A pension expert says millions will find they can’t afford to quit their jobs, while others may be forced out of work before their nest egg is ready.

Teresa Ghilarducci knows retirement. A labor economist and professor at the New School for Social Research in New York, she’s long studied the shortcomings of how the US handles preparing for citizens’ old age.

Much of the financial industry is devoted to running retirement funds—$25 trillion in traditional pensions, 401(k)-style plans and annuities and $13 trillion in individual retirement accounts. But Ghilarducci says tens of millions of workers aren’t getting the help they need to save. It’s a problem worrying some on Wall Street, too: Larry Fink, chief executive officer of BlackRock Inc., the world’s largest asset manager, devoted his latest annual chairman’s letter to the need to shore up retirement savings.

Ghilarducci has advised Democrats, including former President Bill Clinton, and Republicans, such as former California Governor Arnold Schwarzenegger, on pension policy. For years she’s proposed creating a national plan that would automatically sign up every worker without a pension or 401(k) and invest the money in professionally managed funds.

It’s a big government program that taps into markets in a way that could also appeal to some dyed-in-the wool capitalists. (In fact, in 2016 she co-authored a version of the plan with Hamilton “Tony” James, former president of private equity giant Blackstone Inc.) But in Ghilarducci’s latest book, Work, Retire, Repeat: The Uncertainty of Retirement in the New Economy, she pushes back against a solution that’s popular among finance and corporate leaders, including Fink: People should work longer.

Ghilarducci spoke with Bloomberg Television’s Sonali Basak on May 10 to find out what needs to change. This interview has been edited for clarity and length.

SONALI BASAK: Is working longer the solution to making sure people have enough money to retire?

TERESA GHILARDUCCI: Ever since I started my career, when Social Security was being cut [by raising the age for full benefits] and pensions were going on the wayside, and there were more 401(k)s or do-it-yourself-type systems, we all knew that people would not have enough given that we did not have a good pension system. And so people thought, “Well, for the small group of people who are blue-collar workers, bricklayers, they won’t be able to work longer. But for everybody else, the work is going to get easier.”

Well, in 40 years that has not happened. Now think about it for a while. A lot of jobs that aren’t blue-­collar work have become pink-collar. And pink-collar jobs are jobs that women do very much in the service sector—taking care of older people, taking care of children. That requires a lot of heavy lifting, a lot of stooping and bending, a lot of physical activity.

And those jobs break bodies down. There are also a lot of light-blue-collar jobs or semi-pink-collar jobs that require a lot of engagement with the computer. And the computer has made some aspects of jobs easier. But the requirements for intense concentration, keen eyesight and actually being able to speed up your work because of increased surveillance have actually made those jobs harder, too.

And when you add up all the complexities involved in jobs that older people have, those jobs actually can raise cortisol levels, increase inflammation and cause more metabolic disorders and early death. So a lot of the jobs that people have or expected to have in old age are actually the kinds of jobs that will break bodies down and are accelerating sickness.

SB: How will this play out?

TG: There are some businesses that are hoping there’ll be a big supply of desperate older workers ready to work. Those jobs are in home health care and personal care. A good 10% of the new labor force will be these jobs in just that one occupation.

But business services, janitorial work—again, a disproportionate amount of older workers—those businesses really like the fact that these workers are very, very cheap and they’re very desperate. The fact that the jobs are breaking down their bodies really isn’t a concern of the employers. Part of the crisis is that the lucky ones will be able to get those jobs. The part of the crisis that I think many experts, including Larry Fink, don’t understand is that most people cannot decide when they retire.

They are retired, they don’t retire. So 52% of people who say they are retired said they were forced to retire, either because of their knees or their metabolic disorders or just the stress of the job they couldn’t take. Or they had to take care of their spouse, were pushed out or laid off. So this idea that workers can just decide to work longer is also a myth, because most people cannot decide whether to work or not.

SB: Whose responsibility is it to make sure people have enough money to retire?

TG: We can say it’s up to the 18-year-old to be financially literate and to understand that when they get out of school or start work, because half of 18-year-olds don’t even try college. And you can think, so it could be on the individual. And then people say, “Well, it’s up to their parents to tell them what to do.” Well, a lot of children did not pick the right parents—that was a joke. But it’s really important for us as a society to realize that there’s a lot of wealth—including knowledge and wealth, actual wealth—that’s handed down, and a lot of debt and a lot of burden that’s also handed down. So the answer to your very pointed question—“Whose responsibility is it?”—I’m going to say it’s unreasonable to think that it’s just the person, an individual person’s responsibility.

No other country requires the individual to do so much for their retirement planning than the United States. We moved away from traditional pension plans—where if a worker worked, they were just put into a plan, that money was managed for them, they couldn’t choose. We moved into 401(k)s, where the worker had to decide how much to invest, whether or not to invest, and had to choose an employer that actually provided the plan. Most employers do not.

Most people, 83 million workers right now, are employed but not in any kind of setup where they can save for retirement. So the employer doesn’t even have to have any responsibility for it. And the government’s responsibility is to give a tax deduction to an employee that happens to save. Well, who are those workers? They’re the highest-paid, and they have the best employers. The tax deduction—the government’s responsibility for savings—is only going for the very top. So that 80% of our $270 billion that we spend, that the government spends, on retirement savings is going to the top 20%.

SB: Is that a call to eliminate the tax break for contributions to 401(k)s?

TG: This is a very expensive and regressive tax benefit, but it does help some people save for retirement. So why get rid of something if it works for one slice of the population? All I’m saying is, don’t leave the 83 million people who don’t have access to retirement plans out of this big bonanza. So perhaps we can put a cap on [the tax benefit] and make it less expensive and more efficient by not giving away thousands of dollars a year to people who don’t need it. So we could cap it, but we also could broaden it so that everybody can get some help from the government. I’m still going back to your question: “Whose responsibility is it?” And it’s the system’s responsibility to get people to accumulate money for their retirement earlier in life.

They accumulate Social Security credits. There’s no choice about whether or not you’re in Social Security. Even the most conservative Republican would not call for making Social Security voluntary. So why do we have our pension system—the other vital part of the pension system accumulating money, having it managed by BlackRock or whoever—why would we make that voluntary? And the countries around the world that have a system that’s graded A or A-minus—there’s an international grading system of pension systems— none of the advance-funded, prefunded part of their pension system is voluntary.

SB: What about concerns regarding the solvency of Social Security?

TG: The fix for Social Security is to put more revenue in it. We are past the point where we can fix Social Security by cutting benefits. That’s a nonstarter, because the benefits for Social Security are keeping almost all of the people on it above the poverty level. So it’s a vital anti-poverty device. Cutting it would just make the system even more grim. So we need to put more revenue into it.

The Social Security actuaries—back in the day, I mean, this is in the ’30s, again, renewed in the ’40s, ’50s, ’60s—said that Social Security will need revenue from general revenues. We should not just be dependent upon the payroll tax to fund the whole thing. So there are many, many easy fixes to Social Security, and it really requires just more money from other pots—capital gains, lots of other places we can get Social Security revenue. The key thing as an economist is whether the amount of money needed will break the bank, will break the economy. And we’re nowhere near that. We spend much less in terms of our gross domestic product on the elderly than other countries. Even if we fully funded Social Security, we would still be under the international averages. It’s less than half of a percent of GDP.

SB: How much would raising the capital-gains tax help close the gap? And also, wouldn’t that be a transfer of wealth from the investor class to the broader public?

TG: The investor class is part of the broader public. If you only try to protect the investor class and let them be involved in the wealth-accumulating part of our economy, the investor class may be threatened by the collapse of the very economy they’re benefiting from. So I think with [hedge fund billionaire] Ray Dalio and even Larry Fink, there’s very much a recognition from the investor class that if we have wealth-building institutions in this country, everybody has to be part of it.

I did a calculation that if Elon Musk paid for Social Security just on his compensation for the entire year, and some of his capital gains were taxed to fund Social Security, just one person, it would save one-twentieth of the deficit in Social Security. Imagine broadening that out to maybe 20,000 other people. Just helping share in the funding of Social Security, we could solve that problem overnight.

Not funding Social Security and not having an actuarial report to say, “Hey, it’s funded for the next 25 years,” depresses the savings rates of ordinary Americans. We are finding out in surveys that people are saying, “I’m not saving for retirement. I’m not building wealth because Social Security won’t be there.” Not dealing with Social Security is inducing a fatalism that is suppressing the savings rate, which actually suppresses the motive for people to save for their own retirement. So it’s interconnected.

SB: Is enhancing Social Security the fix?

TG: Social Security has to be part of it, but there has to be something else which is much bolder than the kind of ­moving-the-needle legislation we’ve seen in the last 40 years. Almost everybody agrees that we need to get people saving for their retirement earlier, as early as possible. So as soon as someone starts working and having to pay into Social Security is exactly the moment they should start paying into their own account.

And there is a bill in Congress, both in the House and in the Senate, supported by both Republicans and Democrats, that has a simple fix. It’s called the Retirement Savings for Americans Act, RSAA. It only applies to the over half of workers who do not have a retirement account now and won’t next year. They will be automatically enrolled into a government-administered pension plan, a national pension plan. Automatically they’ll save 3%, and if their earnings are below the median—so that’s half of workers in this eligible set—the government will match 5%. And everything we know from behavioral finance, from case studies, is that when you include a match, something flips in people’s brain. They’re not fatalistic about retirement anymore.

SB: This sounds very close to what we see in some other countries, similar to an Australian “super” fund or even a sovereign wealth fund.

TG: Yeah, I’ve been working for a lot of years with many different people, many of them on Wall Street. We all agree that we should take examples from other countries where they build a capital fund. Capitalists love it because it provides a capitalist fund and everybody’s involved, and the Democrats love it because it actually provides economic security. Republicans should care about economic security as well. But there’s something for everybody. It is like a sovereign wealth fund. It’s an asset that matches a liability. And that liability is that a population ages and can’t work forever.

SB: Who manages the money for a fund like this?

TG: I’m a big fan of traditional pension plans, the kind that state and local workers have, and many of the unionized workers in big companies—or at the companies that don’t want to be unionized so they provide a good plan.

What they do is pool money, and this is what the government plan would do. The government would not manage this money. It would be managed just like the defined benefit plans of the World Bank or the state of California. It would be managed by institutional investors. The dollars invested into those kinds of pooled, professionally managed funds will go a lot further than the 401(k) money today.

Right now we’ve provided a system to American workers that is guaranteed to not give them the best fee-adjusted, risk-adjusted rate of return. Because the poor individual has to decide what portfolio to get them on the efficient frontier [the ideal mix of risk and return]—that’s completely impossible for a worker who has to deal with building a building or teaching an English class. We have a system that’s not aligned with the capabilities of the people that have the most responsibility. So the money would be funded in the sovereign wealth fund by professional private money managers.

SB: A recent New York Times article citing your research asks if the 401(k) was a mistake. Was it?

TG: The 401(k) system was a mistake. If it was meant to be the retirement system for all Americans, it would’ve been called the retirement system for all Americans. Instead it was named after an obscure part of the IRS code, and it was meant for a completely different purpose. It was meant to supplement Social Security and traditional pensions. But because of several factors, it became a retirement savings plan for just a privileged part of the American economy.

SB: There’s a big debate about the growing role of private companies in the economy. Should individuals’ retirement funds be able to invest in private assets?

TG: An individual having private assets along with liquid assets in a 401(k) account is very difficult to manage—401(k)s are not long-term investments. They’re liquid. A person can take money out of that account. And so Congress called them retirement accounts, but they’re not retirement accounts at all. I told Congress—I think just several weeks ago, I was in front of a Senate committee—I said, “Congress, call them the Great American Emergency Savings Act or savings accounts, but have a real retirement account.”

A real retirement account is not liquid, and therefore the asset that is not as liquid as a public market asset is the appropriate asset. We have this system where we’re trying to match short-term assets with long-term liabilities. It’s a huge, giant asset mismatch that’s costing Americans their old age. And it’s costing the American economy.

Written by: @Bloomberg

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