above are already participating in every IRA and retirement plan available, but under $50,000 participation is much lower. My answer is, for those folks under $25,000 a year I'd stay with wage indexing.
FA: When it comes to incentivising the private sector, you've suggested tax incentives for certain workers and an opt-out type plan at the employer level. How would those work, and can the Bush-proposed Retirement Savings Accounts and Lifetime Savings Accounts speed the way?
Pozen: To create these accounts without also reforming Social Security would be a mistake, for the reasons I've cited. The people who would use them already take advantage of all their retirement savings options. We need both sets of reforms. I've suggested, along with others, that one way to help all households save for retirement is to change the current 401(k) opt-in requirement (which requires workers to sign up to save), to an opt-out requirement so that 1% of all workers' income would automatically be contributed to an IRA at a qualified financial institution. I also think some type of refundable tax credit for contributing would help those earning $25,000 or less annually. Many don't currently pay federal income tax, so the incentive can't be a credit. It has to be a refund.
FA: Studies from the Employee
Benefits Research Institute and the American Association of Retired
Persons already show that retirees feel ill-prepared financially to
meet their health care needs. Can public policy really change this?
Pozen: The number of employers that offer post-retirement health care
is rapidly declining. Employers find it too expensive to be on the
line. There will be a huge drain on Medicare and the new drug benefit.
I don't think anyone knows what it will cost. But we have to try to
keep the costs within reason. I've done a lot of work for public
officials in Massachusetts, and I've come to believe that we need
higher co-pays and deductibles to keep costs down, combined with
education about relative costs and choices.
Has anyone not gone to see a doctor as a result of a $10 co-pay? That's why I'm interested in the new HRSAs (Healthcare Retirement Savings Accounts). They give people more skin in the game and provide a tax deduction coming in, tax-deferral on the funds that accumulate and you can use it in retirement for Medicare and to fund the donut hole in drug coverage. It's also critical that people are educated about their choices and costs and are charged accordingly. They should be able to choose between a $100 x-ray and $200 x-ray, but today you can't find out how much you're being charged, so you can't make an informed decision. People need a financial stake.
FA: Thanks, Bob.