In this installment of the Harvard Business School Healthcare Alumni Association (HBSHAA) Q&A series, Alicia H. Munnell, Peter F. Drucker Professor of Management Sciences at Boston College’s Carroll School of Management, talks to Michael Wong about building long-term financial health via career sustainability.
Michael Wong: Recently a colleague from my AstraMerck start-up days discussed how poor financial health, before the pandemic, was the fifth biggest killer in America.1 Per your extensive research on the state of Americans’ lack of financial health, what can leaders do to help address this challenge?
Alicia H. Munnell: Our Center has a National Retirement Risk Index, which measures the share of American households that are at risk of being unable to maintain their pre-retirement standard of living in retirement. Since the Great Recession, the Index has shown that even if households work to age 65 and annuitize all their financial assets, including the receipts from reverse mortgages on their homes, roughly half are at risk of falling short.2 These findings underscore the need to fix our retirement system, which includes shoring up Social Security’s long-term financial health; ensuring that all workers have access to a workplace-based retirement savings plan; and encouraging people to work longer and delay Social Security claiming.
First, with respect to Social Security, the program faces a long-term financial imbalance of about 3.5 percent of payroll, which means that if policymakers raised payroll taxes by 1.75 percentage points each on employees and employers, the imbalance would be eliminated. (Though, because of longer lifespans, the system would continue to fall back into a long-term deficit absent further adjustments.) Fixing the problem is conceptually simple but politically difficult. Various combinations of revenue increases and spending reductions can solve the problem. Personally, because current Social Security benefit levels are not overly generous and are becoming less so over time, I would focus on revenue increases. Besides the standard options of raising the payroll tax cap or payroll tax rates, a more unorthodox approach like shifting the system’s “legacy debt” burden to general tax revenues could be considered.
Second, the main reason that U.S. workers end up with inadequate retirement savings to supplement Social Security is that, at any given time, only about half of private sector workers are covered by an employer-sponsored retirement plan.3 Policymakers have tried for years to address this “coverage gap” but efforts at the federal level haven’t moved the needle, because the programs have relied on the voluntary participation of employers. In the absence of federal action, though, a number of states have adopted mandatory auto-IRA programs, which require employers without a plan to automatically enroll their workers in an individual retirement account (IRA). The inclusion of a mandate for employers is a game-changer. So far, Oregon, Illinois, and California have up-and-running mandatory programs, and Connecticut, Maryland, New Jersey, Colorado, Virginia, Maine, and New York are in the process of setting them up.4 While these programs look promising, solving the problem on a state-by-state basis is still a silly way to run a railroad. A more definitive solution needs to come at the federal level. We saw a hint of progress this year when the House Ways and Means Committee voted to include a federal auto-IRA in the initial Build Back Better Bill. But this provision didn’t make the final cut.
Third, I have long been a fan of working longer, which has several beneficial effects: delayed claiming of Social Security produces higher monthly benefits; workers with a retirement plan can see their assets grow as they contribute more and earn asset returns for a longer period; and the length of the retirement span over which assets need to spread shrinks. Earlier this year, my colleagues at the Center found that roughly 85 percent of those working at 62 can work to 67, which means that the prescription to work longer is still useful advice for much of the population – and the typical worker can work until 70 based on estimates of disability-free life expectancy.5(Sixty-seven is Social Security’s so-called full retirement age for most of today’s workers, but 70 is the age at which people maximize their Social Security benefits.) However, a substantial portion of Black workers and individuals with low education will not be able to work to 67.6
If people are willing to reframe their assumptions around working longer, what can, and should they be doing to have career sustainability?
In recent years, Americans have become increasingly aware of the benefits of working longer. And policymakers can help make work more attractive for older workers by making permanent the temporary enhancements to the Earned Income Tax Credit for individuals without dependent children in the American Rescue Plan Act. (Specifically, these provisions included — for 2021 only — eliminating the upper age limit of 64 and increasing the maximum credit from $543 to $1,502.)
Once workers are committed to the goal of working longer, they can help boost their own prospects for success by signaling to their managers that they are willing and able to work longer and would like to continue enhancing their skills. Workers should also take good care of their health, which will allow them to maintain a high productivity level in the workplace and demonstrate an ability to mentor younger workers, as some evidence indicates that inter-generational workplace teams are more productive.
Of course, workers can do all the right things, but they still need employers who are willing to hire and retain them. In this regard, older workers have a lot to recommend them. Data show that older workers match up closely to younger workers in terms of health, education level, and fluency with technology. Older workers also have lower turnover and a wealth of skills and experience; perhaps, not surprisingly then, their performance matches and often exceeds that of younger workers.
In terms of employers’ perceptions of older workers, a survey that we conducted in 2019 found that older workers are seen as more costly but also more productive. And an overwhelming majority of employers said older workers and prospects were “as attractive” or “more attractive” than younger employees or prospects. In addition, an aging workforce will also produce more older managers and, therefore, a more receptive environment for older workers.7 Of course, responses to a survey do not necessarily translate into direct actions, but the findings were at least encouraging.
Policymakers could also help here by taking a bold step: establishing a national retirement age of 70. This standard could be made more flexible by setting it as a default and allowing firms to opt out or set a higher age. A default retirement age would have benefits for both retirement planning and workforce management. On the employee side, it would provide a more formal process to enable workers to plan to work longer, begin partial retirement, or enter into full retirement at age 70, which also coincides with the age at which they can claim their maximum Social Security benefit. On the employer side, a default retirement age would give employers a way to separate from an employee whose compensation outpaces his or her productivity, increasing the attractiveness of hiring older workers
Even without such a reform, though, I am cautiously optimistic that employers will become at least somewhat more receptive to hiring, investing in, and retaining older workers — particularly in today’s current period of labor shortages.
Alicia H. Munnell is the Peter F. Drucker Professor of Management Sciences at Boston College’s Carroll School of Management where she also serves as the Director of the Center for Retirement Research at Boston College. Before joining Boston College, Dr. Munnell was a member of the President’s Council of Economic Advisers and assistant secretary of the Treasury for economic policy. Professor Munnell earned her B.A. from Wellesley College, an M.A. from Boston University, and her Ph.D. from Harvard University.
Michael Wong is an Emeritus Board Member of the Harvard Business School Healthcare Alumni Association.
1. Spann, Tom. https://www.youtube.com/watch?v=YrIXxlIgBks
2. Munnell, Alicia H., Anqi Chen, and Robert L. Siliciano. 2021. “The National Retirement Risk Index: An Update from the 2019 SCF.”Issue in Brief 21-2. Chestnut Hill, MA: Center for Retirement Research at Boston College.
3. Biggs, Andrew G., Alicia H. Munnell, and Anqi Chen. 2019. “Why Are 401(k)/IRA Balances Substantially Below Potential?”Issue in Brief 19-7. Chestnut Hill, MA: Center for Retirement Research at Boston College.
4. Center for Retirement Research at Boston College. 2021. “Closing the Coverage Gap.” Chestnut Hill, MA.
5. Munnell, Alicia H. 2021. “Working Longer Is Possible for Most People.” MarketWatch. July 31, 2021.
6. Quinby, Laura D. and Gal Wettstein. 2021. “Are Older Workers Capable of Working Longer?”Issue in Brief 21-12. Chestnut Hill, MA: Center for Retirement Research at Boston College.
7. Munnell, Alicia H. and Gal Wettstein. 2020. “Employer Perceptions of Older Workers: 2019 Survey Results.”Issue in Brief 20-8. Chestnut Hill, MA: Center for Retirement Research at Boston College.