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>> susan: i'm susan collins, the joan and sanford weill dean here at the gerald r school -- gerald r. ford school of public policy and i'm delighted to have you with us this afternoon. on behalf of the ford school community, it's a real pleasure to welcome you for another in our series of distinguished lectures, the policy talks at the ford school. this afternoon we are very honored and very pleased to have with us dr. roger ferguson who is president and chief executive officer of tiaa-cref.
you'll find a biography in your program, and i'm not going to give all of the details, but i think as you take a look at it, you will be very struck like i have been by just how varied his career has been. he has reached the highest levels in an incredibly wide range of policy areas and just to highlight a few, he has served as vice chair at the federal reserve board of governors. he is a member of president obama's counsel
on jobs and competitiveness. he's a lawyer by training and at one time was a partner at mckinsey & company. he's shaped policy from the private as well as nonprofit sectors as head of financial services for swiss re. and on the board of a number of nonprofits and, of course, now in his current role as ceo of a fortune 100 provider of retirement services. i first met roger when he was a ph.d. student in economics
at harvard and i was an undergraduate economics major. and he was a very thoughtful and supportive colleague then and has been ever since. and so i, and many others in the profession, are very grateful to him for that. this past year he co-chaired a national academy of sciences panel on which i was a member. that panel was convened by the united states congress to examine some of the same issues that he will focus
on in his remarks this afternoon. what are the long-term economic implications of an aging population? can our government maintain current levels of publicly funded support for older people? what are the trends in retirement ages and the prospects for people working longer? and what are the levels of personnel savings today that are necessary in order
to maintain current living standards in retirement for a range of economic scenarios? these are very important and challenging questions. the panel actually released its findings just two days ago and you might have seen some of the press coverage from the briefing that roger and his co-chair gave. again it's very important information for all of us to understand and grapple with. and so we're so pleased today to be able to welcome dr. ferguson
to share his views about it. he's been very generous already with his time today meeting with students and faculty as well as delivering this public lecture. and he's graciously agreed to take questions after his remarks. and so from the audience just before 5:00 o'clock we will be collecting cards. and so we invite you to write questions that you might have
and we will pick them up a little bit later in the afternoon. professor john ciorciari of the ford school faculty will help to select questions from the cards or from twitter. we invite questions from twitter as well as -- and along with one of our graduate students dawn lynn kaiser who will be actually asking the questions this afternoon. and so with that it is my honor and great pleasure
to invite dr. ferguson to the podium. [ applause ] >> dr. ferguson: thank you very much for that kind introduction. and let me be the first to say that it's really a pleasure for me to be here at the ford school. i want to thank susan collins for inviting me. i want to take a moment and recognize a couple of friends in the audience. marina whitman and her husband bob are back there.
so i want to say hello to you and nice to see all of you. and it's really a pleasure for me to be here in part because my linkage to the school goes back to the original dean, ned gramlich, who served with me on the board of governors at the federal reserve and i counted as a friend for many, many years. and finally and most importantly i must say being an mr is important because you get to go to comet coffee which is an important stop in america as all of you know.
so it is a pleasure for me to be here and i will say that one of the great things about the ford school is that in educating tomorrow's leaders and also conducting research, this school embodies a hope for a better tomorrow and we're counting on all of you to help us get through some of the pressing problems that i'm going to be describing and we'll talk about in the q and a session. so today i want to take a look at one
of the more profound challenges that we are facing as a nation and that's the issue of retirement, or more accurately, how to insure safe and secure retirement for everyone in america in the 21st century. at a time when we have both great demographic and economic changes and challenges, retirement is an issue that's sort of natural for tiaa-cref, as many of you may know, because we are the leading provider of retirement services in the higher ed space
and the nonprofit space in general. and, in fact, we were founded over 94 years ago to provide safe and secure retirement for college professors. another great reason for me to be here -- another honor for me in being here is that, in fact, the university of michigan was the first school to sign up with tiaa-cref back in 1919. and so we have a special relationship
with this institution. so how have things evolved for us? well, today we serve 3.7 million people nationwide, not just in the academy but also in research, medical, and cultural communities. we now do more than just retirement, even though that's our core, and overall our mission to provide financial security and well-being is unchanged. so we've watched with alarm as retirement has become a source
of increasing angst across our nation. americans confidence about achieving a comfortable retirement has hit record lows in the faces of factors such as a 2008 financial crisis, the shift from defined benefit or db, plans to define contribution or dc plans, the aging of the population, the explosion of healthcare costs. and all that adds up to some uncertainty about the future of social security, medicare and medicaid.
and then many of us recognize that the personal savings rate for many americans and for america overall has been abysmally low for some time. so it therefore concerns us that most workers -- for most workers retirement has become much more of a do-it-yourself activity. even as far too many of our citizens lack financial literacy skills to make the sound decisions about savings and investment
and retirement that they're being called upon to make. so we at tiaa-cref have been speaking out about the need for a new retirement system, one that fits the realities of the 21st century. we've also worked to highlight the needs for greater financial literacy. but clearly there's much more work to be done. so let me quote just a few statistics. just 14 percent of americans said that they're, quote,
very confident that they will have enough money for a comfortable retirement. that's in the most recent employee benefits research institute study on retirement readiness. that same study indicated that 60 percent of americans say they have less than $25,000 -- less than $25,000 in retirement savings. and then according to a recent gallup survey, 66 percent of americans said
that their top financial concern is not having enough money for retirement. the need for actions only become clearer based on the work that susan collins and i and many others did as part of our national academy of sciences study. and as she indicated we just released that study on tuesday and i'll talk about that a bit more in a minute but it underscores the urgency of responding to the challenges of retirement that we're talking about.
so what i'd like to do in my talk today is look at three or four different things. first, i want to talk about the issues, the broad macro issues that underlay the retirement landscape. i'm going to talk a little bit about the potential solutions that might emerge over time, and then obviously i want to open up and leave plenty of time for questions and answers. so let me talk first about the issues that underlie any discussion about retirement
and that is the issue of the aging of the american population. so the committee that susan referenced was founded or started in 2010 to look at that issue and the macroeconomic effects of an aging population. and the goal was to provide factual foundation as policy makers, particularly in congress, think about and debate issues such as deficit reduction, medicare, and social security.
the starting point for the study and obviously one of the major kicking off points for any discussion on retirement is the demographic shift that's now underway in which americans age 65 or older make up an increasingly large percentage of the population. in fact, people 85 and above are now the fastest growing segment of america. and this is the result of two trends. first being the rise in the average life expectancy
in the u.s. today men can expect to live to be 76, women to 81. fifty years ago, the life expectancy was just 67 for men and 73 for women. the second trend that doesn't get much discussed is the declining fertility rate. today there are 2.1 births per woman compared to 3.7 births for woman in 1957 at the height of the baby boom. so together these two trends are what's driving our aging population.
it's not just about the baby boom generation. although the entry of baby boomers into retirement has certainly shined a spotlight on this phenomenon. it's more than the baby boomers though. it's also the other cohorts that are smaller just as the largest baby boom population moves towards retirement. the second big story is that aging
and the aging population is not just an american story. by mid-century, many developing nations will catch up to the developed world in terms of old age dependency ratio. that's the number of elderly people as a share of the working age population. that's remarkable considering that when i was in graduate school and susan was an undergraduate, countries like china, south korea,
and mexico were struggling just to feed their own people. and now as all of you know and particularly in china because of the one child policy, they have a rapidly aging population as well. the upshot of all of this is that there are fewer and fewer people working and they're supporting more and more people who are getting to an age that we consider retirement age. and that's obviously a recipe for big fiscal challenges.
so our committee looked at what these trends, both in the u.s. and globally, will mean for the u.s. economy in the future. and obviously in the u.s. economy the real challenge is the threat to health and stability of social security, medicare, and medicaid. together the cost of these three programs currently amounts to roughly 40 percent of all federal spending and 10 percent of the nation's gep. and we're already well aware of some of the challenges
that the system is undergoing. just a few months ago, the trustees of social security projected that the combined trust funds will be exhausted by 2033, three years sooner than projected just last year. they also reported that the ratio of workers paying taxes for social security benefit -- beneficiary will hit 2.8 workers per beneficiary this year. that's down from 3.4 workers per beneficiary
in 2000 so 12 years ago. so our report seeks to clarify the issues that are relevant to policy makers and to suggest some potential options that they may want to consider. and we do believe, and there's some positive news here that sound policies can, in fact, mitigate the negative effects that we're going to be confronting here. and that those policies don't have to be a combination
of four different policy levers if you will. one is the major structural changes to social security, secondly, a higher savings rate during working years. third, the possibility for many of us of longer working lives. and fourth, the need to find greater revenue which frankly means having to raise taxes in order to pay for some of this. the other thing that we focused on is that individual workers must be better prepared for retirement
by planning ahead and by adapting their saving and spending habits. so we therefore emphasize something that's unusual in this kind of report which is the need to take action sooner rather than later. the longer our nation delays in making needed changes, the larger will be what we call the liability, the legacy liability that will be passed on to future generations.
and the larger the increase we'll need to make in terms of taxes on the future workers. and frankly if we don't act soon, the larger the reduction of benefits will be called for for future retirees. so it's imperative that we act now. we'll have more options and the cost of acting will be lower now than if we delay. our report also emphasizes that financial literacy has become on evener more crucial issue in light of these challenges.
we note that people who are not financial literate will have a much tougher time preparing themselves for the financially secure retirement that everyone wants, particularly in an environment in which there's so much uncertainty about social security, medicare, and medicaid and which americans have greater responsibility for their retirements. but sadly our nation is seriously under-informed when it comes to financial literacy.
a research by two professors, annamaria lusardi [assumed spelling] who was at dartmouth, i think is now moved to george washington university; and olivia mitchell of the university of pennsylvania both of whom, by the way, are fellows at the tiaa-cref university, our research group. so annamaria lusardi and olivia mitchell have shown just how unprepared many americans are to make sound savings and investment choices.
in their study of people over 50, only one third of respondents were able to correctly answer three basic questions having to do with interest rates, the effects of inflation, and the concept of risk diversification. my company obviously cares deeply about financial literacy because research has shown that financial literacy has a profoundly important effect on achieving retirement security.
people with a high degree of financial literacy are more likely to plan for retirement. and then in turn those who plan for retirement are more likely to have better outcomes. planning for retirement is a powerful predictor of wealth accumulation. in fact, people plan for retirement have more than double the wealth of people who do not plan. and conversely people with lower financial literacy tend
to borrow more, they accumulate less wealth, and they tend to select financial products with higher fees. folks with less financial literacy also less likely to invest in stocks, they're more likely to experience difficulty with debt including bankruptcy, and they're less likely to know the terms of their mortgages and other loans that they may have outstanding. so the lack of financial literacy is certainly a broad issue in america.
but when it's viewed through the prism of race, the effects are even greatly magnified. minorities along with women and the least affluent have some of the lowest financial literacy rates in the country. so it's not surprising when it comes to saving for retirement that studies have found serious gaps in the preparedness of african-americans and hispanic workers. and the older problem is likely to become worse. there's a recent survey from the financial industry regulatory
authority or finra that found that young americans were less likely to be financially capable than older americans. and the latest jumpstart coalition survey of high school seniors showed that the financial literacy of high school students has fallen to the lowest level ever. now that's hardly surprising since 26 states have no financial literacy requirements at all in their k-12 education systems.
and only four states mandate that students take a personal finance class in high school. i will say in this score there's some potentially encouraging information. the national conference of state legislators reported that this year seven states have enacted legislature or passed resolutions promoting financial literacy. and in 28 states such measures have either been introduced or are pending consideration.
so it's heartening that the nation is starting to turn to this crisis of financial literacy and obviously i hope that our nas study will help drive that further. so let me now turn to some of the changes that we are confronting -- or challenges we're confronting in funding retirement and how that's combined with the demographic and economic issues i've just talked about. all of you probably know that once upon a time we talked
about a three legged stool as an analogy for understanding retirement systems. the three legs were pensions, social security, and personal savings. and today all three legs are a little wobbly. pensions have become a thing of the past for most americans in the private sector. and the public sector headlines clearly indicate that states and municipalities are confronting a crisis
of epic proportions in unfunded pension liabilities. as i mentioned already, social security is in trouble as the trustees have attested. and it will soon begin paying out more than it takes in. and the u.s. personal savings rate has been completely inadequate for many years now. even back -- even dropping to negative numbers back when i was on the federal reserve. so given the scenario it should be no surprise
that americans are less confident than ever about their ability to afford a comfortable retirement. people are also expecting to work longer and longer. a recent survey found that 37 percent of people said they expected to work past 65 and that's tripled the percentage of 20 years ago. so how did we get to this point of such uncertainty about the three legged stool? well, first we've seen the demise
of traditional pension plans in the private sector over the past 30 years. these traditional pensions are known as db or defined benefit plans. and in the old days you'd work for a company for many years, maybe for life and when you retired along with the gold watch, you'd get a monthly retirement check. importantly the size of the check that you would receive under a db plan had nothing to do with investment returns
and may have had nothing to do with your salary. it -- rather it was based on service and age and every once in a while also earnings. as recently as 30 years ago, 84 percent of private sector workers had access to this kind of db plan. as of 2008 only 33 percent so from 84 down to 33 percent in the private sector have access to a db plan of that type.
today what's happened is the defined contribution plan, particularly the 401k, has become the primary means of saving for retirement in the private sector. but the 401k and other dc plans don't guarantee workers a specific retirement check amount. rather as all of you know, they are vehicles that enable employees to save for their own retirement and in many cases employers contribute as well. but the kind of retirement check that a worker ends
up with depends on the combination of contributions made and investment returns earned during their working lives. importantly and people forget this because things have changed so much but 401ks were never intended to play the role that they do today. they were never intended to be the core retirement system. they were meant to be a supplemental retirement system to top off traditional db plans.
and that's the fundamental problem with the new model. whereas once employers shouldered the responsibility and risks of funding retirement, today it's the workers who must bear that burden. and workers who in many cases as i've indicated have no formal education or training in investing or have no financial literacy and they're called upon to make these very important decisions. moreover, there's ample evidence that a 401k based model
in the private sector really is not doing the job in other ways. many eligible workers don't participate, many employers and employees don't contribute enough, many employees don't implement an appropriate asset allocation. and finally and most troublesome, many employees do not hold on to their retirement savings. instead they crack into their retirement nest egg to fund living expenses. so in light of all these kinds of challenges,
it is not surprising that mckinsey & company, the consulting firm, found that the average american couple will be some $250,000 short of what they need to retire securely. another problem with the current model is that people tend to get up -- get caught up in the size of their account balances without really thinking about or having much knowledge about the income flow that will be required in retirement. in fact, and this is hard for many people to get --
to gather because of increased longevity, many folks will need to fund retirement that can stretch 20 or 30 or maybe even 40 years. so the challenge that people are facing is managing longevity. and managing longevity in which many of us will be living with chronic illnesses. so in this new model, people need to see their savings not just as a pot of money but have to understand what the income stream is that's going
to be associated with that pot of money. so clearly the current model needs reform. but to be quite balanced in this, there are some positive aspects of a 401k model. first, it's an individualized system. so that's something that people really care about and enjoy. secondly, a 401k system is more aligned with the way people work these days because individuals move around from job to job and do not work
for a lifetime in one place. nevertheless these fundamental problems do remain. so that's the private sector. so far not so good. let's look to the public sector and i would say they're facing some equally challenging issues in the amount of retirement. their defined benefit plans do remain the dominant model with nearly 80 percent
of employees having this type of plan. but all of you know from reading the headlines it's states and municipalities are struggling with large gaps between promised retirement benefits and current assets. and it's been estimated that the unfunded liabilities in state and local pension systems have reached an astounding 4 trillion dollars. and now many government entities have been working on this and have been making changes in their plans
and over the past two years, 39 states have enacted some form of revision including things like requiring employees to contribute more, tightening eligibility rules, and modifying how benefits are calculated. so it's clear that in the public sector we need to bring some approaches that will bring greater clarity and cost certainly to employers while also bringing greater retirement security to workers. so you can imagine that we
at tiaa-cref recognizing these challenges spent a lot of time thinking about these issues and trying to figure out what it would take to create a retirement system for the 21st century. so what would a retirement system for the 21st century look like? first, it would continue to recognize that helping employees achieve financial security in retirement is a shared responsibility
between employers and employees. so the risk shifting that's going on would end up in a middle place with both employers and employees having a responsibility. secondly, retirement system for the 21st century would provide an income that could last a lifetime as i've indicated 20, 30, maybe 40 years in retirement. i haven't talked much about it,
but such a system would help employees to deal with healthcare expenses which loom as a very large financial burden as people live longer and as i said with chronic illnesses. the fourth element of a retirement system for the 21st century would be that it would not really be one size fits all given the demographic and other challenges and changes in society. such a system would have to be sustainable dealing
with baby boomers, the 80 million of us who are going to be retiring over the next several decades. and importantly it would include a strong dose of education and communication and advice recognizing that most people bearing a greater responsibility and not having enough financial literacy are going to need some assistance in making these tough decisions. one model that's working well and therefore can, i believe, form national thinking
and certainly form our thinking is the one that works in higher education, i believe, and wouldn't surprise you i suspect being that as co at tiaa-cref we are the leading provider of that kind of service. and there are a number of things that i think stand out for the system that we have in higher ed that might be appropriate as a national level. first, most of them feature mandatory participation,
and so an automatic enrollment might be a feature of a retirement system for the 21st century. secondly, employees must have the right mix of investment options that can help them build the kind of saving that they need. and the mix of options needs to be optimally decided, not too many choices, not too few choices. a third thing that we've seen is in the academic sector as you know the notion of preparing
for retirement still is a joint responsibility with employees and institutions both contributing. and finally employees typically have access to either a db plan or an annuity option that provides a level of guaranteed income in retirement. and then of course the important issue of education and advice is an important part of what we provide in our model. and we believe that the model is working and, in fact, our participants tell us that.
in a recent survey by the tiaa-cref institute, we found that 75 percent of higher ed workers are confident that they will have enough money to live comfortably in retirement. and that compares with just 49 percent of all u.s. workers so 75 percent versus 49 percent. so it's clear that one of the most pressing issues then is to move people into a system that provides for lifetime income.
and that's essentially making availability -- available financial security for everybody. this is a particularly important issue now if i can think about one other segment and then wrap up here. this is the issue of financial security for lifetime is quite important for everybody but it's particularly important for women. and that is because women often end up with a nest egg that is half the size of that of a man
of the same age and occupation. and that's for a couple reasons. one, is women still earn about 77 to 81 cents for every dollar that a man may make. and they often spend an average of 10 to 12 years out of the workforce caring for children or elderly parents. and yet women as i've already said also live longer than men, and therefore, they'll have to support themselves through a long retirement
with what might be a smaller nest egg. and so the bottom line for both sexes is how do we insure that people's primary savings vehicle is a dc plan can convert their savings into an adequate and secure income that lasts as long as they do. and here the answer will not surprise you is annuitization. there's a recent report by the government accountability office last year that encouraged annuitization as an important means
for addressing the issue of a lifetime income. and in that scenario people who are retiring purchase -- take part of their savings to purchase an annuity to deal with their basic lifetime income for the rest of their lives. but the report noted that while annuitization is probably a smart choice for many americans, just 6 percent of those in a defined contribution plan chose or purchased an annuity at retirement. the other thing that this report noted is
that many people took social security benefits before the full retirement age, therefore passing up the opportunity for higher benefit levels and additional lifetime income. so the report found a big disconnect, this gi report between what experts recommend and what people do. because experts recommend that retirees convert a portion of their savings into an income annuity to cover necessary expenses and they recommended that people have an annuity instead
of a life lump sum withdrawal. and experts also recommended that you delay taking social security until reaching at least full retirement age and in some cases continue to work and save past full retirement age. so they're clearly some important implications that the gal study has found is that while experts have a sense of what folks should do, very few of our citizens outside of the higher ed space are doing it.
so let me close now by just summarizing all the things that i've said here. first, talked about the aging population and recognition of that as a global problem. that clearly presents a number of macroeconomic challenges to our nation, particularly for programs like social security, but i also said that policy options do exist and implementing those policy options sooner rather than later can start to at least mitigate, not reverse,
but at least mitigate some of the negative effects. or put it another way, the longer we delay, the higher the ultimate cost is going to be. the second thing that i've said is that this demographic shift of aging baby boomers combined with the recession have really combined to shine a very bright spotlight on this retirement issue and on the need to build financial security that lasts a lifetime.
and indicated that obviously the issue of financial literacy is a very important part of this given the new requirements of individuals to bear some of the responsibilities. we have to increase financial literacy. and then finally i pointed out that there are some solutions, if you will, in building or outlining what a financial secure retirement system would look like for the 21st century.
so let me stop now by thanking you again for your attention. thank you for allowing me the opportunity to speak in this wonderful school, and i look forward to being able to answer as many questions as we can in the time that's allotted. so thank you all very much and i'll turn it over to our moderators. thank you. [ pause ]
>> dawn lynn: thank you very much for your lecture. we do have questions from the audience and if you still have additional ones, please raise your hand and they'll be collected. my name is dawn lynn kaiser [assumed spelling]. i'm a second year masters of public policy student here at the ford school. and mr. ferguson, our first question, what suggestions do you have regarding education programs
geared towards planning for retirement? how early should this education begin and should it be a part of the federal education policy? >> dr. ferguson: that's a great question and i think first it should begin as soon as possible if you will. folks when they get their first job i think should start to be educated on these issues. obviously i've also indicated the importance
of general financial literacy in k-12 in high school. but if we could have a system in which there is first mandatory enrollment and then associated with that education at the very, very beginning, i think that's helpful. and the education i think should be around a couple of things. one is a generally sense of figuring out what one's risk tolerance is. two, figuring out there are some benchmarks
around how much one might want to save and invest. the third is the importance of diversification because a lot of individuals as we've discovered haven't understood the value of diversification. and then the fourth is starting to educate everybody on what a life cycle might look like because i think many people underestimate how long they may well live in something that we might call retirement and therefore tend to think they're going
to save too little. and then the fifth thing -- or they tend to save too little. and then the fifth thing obviously is the importance of thinking about not just building this big nest egg but what it means for lifetime income. i do believe that it should be built into national policy. i will tell you from my experience at the fed where we did make financial literacy one of the priorities, it is very, very difficult even if it's a priority of a big
and important financial federal agency, to figure out how to actually make it come to life. and i think as i've thought about it part of the challenge is that so much of education policy is actually developed at state and local level. and so what happens there i think is as important as what's happening at the federal level. >> dawn lynn: thank you.
our next question, is the social security age destined to rise with life expectancy and should it? >> dr. ferguson: well, gee thanks for asking the easy questions. [laughter] the ones that are not at all controversial. i would say honestly i do believe over time the social security age is destined to rise with life expectancy and with the ability of people to work. in fact, i think all
of you probably know there was a commission from many years ago that already put us on the path towards a gradual increase in retirement age but i think we're going to have to take another look at that. now the other thing that's important to say is while that may be true for many folks there still are a number of people in american society for which delaying retirement is almost physically possible. and one of the things that happens, you know,
all of us who do these sort of jobs that require a lot of intellect but not much in the way of physical activity. you know, the moving of the mouse is not for many of us heavy work. we ignore that even on our campuses and certainly in many parts of america there are a bunch of people for whom delay in retirement is really not an option. and so we have to figure out how to be sensitive to both sides of this; right.
because folks who influence policy makers tend to be those that sell, sure, you know, i intend to and therefore all of us can work a little longer. true for a lot of americans. society has changed over time but i do worry that those of us who do sort of white collar jobs or get folks who do other kinds of white collar jobs or blue collar jobs or pink collar jobs or they're called so i always hasten to add that i think social security retirement age is going
to have to increase. how that works for everybody i think is going to be one of the challenges that we have to work through. our next question, what are your thoughts about the encore career idea new meaning for -- meaningful work often part-time for older adults? what policy changes would support more encore careers? >> dr. ferguson: i think the so-called encore career or the second act or whatever it's called is pivotal frankly.
i think it creates a great value for the individuals involved or has a possibility of doing that. there are a number of things that i think stand in the way of that. in some cases depending on how you work and where you work, if you retire can you then come back as a consultant or in a part-time role. there's a question of policy that affects some institutions. but i think bigger than that is really, you know,
there's not a business model yet that's evolved for having both full-time workers at a certain age and then so-called encore workers. and so older folks who still want to be in the labor force find themselves in the, you know, forms of consulting, if you will, where there are sole practitioners. so i think the real issue is not a policy issue. it's really understanding how we build models that have
in the workplace folks under so-called retirement age who are working full-time and working together with folks who are part-time, if you will, and doing an encore job. but i think it's important to have that as sort of a way that all of us start to think about things because it's going, i think, to be inevitable for lots of folks. and i think it's also good for society. if i can lengthen my answer a bit in the report -- the dns report that susan and i talked about,
there was some work done by a german economist axel borsch-supan who got his ph.d. at mit but has done some very interesting work in some manufacturing and car factories in germany. pointing out that teams that had people of different ages and different generations were more productive than folks that have -- the teams that have only, you know, one generation. and this is just sort of a special case of the general knowledge that we've learned --
actually, i think a university of michigan professor has written books on this on the value of diversity in the workplace leading to better -- better answers and more productivity. so we think of diversity in different ways around gender and race and other things but we shouldn't forget generational diversity as well. and axel's work actually shows that in a manufacturing atmosphere,
productivity actually goes up if you have intergenerational teams. our next question, with regards to securitizing income streams in retirement with annuities and the low annuity participation rate you mentioned earlier, how can we secure but simplify these annuity products and will this simplification increase participation in your opinion? >> dr. ferguson: the answers, one,
we do need to simplify annuity products. obviously, we at tiaa-cref have a very good and simple annuity that works very well. and in fact there's going to be a report that comes out that looks at our participants -- i don't have the report but i've got some of the data from it, and it shows that about 40 percent of our participants when they retire typically take annuity income as their first draw from their retirement assets.
and then we also see that many people take more than one version of retirement income and they often what's called laddering their annuities. and the reason i talk about our statistic that is about 40 percent is there's -- that's clear proof that a simple annuity that's in the plan and for which there's advice can get people to have the right kind of outcome. society as a large i think therefore can learn a
couple lessons. one, simpler annuities because a lot of the folks who talk and give advice are anti-annuity because annuities are very complex and can be expensive. secondly, we've got to make annuities part of the plan. one of the things that happens in the 401k world is you have this big bucket of savings, you get to so-called retirement age, and then you have to make an annuitization choice and that's a hard choice
for lots of people to make. and then i think the third thing is really understanding better than we currently do what it is that holds people back from annuitization. so simplifying is one of the answers. there's a professor at the university of illinois named jeff brown who has talked about framing. and if you talk about annuitization, people aren't very interested.
if you talk about guaranteed income for life, they are quite interested. i think we also need to understand some of the -- i would -- not framing but sort of the more rational things that people worry about when it comes to annuitization such as having what's called an economics of request mode. the desire to sort of leave money to others and you have to build annuities that allow that to happen as well. so there's putting annuities into the plan,
simplifying annuities, and then understanding and maybe adjusting the products so we can -- so we can respond to why it is that people do not annuitize. our next question is actually from twitter. how do we assure women's economic security giving their lower lifetime incomes? >> dr. ferguson: that's -- i love modern technology. it's a question from someone named twitter so [laughter] my kids -- i have a 21 year old and 18 --
they'd be appalled i made such a stupid joke. so i know what twitter is. that's a very good and a very important question so let me tell you what we've tried to do. what we have done in our company recognizing these issues around gender differences, we've actually developed a training session financial literacy symposium, i guess you would call it, a seminar for women that's taught
by our women professionals. and that is starting to show some real traction just in terms of the number of people who are interested in doing this. and the most important statistic is that after these general seminars which last for about an hour, hour and-a-half something of that sort, we're getting a very, very large turnout of folks who want -- women who want to sign up for counseling sessions
and then they're tending to take action. they're tending to save more, diversify their portfolios and other things. so i think -- now we are a microcosm of what i think has to happen more broadly. which is, one, recognizing that there are gender differences and sometimes it's hard to talk about gender differences without seeming to be, you know, doing things that are inappropriate
but if there are then one should recognize them. and two, then understanding with those differences how you leverage them if you will into getting people to take action. and i think we started to figure out a little bit of that. how we do that at a national level, i think ultimately it's up to institutions such as this and such as mine to partner together to give women a chance to understand these issues better.
now you know easier said than done. it works in places where you've got, you know, institutions like university of michigan and tiaa-cref. what we do more broadly at a national level, i do think it goes back to k-12 financial literacy for one thing. i think it goes back to that early enrollment moment where we start immediately to identify what the differences might be.
and so those are some of the other things that we can do but the challenge here is that there really is no silver bullet because giving financial advice at some broad macro level is not nearly as impactful as what you do sort of case by case. and that's sort of big challenge so i've got -- we know a little bit about what one can do if you got the resources. i can't say there's sort of an obvious sort
of national answer that's going to work for, you know, half the population but it's going to be very important for us to start to look at that issue. our next question, the trend towards defined contribution retirement seems to be accelerating. do you see regulations increasing in step to monitor and regulate the providers? >> dr. ferguson: i hope so in the follow sense and i've seen this in a couple of states.
i haven't talked much about it but one of the states that's made a big change has been rhode island. and what rhode island has done is create a hybrid plan and so i think this trend towards defined contribution can be dealt with if there are regulations such as the -- or advice and then maybe regulations so the tiaa advice about annuitization leading to regulations from the department of labor, for example, might be one way to do that. or if states -- states are one of the places where the move
from db to dc is occurring most rapidly. follow the models towards a hybrid plan as opposed to going to a pure dc plan. so i think since a lot of this is happening at those levels that's where it can be done. and then as i said the department of labor since it oversees arista plans if it really pushes for more annuitization in the plan can help by that kind of regulation to create a hybrid plan that has both a dc element
and then a db element to it. our next question, i have heard that low interest rates are forcing retirees into riskier investments. your comments. >> dr. ferguson: well, the answer is that it is true. let me be a little clearer about it. low interest rates are forcing -- it's something -- everybody into, you know, riskier investments.
it's one of the reasons why we're seeing a rallying in the stock market. it's one of the reasons perhaps why we're starting to see a pickup in housing. but i would be a little cautious because then what happens when one says that is there's sort of a natural sense that -- well, that means we must have higher interest rates right away. so recognize for those --
this is now getting the monetary policy issues so low interest rates do have the effect of driving everybody on the other hand, a reason i think that the fed is engineering very low interest rates right now is to create sort of a cushion under the economy and so it's a tradeoff that they're making frankly. now what does that really mean? i think the fact that we are currently having very low interest rates validates the importance
of having a diversified portfolio. even as you get older, even as people get into retirement, there's still reason to have some equity exposure as well as fixed income exposure. you know, i think people think, well, as i get older i -- you certainly want to move more towards fixed income, but having equity exposure even as you are in retirement gives you a chance to offset moments when you have low interest rates by having an increase
in the equity values that you might have in your portfolio. and so the real message out of all of this is because you cannot predict what the financial markets are going to throw at you during the course of retirement, it's still important to have a diversified portfolio. there is a danger in being, even as one is retired, particularly if one is retired of overly conservative just as there is a danger in being, you know, sort of overly eager to take risk.
and this very low interest rate environment is sort of proof of the importance of having diversification as a way to deal with different kinds of economic environments. our next question, bear with me, it's a little bit of a long one. how much of the increase in the stock market over the past 30 years is attributable to the change from company pensions to iras forced entry into the stock market? and as the population ages and begins withdrawals
from these iras, how much of a decrease in stock market is likely to occur? >> dr. ferguson: okay. let me -- that's a great question. let me try to answer the second part partially because i don't know the answer to the first part [laughter]. so i should at least go where i think i know the answer. so on the second issue there is, i think, what we on our study team, that nas study think
of as being a myth out there, that as baby boomers retire, they're going to dump their stocks and the stock market is going to collapse. we think that's not the likely outcome. and that there will be other forces that will drive equity markets but it's not going to be, you know, the aging of the baby boomer population. the reason that we believe that is that equity markets in particular are really quite global.
well, a number of things. first, we don't believe based on the diversification i've just talked about that individuals are going to be sort of dumping their stocks. they will be selling them gradually over time as they get older, but they'll still hold on to some as they diversify. secondly, even among older folks there are different risk
profiles and so we shouldn't imagine that everyone is going to, you know, reach a certain age, you know, and start to act the same way. the third is remember one of the things i've said is we may have to -- younger people and maybe in some sense all of us may have to increase savings so even as some folks are selling their stock in order to -- their equities in order to fund retirement, there will be other people, younger people, a smaller cohort
but increasing the savings rate may offset some of that selloff, if you will. and the final thing equity markets in particular are quite global. and as growth picks up around the world, even though they have demographic challenges, as the rest of the world becomes much more middle class as they are forced to save more and as they think about diversifying their portfolios
and overcoming what susan and other international economists call a home bias in investments, they will naturally look to the u.s. market as the deepest and most liquid. and so i think this statement that equity markets are going to -- u.s. in particular be on a downward trend because of demographic is false. it's a myth. so the first part
of the question i have to be very honest. i honestly cannot tell you how much of the rise in equities was driven by the increased use of dc plans. i'm not sure that anyone can really tell you that. we can tell you the amount of equity that's being held in dc plans but how that drives pricing as all of you know depends on supply and demand dynamics that are global. and so while this has been an interesting trend,
just as i don't think that, you know, the aging of the population is going to lead to a huge selloff, it's hard for me to say that the big rally that we've seen in equities over the last period of time is being driven by aging populations. in fact, as one thinks back on economic history, there have been, you know, lost decades in equity markets that are sort of inconsistent with the notion that aging baby boomers have been -- i'm sorry.
that young folks, baby boomers, aging through the population from the 60s to now have been leading to this sort of steady uptick in equity evaluations. because if you look at what happened to equities, there have been periods in the 70s where they were really flat; then they rallied; then they're flat; then they collapsed. so it's all the behavior of the equity market's actually belies the notion that somehow or another it's demographics
that really we're driving what's going on. i think there are many other forces including policy forces and the other kinds of dynamics that drive markets and demographics, i think, was probably a relatively small part compared to other things. next question, i worry that our children cannot save enough for retirement due to the skyrocketing costs of undergraduate education. >> dr. ferguson: i worry about it too.
you know i wish i had sort of a more insightful comment. i think the issue, and i've talked to some people on various campuses about this, we really are going to have to rethink the financing model for higher ed. and that question sort of takes me into that space. because just as i've talked about the threats of retirement not this campus -- this campus has actually been, i think, in better shape than many others. but we cannot continue to depend on, you know, 7,
8 percent increases in tuition year after year after year in order to drive the higher ed model. frankly i think the higher ed model also is not going to be able to depend for research support from the government as much as they have in the past just because the general fiscal challenges that we confront. there are a number of us who think about endowments and we're not quite sure that you're going to see double digit increases in endowments as well.
and so i think higher ed generally speaking, not any particular institution is going to have to really rethink it's financing model for lots of reasons. and one of them is that young folks, our children, are not going to be able to afford the kinds of increases that we've thrown at them in higher ed space. now my impression based on conversations i've had on this campus is that the university of michigan is actually starting to come to grips
with this issue has started to think about sort of gradually keeping costs under control for sure. i suspect that's not popular with everyone. so i'm not getting into what other political dynamics on the campus may be. but i think the point i'm making is that a well managed institution can think about a multi-year strategy for trying to gradually adjust its approaches including lightening
up, if you will, on the big increases in tuition because i agree that our children or in some cases grandchildren will have a hard time affording the kinds of education that i did and folks in this room have had. we also have another question from twitter. how is the uncertainty in retirement planning likely to affect labor management bargaining in the near and midterm?
>> dr. ferguson: yeah. that's a great question. i think we've actually already seen that to some degree. actually some of you, i doubt if any of you or many of you are football fans. you know that one of the disputes that existed between nfl and the referees union was around moving to a 401k type plan. and so we see that being very, very visible.
i think the reality is that this issue around retirement and retirement security is going to continue to be an important challenge in labor management relationships. one of the reasons that i am so enamored of the hybrid model is that our experiences has been that it seems to be a middle ground that brings together labor and management. because it can create more certainty about what the employer is going to have to pay
in by creating a dc type plan. but a hybrid model that has an annuity or other kind of db option creates some certainty about retirement outcomes and risk sharing for the employee. and so, you know, i do think that these hybrid models that combine db and dc are a good way to try to break through some of the natural tensions that exist or could exist around retirement security for management and labor and we've seen already, you know,
that at the state level, local level etc. this has become a really hot issue. and this is going to be our last question. what are the effects of immigration policy on the retirement crisis? some have suggested that net immigration into the u.s. has to a certain extent made up for the declining birth rate. >> dr. ferguson: it has to a certain extent because immigrants --
net immigration has tended to be somewhat younger than the existing population. but one has to recognize that even immigrants start to get older, you know, no one's going to be perpetually young. and so while it may at the margin be helpful, i'm not sure one should look at that as, you know, the core solution. it is part of the solution space. one of the reasons that we have a relatively younger population
compared to japan or china or other places is that immigration has helped us over time. but, you know, that's once you get a stock of immigrants by definition they're going to age as well so you still have an aging population. you may start from a slightly lower base which is one of the things that's helped us. i don't want to go too far into immigration policy but one of the other things that our report says is that a solution
to all of this, given the fact that we have a smaller cohort of younger people that will be supporting all of us aging baby boomers is that we have to create greater productivity in society. and you know one can think about immigrant policy, immigration policy that can either be helpful in that regard or neutral in that regard. and so i think the real issue around almost any policy has to do with refreshing the population has in part to do
with how do we create much more productivity in society. so it's not just around age. it's also thinking about how you make those folks more productive. well, thank you all very, very much. these have been great questions and i really have had a wonderful time here. and look forward to maybe returning to ford school at some point in the future.
so thank you all very much. >> susan: thank you very much. that was terrific. it is really wonderful to be able to have such a clear and candid discussion of very important issues and we're particularly pleased to have this important topic addressed as part of our policy talk series. so thank you very much.
i'd also like to thank john ciorciari and dawn lynn kaiser for framing the questions. and in particular, our audience for pulling together such a wide range of very thoughtful questions that enabled us to expand the conversation this afternoon. so thank you both to those who are here with us in the room and also to those who are watching online. with that, let me ask you to help me end the session by giving a final thanks to dr. ferguson for his presentation.
thank you very much.
