Time For a Pension New Deal?

Heidi Heitkamp, the former US Senator (D) of  North Dakota wrote a comment for CNBC, A looming retirement crisis threatens us and future generations. Here's how we can avoid it:

Economists who argue that there is no retirement income crisis are missing the point. The crisis is not today, it is 20 years in the future.

But the time to act is now, before it's too late.

Every day, millions of Americans go to their jobs, work hard, and play by the rules to pay the bills and put food on the table each night. But they often struggle to then find any way to save for retirement.

Currently, almost half of all American families do not have any retirement savings. That's a time bomb waiting to go off, putting families across this country in jeopardy for generations and placing our economy at risk.

The challenges are clear: More than one-third of all private sector workers do not have access to a workplace retirement plan. Projections show that 44 percent of Baby Boomers and Gen Xers risk running short of funds for retirement. And 40 percent of American adults would be unable to come up with $400 for an emergency expense account, without borrowing money or selling a possession.

We face a looming retirement crisis that will impact millions of elderly and soon-to-be elderly Americans, as well as our children and grandchildren who will have to bail out those generations.

By 2035, and for the first time in U.S. history, Americans over the age of 65 will outnumber our children. If we stay on trend, America's old-age dependency ratio in 2020 will be 3.5 working-age adults for every person of retirement age. By 2060, that ratio will fall to about 2.5 to one.

The reality of the aging of America must be considered with current income trends. A recent study from the Federal Reserve Bank of St. Louis showed that between 1989 to 2013, there has been some wage growth among older families. Yet families in which the head of the household is 61 years old or younger actually saw wage declines over the past two decades by about 30 percent. That's a stark reality for too many families struggling to pay the bills, who often aren't able to save for retirement.

In two decades, Americans will be older and older Americans will be poorer. That reality begs the question: How we will afford to care for older Americans when most American families have no or very little retirement savings?

There are steps we can take to help address this looming retirement crisis.

First, individuals and families must make saving for retirement a priority. It can be difficult to think about your 401(k) or IRA when you're living paycheck to paycheck, but putting a little bit away each month will make all the difference. The earlier you start saving, the better off you'll be.

The long-term solution lies in the adage "time is money," or at least the opportunity to make money. If you put in a little bit in savings each year starting at a young age, it will add up to a lot of money by the time you're 65 years old – and much more than if you start saving for retirement when you're 40 or 50 years old. A recent CNBC.com article showed the benefits of starting saving for retirement at 25 or 30 years old.

A $650 monthly deposit into a 5 percent compounding account will yield $ 1million after 40 years. A little over $10 dollars a day (the price of an average dine-in lunch) would yield half a million dollars. Run those same numbers over a 20-year period, and the results are $267,000 and $132,000, respectively.

The answer is obvious: start saving early, even if it's a small amount, and get regular tax-free savings.

Second, Congress must act as well. This retirement crisis is not news for policy makers.

Last July, while I was still serving in the U.S. Senate, I worked with Senators Tom Cotton (R-AR), Cory Booker (D-NJ), and Todd Young (R-IN) on a bipartisan package of common sense bills that would help boost retirement security for individuals and families. It was strongly endorsed by the Bipartisan Policy Center. I hope these bills are reintroduced this Congress because they are needed.

Congress needs to invest in hard working families by helping make sure they can save for retirement now, so they will be set up for success in later years. But it also must be careful to avoid further complicating an already overly- complicated retirement savings system.

The dirty little secret is that government can provide all the incentives in the world for workers and families to save for retirement. But none of it will matter unless those workers and families make saving for retirement a priority as well.

The dirty little secret, or not-so-much of a secret for longtime readers of this blog is America's broken retirement system is failing millions of Americans and the brutal truth on 401(k)s and DC plans is they will only aggravate pension poverty down the road.

Don't get me wrong, Heidi Heitkamp is right about individuals taking responsibility by saving and investing wisely starting at a young age but the problem is a) very few are able to save and b) even when they do manage to save, most aren't investing their money wisely and are retiring with far less than they could have.

What about millennials? They're very frugal, savvy, investing in diversified low-cost ETFs or through robo advisors, demanding workplace perks like flexible working arrangements, medical coverage, and a 401(k) match.

They may be more savvy and frugal but that's mostly out of necessity and by the time they retire, they too might be confronted with the same problem, a gross retirement savings shortfall. Don't forget, the younger generations will be living longer and they run an increased risk of outliving their retirement savings (longevity risk).

There's another bigger problem, the next thirty years are going to be very tough, you can forget about 7-8% annualized return, I'm not even sure 5% annualized will be achievable depending on how long economic stagnation lasts.

This problem is even more acute for retail investors who don't have access to quality private market funds that big institutions have access to, investing in their funds and co-investing alongside them on direct private deals.

All this to say, all these young, savvy investors might be doing everything right, saving diligently,  investing in low-cost ETFs, diversifying across sectors and geographies, and come time for them to retire, many might still confront the same nightmare that many baby boomers will confront over the next ten years, namely, retiring in pension poverty.

So, while congresswoman Ocasio-Cortez battles to create a "Green New Deal," gaining praise by some and scorn by others, I think it's also high time the US looks at adopting a "Pension New Deal" to make sure millions don't end in pension poverty down the road.

In order to do this properly, however, the US will need to offer all its citizens a well-governed defined-benefit pension plan backed by the full faith and credit of the US government. Take the governance elements that have led to the success of Canada's large public pensions and expand that coverage to every working American. Only then will Americans realize what many Canadians are now realizing, the value of a good pension.

That is the only real long-term solution but in a country that views universal healthcare as socialist and not an inalienable right, I can't imagine offering people a universal defined-benefit pension will fly over too well even if it makes great long-term sense, provided they get the governance and risk-sharing right.

That's why more and more Americans will fall through the cracks in the years ahead and don't kid yourself, the pension crisis exacerbates rising income/ wealth inequality and it will detract from growth, making it harder to achieve high returns. It's part of the vicious deflationary cycle I'm worried about and when it hits us full force, it will cap growth for years to come.

Heidi Heitkamp is right to worry about the looming retirement crisis. I agree with her diagnosis, we saw evidence of it during the recent government shutdown when government workers living paycheck to paycheck were forced to borrow money and get food at food banks in order to survive.

Where I partially disagree with Heidi Heitkamp is in her thinking that more savings into a 401(k) and starting to invest at an early age will be enough to fend off the retirement crisis down the road.

It won't be, things are only going to get worse unless the US adopts a "Pension New Deal" or at least enhances Social Security and model it after the Canada Pension Plan where assets are managed properly at the Canada Pension Plan Investment Board where they invest across public and private markets all over the world.

Don't hold your breath on the Pension New Deal or Green New Deal which already off to a very rocky start and has detractors from many people, including Howard Schultz who thinks it's not realistic and immoral.

The problem is we have a global climate crisis and retirement crisis, and unless we tackle these issues with sensible policies that work over the long run, both crises will only get worse.

The retirement crisis is much worse for some countries, like the United States, where millions have already succumbed to pension poverty.

Below, former United States Senator and CNBC contributor Heidi Heitkamp joins CNBC's "Power Lunch" team to discuss the wealth gap and proposed tax plans in Washington. Heitkamp is from North Dakota and served as a Democratic senator from 2013 to 2019.

She's right about one thing, even if you increase taxes on the wealthy and redistributed the money to people, most won't put it in their 401(k), they will opt to pay down debt or spend it on frivolous things, which is why I would make pension contributions of a Pension New Deal proposal mandatory (like Social Security), not voluntary like 401(k)s. I know, it will never happen, at least not until the US reaches a breaking point.