LOS ANGELES (Reuters) - The U.S. retirement age should be extended to reflect longer life spans and the parlous condition of many pension programs, according to economists at the Milken Institute’s global conference.
A simple remedy to the broad problem of underfunded plans — whether traditional defined-benefit pensions or the employer-sponsored 401(k)-type defined contribution plans that are replacing them — is to raise the U.S. retirement age by several years, perhaps to age 70, the officials said at the think tank conference held this week in Beverly Hills, California.
Michael Milken, the junk bond pioneer who was imprisoned for securities fraud before starting his think tank, proposed that the retirement age be adjusted to 85 percent of average life expectancy, which in the U.S. reached 78.1 years in 2009. When the Social Security system was introduced in 1979, the average U.S. citizen lived to 61.7 years.
“It’s a no-brainer that we have to index the start of benefits to life expectancy,” said panelist Zvi Bodie, a management professor at Boston University who has written about pension finance and investment strategy. “I don’t understand why there’s any debate about that.”
Gary Becker, a Nobel Prize laureate from the University of Chicago, told a luncheon audience in a separate session that policymakers have little choice but to delay payment of retirement benefits given the gaps in the budget deficit. He urged the U.S. Congress to consider legislation moving the retirement age to 70 for people unhampered by disabilities.
“I think a lot of people would prefer to work longer,” Becker said.
The well-chronicled leap into retirement age by the first generation of Baby Boomers is straining an already stressed budget and attempts at reform shouldn’t be waylaid by irrelevant social policy arguments, others said.
The problem has been exacerbated by the fact that “most people” begin claiming benefits by age 62, although the eligibility age was 65 when Social Security was first established, said Charles Blahous, a public trustee for Social Security and Medicare who is a fellow at the conservative Hoover Institution.
“We shouldn’t let the fact that some people somewhere may have a physical incapacity mean that we have to pay everybody to leave the workforce at age 62,” Blahous said.
He tarred Social Security as “the single most expensive program in the budget” and said it is at risk of ceasing to exist unless major changes are made in the program.
Blahous urged policymakers to rescind Social Security’s special budgetary status and require it to compete with other entitlement programs such as Medicare and Medicaid as part of the general budgeting program.
David Blitzstein, a pension specialist with the United Food and Commercial Workers International Union, said Blahous is ignoring potential solutions, such as tax increases, that could preserve Social Security and bolster public pension plans.
The debate comes as Congress is considering some radical proposals to deal with underfunded public pension plans while individual states are moving to cut back guaranteed benefits.
Rep. Devin Nunes, a California Republican, has introduced a bill that would prohibit state and municipal governments from issuing tax-exempt credit or direct-pay bonds if they fail to annually disclose to the Treasury Department data on how they calculate their unfunded pension liabilities.
His bill also would also require bond issuers to lower the expected returns on their investment portfolios to a rate of 4 to 5 percent from the 7-8 percent rate generally used today.
Several private equity executives at the Milken powwow contended that both defined contribution and defined benefit plans could reverse their funding deficits by pouring investment money into “alternative” investment classes, including hedge and private equity funds.
“There’s this incredible risk aversion now” as a result of the 2008 financial crisis, said J. Tomilson Hill, vice chairman of private equity firm Blackstone Group LP. “It’s really difficult and sobering.”
David Rubenstein, a private equity executive who co-founded
the Carlyle Group, said “more and more money is likely to go into private equity, particularly public pension funds.”
Reporting by Philipp Gollner, editing by Jed Horowitz