Planning for (Everyone’s) Retirement

Wharton’s Olivia Mitchell is a key player in Social Security reform.

By Stephen J. Morgan

Back in the 1970s, Olivia S. Mitchell knew as much about investing for retirement as your average 25-year-old. Which shouldn’t be surprising since that was precisely Mitchell’s age when she joined the workforce as an assistant professor of labor economics at Cornell University with a newly minted PhD.

“You know, it’s funny. When I first started teaching at Cornell in 1978, I had just finished my dissertation, and they asked me to teach a course on employee benefits,” she recalls. “I knew nothing about employee benefits. In fact, we had a defined contribution plan at Cornell, and they asked me how I wanted to invest my money? I said, ‘Gee, I don’t know. What does everybody else do?’ And they said, ‘Usually, 50-50 stocks and bonds.’ And I said, ‘That sounds like a silly idea.’

“So, I started thinking a little bit about how to invest my pension and the role of pensions and retirement income. Then I taught this course, and began to teach it more over time, and I started to do some research on pensions. After that, things just flowed.”

Today, Mitchell is known around the world for her expertise on private and public pensions, employee benefits, and compensation, including the mammoth and troubled U.S. Social Security system.

At Wharton, she holds a number of positions: International Foundation of Employee Benefit Plans Professor in the Insurance and Risk Management Department; executive director of the Pension Research Council, the oldest research center of its kind in the country; and senior fellow at the Wharton Financial Institutions Center and the Leonard Davis Institute. She also has been a consultant for the World Bank, the Federal Reserve Board, the InterAmerican Development Bank, IBM, KPMG Peat Marwick and other companies and organizations. She is the co-author or editor of 11 books, most recently Innovations in Financing Retirement (University of Pennsylvania Press, forthcoming) and The Role of Annuity Markets in Financing Retirement (MIT Press, 2001).

Much of Mitchell’s time in recent months has been taken up by business in Washington. In the spring of 2001, she was named by the White House to serve on the President’s Commission to Strengthen Social Security, which comprises eight Republicans and eight Democrats. (Mitchell is a Democrat.) The events of September. 11, 2001, pushed many national issues, including Social Security, into the background.

But it is only a matter of time before the nation’s retirement system comes to occupy center stage.

Social Security reform is a hot-button issue if there ever was one. More than a few newspaper and magazine writers have called Social Security the third rail of American politics: touch it, and you die politically. But even that charming image does not do justice to the potential repercussions of tinkering with something that enjoys the biggest special-interest constituency there is — every American.

The issue is so sensitive that Mitchell, in an interview in her office in November, would not discuss how the commission might recommend revamping the Depression-era program. The commission was to have completed its work and issued a final report by the end of 2001, but Mitchell said there was a chance the report would be delayed.

Mitchell was happy, however, to outline the parameters of the debate and offer some insight as to what the final report may generally suggest. She sees the commission’s role as one of “education, not legislation.”

“None of us is a current standing politician,” Mitchell says of the commission, which is co-chaired by former New York Sen. Daniel Patrick Moynihan, a Democrat, and Richard D. Parsons, co-chief operating officer of AOL-Time Warner, a Republican. “I myself have no interest in becoming a politician. Economists tend not to make good politicians. I think that we were selected because we have the ability to look both at the financial and the overall welfare equity issues and not necessarily be focused on what will this Congress in this year be able to pass or not pass.”

In the end, she says, “the president still has to stand behind a plan, assuming he wants to go forward with it. So ultimately whatever gets brought to the floor of Congress will be a political decision. I think we have the need to take the long view and focus on the big questions.”

The commission, in coming up with suggested revisions to Social Security, must adhere to six guidelines laid out by the White House in restoring fiscal soundness to the system: benefits cannot be changed for retirees and people soon to be retired; any Social Security surplus must be earmarked solely for Social Security; payroll taxes cannot be increased; the government must not invest Social Security funds in the stock market; Social Security’s disability and survivors insurance program must be preserved; and reform must include “individually controlled, voluntary personal retirement accounts that will augment Social Security.”

The last charge is the one that has drawn the most controversy. “With this commission, it’s the first time that private accounts have been talked about at the federal level in the history of Social Security,” says Mitchell.

Last summer the panel came under fire. Rep. Richard Gephardt (D, MO), the House minority leader, called for creation of a new commission because he said the existing panel was made up of people who were predisposed to supporting Bush’s plan to partially privatize the system. Others criticized the commission for trying to frighten people into thinking that the system is in worse shape than it is.

Mitchell dismisses those criticisms, but otherwise works hard to stay above the fray. She is not bashful, though, about discussing the problems with, and misconceptions about, Social Security that must be addressed. One of the biggest mistaken beliefs: All of us have Social Security accounts with our names on it in Washington. Many people do not realize that Social Security is a pay-as-you-go system, which means current payroll taxes are used to pay benefits for today’s retirees. Another thing many have difficulty grasping: the vast sum of money that will be needed to fund the system in years to come, as the baby boomer generation retires, and fewer workers are available to pay Social Security tax.

“The Social Security system has an unfunded liability — that is, promises have been made to workers, but there’s no money set aside to pay those promises,” Mitchell says. “Any money that we pay retirees — current retirees or ourselves in the future — has to be taken out of the tax revenue.”

In a study entitled “Social Security Money’s Worth,” which was published in her 1999 book Prospects for Social Security Reform, Mitchell measured how big this unfunded liability was and put it in terms that most people could understand — $70,000 per person working today. “In other words,” she says, “if we could imagine moving the system to immediate solvency, each of us would have to put up $70,000 today, and we would have to start afresh saving for our retirement. That’s a big number.”

If nothing is done to change the system, Mitchell says, the government will have to start cutting benefits to recipients in about 2038 because payroll tax revenue will not be sufficient to pay those promised benefits.

“I think what the commission will probably end up doing is offering options. We may say, ‘We favor this one,’ or we may not. I don’t know yet what we’re talking about in terms of the final outcome. But we’ll have a few options that meet the guidelines, and then we’ll say, ‘These are the possibilities, and they all are fiscally sustainable, and they all have an individual account, and they all do the things they’re supposed to do.'”

Mitchell declined to be specific, but she said that she personally favors allowing workers to invest in Treasury Inflation Protected Securities, known as TIPS. “They’re basically inflation-protected bonds. This is one possible element of the investment portfolio in these individual accounts. You might live 30 or 40 years in retirement, and that means inflation risk is one of the chief concerns that retirees have. I would like to see those inflation-protected securities play an important role.”

Serving on the commission has been a time-consuming – but rewarding — task, marked by months of meetings of commission members and public hearings.

“We’ve had people in to talk to us in a formal way at these hearings,” Mitchell says. “We’ve also had input from literally thousands of other people” in the form of e-mail and letters. “Every week, I receive probably two inches of e-mail that has been submitted to the commission.”

The public hearings were filled to capacity and drew a lot of press coverage.

“Every one of our public meetings has been full — all 16 of us and all 350 chairs in the audience, in addition to Bloomberg, C-SPAN, CNN, ABC, NBC, CBS, plus demonstrators outside, plus a whole variety of different interest groups. When they say public, they mean public. As an educator, I saw that one of the big reasons to be part of this panel was to inform the public about the challenges the system faces and how different solutions are going to lead to one set of outcomes versus another set.”

Mitchell says her understanding of the issues surrounding Social Security has been strengthened by her research and consulting on retirement systems in other countries. Most recently, she has worked with the Mexican government to assess its social security reform, with Brazil to help bring public sector pensions to fiscal sustainability, and with Japan on a project on learning how to cope with the challenges arising from aging populations in developed countries. Mitchell also has taught pension courses in Sri Lanka and India and worked with the Australian pension industry to learn about pension structure and administrative costs.

Mitchell feels comfortable traveling abroad. Her father served with the United Nations, and she spent many years living in Pakistan, Italy, Peru, Chile, Brazil, Colombia, and Mexico. In descending order of fluency, she speaks Spanish, Portuguese and French.

How soon should Congress enact Social Security reform?

“Yesterday,” Mitchell says emphatically. “I think that every year we let go is another year that we face substantial insecurity. What I see as the most troubling outcome of all is that Congress doesn’t act and just lets things drift along until a true crisis emerges when we’re all 80 or 90 years old. The most responsible path is a plan that puts in place some reforms now. The system faces huge uncertainty. We might be around in 2038, and we might not be healthy. We might not be able to work. We might not have all our faculties. Who knows what will happen? It’s better to make the changes now that put the system on a strong keel than to wait until we’re very frail and not really able to have many alternatives.”

As challenging as Social Security is, there is another looming crisis that also must be addressed.

“I think that Social Security is currently a very contentious issue, but what worries me is the 800-pound gorilla in the background, and that’s Medicare,” says Mitchell. “Medicare is stumbling along. It’s facing huge financial deficits — certainly within the next decade and probably sooner than that, maybe in the next five to six years. What concerns me is if we don’t fix Social Security now, there’s going to be no money left over once we focus on Medicare. I think that’s going to be a grave crisis. I think you will see people not getting treatment, dying of heart attacks. That’s going to command empathy and will need to be fixed. If we don’t fix Social Security now when we’re still not in the Medicare thicket, we’re going to be in trouble later.”

As for her own retirement prospects, Mitchell seems to have planned well. She never did follow the advice of the co-workers at Cornell, who suggested she opt for an asset allocation of 50 percent stocks and 50 percent bonds. Mitchell decided instead to put all of her retirement contributions in stocks. Even after switching employers, she kept all of her retirement money in equities from 1978 until 1999, riding the greatest bull market in history.

In 1999, she decided to move all that money out of equities into TIPS. She says she began to grow cautious about stocks while attending a dinner sponsored by the Wharton Financial Institutions Center. The center’s director at the time was finance professor Anthony Santomero, who is now president of the Federal Reserve Bank of Philadelphia.

“After dinner,” Mitchell says, “Tony had this custom of going around the table and asking everyone ‘What’s on your mind? What’s bothering you? What concerns you for the next year?'”

As everyone spoke, it became clear to Mitchell that there was more than a little pessimism about stocks. “After that dinner, I went out and said to my husband, ‘I think it’s time to get out of the stock market.’ And I had done nothing for 21 years prior to that! So I guess I have to thank Tony.”

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