Smart experts have done a lot of deep creative thinking about the topic of retirement coverage and related financial security here in the US. One of those experts is David John, Senior Strategic Policy Advisor for AARP’s Public Policy Institute and Non-Resident Senior Fellow and Deputy Director for the Retirement Security Project of the Brookings Institution. If you know David, you know what a thoughtful, self-deprecating, and funny guy he is. Our timing for this chat was excellent, as you’re about to see.
David, we are so excited to talk to you today. Tell us about your role with AARP and the Brookings Institution.
I wear two hats, but they’re basically pointed in the same direction. With AARP, I'm part of the Public Policy Institute, which is AARP’s internal think tank. I focus on savings, retirement savings, pensions, all those types of issues. And my goal is, working with my colleagues, to develop policies to help people to save more, to have better outcomes.
With Brookings, I am part of the Retirement Security Project -- I'm the Deputy Director there. Once again, we are trying to develop policies, in particular for middle and moderate income savers. We've been especially active in all types of behavioral economic approaches, automatic enrollment, automatic escalation, and we most recently have been focused on ways of converting savings into retirement income.
You were an early advocate of universal workplace saving for retirement. We also call these programs Auto IRAs, and Secure Choice. Tell us a little bit about how this initiative got started; we think it has a pretty interesting history.
Well, at the time I was at the Heritage Foundation and Mark Iwry was (and is again) at the Brookings Institution. The two of us were invited to testify before Congress and also to speak at conferences with the idea that we would take opposite positions and provide entertainment while speaking.
Mark and I discovered that we actually agreed on far more than we disagreed on.
At one of the conferences, we were backstage talking and we started to come up with what became the Automatic IRA. After extensive drafting and redrafting and talking to a wide number of people,
we unveiled the Auto IRA on February 14th, exactly 15 years ago on Valentine’s Day, in the Heritage Foundation's auditorium.
We had speakers from both liberal and conservative perspectives. And we immediately had a bipartisan co-sponsorship for legislation in both the House and the Senate. The key sponsor was Richard Neal who was then just a member of the House Ways and Means Committee. (Representative Neal is now the Chairman of that Committee). And we've been moving forward ever since!
That is so exciting, we would have loved to have been a fly on the wall during those early days.
We used to actually play up the fact that this was a Heritage and Brookings collaboration when we would testify together -- we had it prearranged so Mark would start a sentence and I would finish it.
You jokesters!
Early on there was federal activity under different administrations - ultimately the states ended up rolling with the idea and established the first live Auto IRA programs. What do you like about what you see in these programs so far?
Everything about them. The beauty of it is that we did the theory and the legal framework and the like, but the real hard work was done by you and your successors in Oregon and Courtney Eccles in Illinois, and Katie Selenski in California, and the various other states that are working on this.
What's been beautiful has been to see our concept actually turned into something that works. And of course, one of the great shocks about any public policy proposal is to discover that we did it more or less right and in life it achieves its goals. The fact that we actually have people of the populations that we were targeting participating and building retirement security, that's just really incredibly exciting.
It's just got to feel great to have an idea and to see that idea changing lives for so many people today.
Yes, but we let somebody else do the hard work. They deserve far more credit than we do.
Brilliant. That's what we’re going to say. Now the programs are still pretty young, what would you change? What do you think is Next Gen in the universal retirement savings world?
I see opportunity in two areas. Obviously one thing that's happening now, essentially separate from those two areas, is the fact that the technology is improving. So the lag time between signing somebody up and actually having payroll deductions start is declining and that's absolutely crucial. That was one thing we did not anticipate when we were writing the proposal.
As far as next steps, first is the matter of emergency savings. We've discovered that this is an essential part of securing long term savings, especially for the population that's served by the Auto IRA. And we need to focus on a finding a way that is both cost-effective and easily understandable, that enables people to have some ability to take some of their money to save for the inevitable financial crises that happen all the time.
At AARP, we've just issued a paper by a couple of academics that starts to link the fact that if you have savings now, even just emergency savings, it can mean a stronger household financial picture going forward. And that of course makes it easier for you to increase your retirement savings. So the two are interconnected.
Very cool. What’s number two?
The other one, as we start to move towards a discussion of a national system, is for the future. Is there something more that we can do with the Auto IRA framework -- which works really well for the type of small employer that doesn't have a dedicated HR department and has turnover in their workforce -- can we do something so that maybe the employer can make a voluntary match or a voluntary contribution to that IRA?
Obviously, this requires a great deal of legal thought, and we certainly don't want to endanger anything that's existing or being developed now, but what's the next stage for these programs?
How do we increase the ability of people to build their balances faster? Because when they have larger balances early on they do so much better over time. The real growth in a retirement account is interest on interest on interest. So having a bigger balance early on is really a rather key thing. This is also part of a paper we're doing at Brookings, looking at the whole question of small accounts and their growth. We expect this paper to be available sometime in the late spring.
(For more interesting Auto IRA ideas, read this piece: Achieving Economies of Scale in State-Facilitated Retirement Savings Programs.)
Terrific. We’re putting a pin in that. David, we suspect the third thing that you might talk about is decumulation and draw down concepts. So let's talk about some of the emerging ideas that you like in this space. And we have to talk about our favorite dessert, Tontine.
Of course, absolutely. And have you seen the movie the Wrong Box?
No, we have not.
You must! For more fun with tontines. It’s hilarious. But not related to retirement.
It turns out that related to retirement, the hardest decision that an individual has to make is, how do I take this lump sum of savings? I've been trained throughout my working career to spend income and preserve savings. How do I now adjust this so that I'm actually spending this money down and spending it usefully rather than some way that I'm either going to lose part of it or I'm going to spend it too fast -- or what's equally bad is to be so scared to spend it that I just basically have a lower income than I need. I'm sure that something awful is going to happen the day after tomorrow. And it will be an utter catastrophe unless I kept my full savings untouched.
That's a really crucial problem that we have not addressed sufficiently. So among the solutions, we know annuities are there, but an annuity is expensive. It is very unpopular, it's not flexible, at least in most cases as they exist now. So we've been looking at a variety of alternatives.
More about Tontines, please.
There is the question of the Tontine, which despite its really cool name, is based on an Italian financier who may have developed it, may have only publicized it and may have actually been a crook on the side.
But it's basically a pooled investment portfolio where you get longevity credits.
Essentially, I invest my money and get paid regularly starting at a certain age. When I die, my remaining share of the pool goes to everyone else who is still alive. In a traditional tontine setting, what that means is that my retirement income will start low and work its way higher as more people die (hopefully not me). As the pool of beneficiaries gets smaller, I get income from investments of the deceased, as well as a piece of their remaining investment principal.
How could this work better in today’s retirement world? We want to revise the idea so that you have a more stable stream of income throughout your retirement, or even one that slightly declines over the years. Because of course, you become less active as you reach more advanced ages and need less “spending money.” This revision adds some complexity to the basic structure. We did a paper at Brookings, which discusses that in some detail.
OK, Tontines in a nutshell! What else do you like?
Another variation is a phased withdrawal plan where your money is invested in a pooled account and you continue to own your money, but because it's being invested carefully, you receive income from it over your lifetime. Assets and income levels are not guaranteed (by the way nor is the Tontine), but the odds are very strong that through this mechanism you would continue to receive a higher level of income than you might get from a traditional annuity. And it's also much more flexible. In the event that your circumstances change in some way, you can revise the way your savings are handled, and you can access the principal. We did a paper on that in 2019.
Finally, we're doing a paper later this spring, on Collective Defined Contribution (CDC). In fact I was just talking to a gentleman in the UK who has done some work on this. It turns out with a CDC, which combines the best of both the defined contribution world and the defined benefit world, you actually could end up with a much higher retirement income than you would have otherwise.
So there's a lot going on and it's just a matter of helping people, first by developing something that can be used as a default, something that is an automatic solution. So I don't have to sit there at retirement and think, Oh Wow, I've got to make this decision. I'm sure I'm going to make the wrong one. Something that provides guidance, but is also flexible enough so that as you learn more and as you age, you can adjust it to suit your individual circumstances.
So, something that works well for most and can be tuned.
Exactly.
And it sounds like we're going to have a lot more to talk about soon. This has been a tough nut to crack, right? People have been working on this for a while and it doesn't seem like any of the solutions identified to date are feeling very universal.
No, absolutely. There is still a great deal to work on in this area. And we've got actually a book coming out also in the spring, which collects a bunch of our earlier Brookings papers together, along with papers by some other authors proposing things like the START account, which is a transitional account under Social Security to help people to delay taking their Social Security benefits and things like that. So we've got a lot going on. Lots of fun. (Here are two more great ideas to take a look at: A Retirement Dashboard for the United States ❤ it! and Improving the Saver’s Credit for Low- and Moderate-Income Workers.)
We can’t wait. We do have one last question before we let you go. We're still in a pandemic, any silver linings?
Oh yes, absolutely. I live in West Virginia and my office is in Washington DC. So my commute has gone from 75 miles to 25 feet and that means I actually get enough sleep at night! I can focus on other things, too. Although I don't publicize it, this means that when I'm in a Zoom meeting, if it's really boring or it has no relevance to what I'm doing, I can pick up things on my desk and actually do real work that nobody sees. So, I mean, it's definitely not a total disaster. Being an introvert at this point helps.
We imagine it does. And now when you look away from your camera on the screen, we'll know what you're doing.
Never when you’re on the line.
Right! Thank you so much David. We really appreciate the chance to talk to you.
If you’d like to connect directly with David John, you can reach him here djohn@aarp.org or djohn@brookings.edu. You can follow David’s work and adventures here @dcjretiresecure. And you can follow and engage with AARP PPI Research here: @AARPPolicy and the Brookings Retirement Security Project here.
This piece was featured in the February 11, 2021 edition of Retirement Security Matters. For more fresh thinking on retirement savings innovation, check out the newsletter here.
