OSEC Congressional Testimony
Statement of Secretary of Labor Robert B. Reich before the Subcommittee on Deficits, Debt Management and Long-Term Growth, Senate Committee on finance [12/07/94]
The Anxious Middle Class in Work and Retirement
Chairman Bradley, Members of the Committee: Thank you for the opportunity to discuss the state of retirement savings in the United States. The members of this committee have devoted considerable time and attention to this issue. Many of you were instrumental in passing into law last week a bill to shore up the Pension Benefit Guaranty Corporation. I thank you for that -- and I applaud your broad commitment to retirement security.
Whether someone is retired or still in the workforce, it's not easy to be middle class in America these days. In the years after World War II -- when you, Mr. Chairman, and I -- were coming of age, America had a middle class that was the envy of the world. We turned our hard work into homes and cars, health care, and pensions. As the barriers of race and class and gender slowly began to fall, the middle class enlarged still further. Poverty reached an historic low. And the sense of possibility grew stronger.
But then something happened. A global economy made competition more fierce and jobs less certain. Labor unions, once a middle class staple, declined. And new technologies -- especially the personal computer -- revolutionized the workplace, and eliminated many routine mass production jobs.
As the economy changed, middle class families tried every means of holding on: Spouses went to work, both parents worked longer hours or took multiple jobs, they decided to have fewer kids and have them later, and they drew down their savings. But families have pushed these coping mechanisms about as far as they can go. Our middle class has become an anxious class.
A major source of their anxiety is wages. Last year, even in the thick of a recovery, median household income actually fell. And for workers with less education and training, the downward slide has been sharp. Men without college degrees -- a group that includes nearly three out of four working men -- have suffered a 12 percent decline in average real incomes since 1979.
But income and earnings tell only part of the story. Traditionally, membership in the American middle class included not only a job with a steadily increasing income, but a bundle of benefits that came with employment. Once again, we see a widening gap, and once again the gap is related to education and skills. Employer-sponsored health coverage for workers with college degrees has declined only slightly, from 79 percent in 1979 to 76 percent in 1993. But for high school graduates, rates have fallen further: 68 percent to 60 percent over the same period. And rates for high-school dropouts have plunged -- from an already low 52 percent in 1979 to only 36 percent last year.
Pensions have followed a similar path. Consider: nearly two out of every three workers with college degrees get pension coverage on the job. More than three out of four high school dropouts do not.
Indeed, our very notion of retirement is transforming. When we think of retirement, many of us picture a worker rewarded for a lifetime of service with a gold watch, fond farewells, and a lifetime monthly pension check to add to Social Security benefits. Supplemented by some carefully nurtured personal savings -- perhaps in the form of life insurance -- these sources of income assured security and leisure in retirement.
That happy picture has been true for many of our parents. And many workers assume that they, too, will live comfortably in retirement without following an especially disciplined course of personal savings during their working years.
Secure retirement -- like middle class prosperity itself -- is certainly possible. But it's possibly not certain. To be sure, in the twenty years since Congress enacted ERISA, we've made progress in ensuring that more Americans have adequate incomes in retirement. Today, more than 50 million people are earning or receiving employer-provided benefits. The aggregate amount of savings held in our private sector pension plan for workers' retirement has risen more than ten-fold since ERISA became law, from less than $300 billion in 1975 to an estimated $3 trillion today.
Yet we still have a long way to go. For example, only about 45 percent of all current workers participate in a private pension plan. Now, that average rate hasn't changed much in the last fifteen years. But averages sometimes obscure important details. After all, Senator Bradley and I have an average height of five-foot-ten.
While the overall rate of coverage has been stable, the composition of coverage has changed. As more women have entered the workforce and many barriers to better work have fallen, pension coverage for women has expanded. In 1979, 40 percent of America's full-time working women received pension coverage on the job. By 1993, the figure had climbed to 48 percent. By contrast, many men -- particularly men with only high school degrees -- have had a rougher time in the new economy, which shows up in the pension data: Fifty-five percent of full-time working men were covered in 1979, but only 51 percent were covered in 1993. In general, those who participate in private pension plans tend to be higher-income, full-time workers at large firms. Only about 17 percent of workers in businesses with fewer than 25 employees are earning pension benefits. Coverage of part time workers is virtually nonexistent.
There's been another change, too, one with broad implications for middle class families. When ERISA was enacted, nine of every ten workers who had pension coverage at work participated in "defined benefit" plans. These traditional pension plans guaranteed a monthly retirement check for life, with the amount of the check based on a predetermined, mutually understood formula typically tied to salary and years of service. Added security for these pensions came from the guarantee provided by the Pension Benefit Guaranty Corporation, the PBGC.
But today only about sixty percent of all plan participants are covered by this type of plan. While large companies are not precipitously dropping defined benefit coverage, workers who previously had no pension coverage and workers who want to supplement their defined benefit coverage are fueling a large shift to "defined contribution" plans. In these arrangements, the individual worker must contribute money to the plan -- and then bear the risk of how that money is invested. Of course, these plans offer some advantages over the defined benefit form of pension: direct contribution plans allow individuals to tailor how much money to save from each paycheck, and; they make it easy for today's mobile employees to carry their pension savings from one job to the next. And twenty four percent of all workers now save for retirement through salary-reduction plans at work, up from fifteen percent in 1988.
On the other hand, these plans offer no guarantees as to the amount of the pension at retirement, nor do they guarantee a monthly income for life. They promise only that a participating worker will receive whatever has accumulated in his or her personal pension account at the time of retirement. They require that the worker correctly anticipate saving requirements and investment returns over a lifetime, no small task for even the financially sophisticated. And there is nothing to prevent a worker from consuming his or her savings after leaving a job and receiving a lump sum distribution, an event that in fact occurs far too often. An increasing number of current pension plan participants rely exclusively on defined contribution plans as their only form of employer-provided pension plan.
This shift is one reason our national savings rate has been on a steady decline for two decades. According to the Congressional Budget Office, the net national savings rate, which was at a relatively robust 8.2 percent of GDP during the 1970s, has dropped to a barely visible 1.8 percent as of the early 1990s.
The savings decline has serious implications for America's ability to create jobs and increase incomes over the long term. Two related aspects of this problem concern me most.
First is the effect of low savings on our levels of productivity and investment. Improving living standards for middle class families depends more and more on investing in the things that make our people productive -- breakthrough technologies together with cutting edge skills. But our ability to invest in computers, data networks, and software depends in part on how much capital investors can draw from our national savings. Even though we operate in a global economy, where capital washes easily across national borders, savings still tend to be invested close to home. And when meager savings create a shallow investment pool, long-term living standards are at risk.
My second concern is the effect of low savings on the living standards of our workers when they reach retirement age. Americans are enjoying longer life expectancies -- and therefore longer retirements -- than Americans of previous generations. Today's workers will need unprecedented levels of savings to maintain their living standards during those retirement years. But since workers are now earning less and saving less, they'll have less -- especially if retirement itself grows longer.
Once again, the middle class shoulders most of the burden. The retirement system is shifting more responsibility for saving to workers at the very moment workers are struggling to maintain their incomes and hold on to their jobs. As wages stagnate, it becomes more difficult to pay this month's bills -- let alone to save money for the next century. What's more, many men in their prime working years -- their forties and fifties -- today are working less or dropping out of the workforce altogether. Many of them are left without a pension and without the means to generate any personal savings.
At the Labor Department, we have encountered far too many cases of ordinary people who have reached the age of 65 -- and found themselves unprepared. Let me describe one person, whom I'll call Joe.
Joe came to us earlier this year, because he thought somewhere along the line, he must have been cheated. All his life he had been looking forward to the day, two years ago, when he could retire. Yet here he was, at age 67, working part-time at a local fast food outlet, arriving at 6:00 in the morning to prepare breakfast for bleary-eyed commuters.
What happened? After all, Joe had worked nearly every business day of his life since he finished high school. And he had held many good jobs, especially as he got older. But his employer in the early years didn't provide a pension--not that Joe was much concerned about that in his younger days. Later, he held a union job as a truck driver that offered a good pension. But he lost all rights to any benefits when he left his trucking job without having vested. Joe's second child had just been born, and he decided to take a 9-to-5 job that would keep him in town. In the 1970s, Joe finally did earn vested rights with his employer's defined benefit plan. But in the early 1980's, his employer changed to a 401(k) style pension plan. Joe remembers something about his company changing its pension plan, but he wasn't sure about the details at that time. In any event, his children were in college and looking to him for support, so when his company sent him a form asking if he wanted to forego some of his salary and have it placed in a savings plan, he declined. Paying the bills and raising a family was hard enough.
When Joe left his job at age 65, he was making $38,000 a year. Today, he and his wife, who never worked outside the home, receive just over $13,000 a year from Social Security. He also gets $108 each month from the defined benefit plan that he vested in during the 1970s. But the check is not indexed to inflation. On that income, they can't live even by the modest means to which they were accustomed. That's why Joe has had to "unretire" and return to the workplace.
What can be done to make retirement work out right for middle class Americans like Joe?
First, we need to ensure that all Americans benefit from a growing economy -- higher wages and rising living standards generated by a world-class workforce. We need investment, public and especially private, in our workers' skills, their abilities, and their capacity to work together. This is not a matter of simply creating jobs. The economy has added more than five million jobs since January l993, most in high-paying occupations, and the Administration is justifiably proud of that record. But the 110 million existing jobs continue to split between a relatively few well-paying ones, mostly for well-educated professionals and executives, and a much larger number going nowhere. This is not a matter of simply generating growth. Corporate profits soared 45 percent in the last quarter, and productivity grew at an annual rate of 2.7 percent. But wage growth hasn't matched this pace. And this is not simply a matter of increasing overall wealth. Between 1983 and 1989, mean household wealth increased 23 percent. But almost all the growth went to the top twenty percent of households -- and half of the growth went to the upper one-half of one percent. The rich got richer, and the very rich very much richer. But the rest of the country either treaded water or sank further, trends that continue today.
The only enduring solution is to equip every American to succeed through hard work -- under the rules of the new economy. It used to be enough to keep your shoulder to the wheel and be loyal to your employer. But the rules have changed. Now you need to make your own way in the economy, learn new skills throughout your career, be ready to apply them in new ways and in new settings. That's why this Administration has fought so hard for education, training, skills standards, youth apprenticeships, a reemployment system, and the earned income tax credit.
In the end, the best strategy for increasing savings is to increase wages -- so that people have something left to save after they've paid the rent, purchased the groceries, bought the kids clothes, and taken care of the health care bills. Sometimes we talk about savings too much in the stern tones of a finger-wagging schoolmaster. We've got to realize that people can't save what they don't have. A growing economy that brings every American along must be an essential element of our savings strategy.
Second, we need to educate Americans about the importance of taking personal responsibility for their retirement security. Equipping workers with the financial capacity to generate retirement savings won't be sufficient if they do not grasp the fundamental importance of following that course. Workers need to be educated on the need to save as much as they can, as early as they can. And much of the burden of educating workers on this reality properly rests with employers.
The data demonstrate that many workers don't have the right knowledge to ensure sound retirement income. For example, participation rates in 401(k) plans -- especially among younger workers -- are low. When workers change jobs, an event that presents the worker with a choice between preserving his 401(k) retirement savings and pocketing it immediately, too many still take the latter course. We can take heart that matters seem to be improving. Among workers offered a 401(k) plan, the portion of those electing to participate rose from 60 percent in 1988 to 67 percent last year. But even these numbers are insufficient.
That is why in the coming months, the Labor Department will be undertaking a national pension education program aimed at drawing the attention of American workers to the importance of taking personal responsibility for their retirement security. In other words, we want to reach people like Joe in time so they can take steps themselves towards a better retirement.
As I've travelled the country, people have told me that saving for retirement is an intimidating task, filled with unfamiliar, confusing concepts and language. Many Americans make few or limited provisions for their retirement security during their working years. Many of these workers have either unrealistic expectations of what they can expect from Social Security or were never alerted to the need to save for retirement until it was too late. Even those workers who have made the crucial decision to begin saving for retirement often do not know where to turn for savings and investment advice or education.
Through this public information campaign, and the continued good work of this committee, we hope to revitalize today's middle class -- and make their retirements safe, secure, and productive.
Thank you for the opportunity to discuss this subject today.