How can we build better retirement systems in the wake of COVID-19? Wharton's Mitchell has some ideas
Pension Research Council scholar Olivia Mitchell looks to the future and what policymakers and employers can do.
On January 1, 2020, the retirement industry, and plan sponsors in particular, might have been forgiven for thinking they were doing a pretty good job helping employees save for retirement. But the COVID-19 pandemic “changed everything,” writes Wharton economist Olivia Mitchell in a working paper published this month.
Now new worries, such as how long, or even whether, the labor market will take to get back to pre-COVID-19 status, join the already increasing worries about pension funding levels. U.S. state and local pensions are suffering, with plan funding falling from an estimated 52% to 37%, the paper reports. In addition, retirement systems are “also feeling the pain” as payrolls and government tax revenues are contracting.
In beginning to offer ideas on how retirement plan savers, retirees and sponsors can try to weather what it appears will be a long-term pandemic impact, Mitchell puts forward the idea of pension saving, health care insurance and financial advice becoming “de-linked,” or made separate, from people’s employers.
Going further, Mitchell, the executive director of the Pension Research Council and a professor in the Business Economics and Public Policy Department at the University of Pennsylvania’s Wharton School, also concludes in the paper that future pensions will “require new methods to share risk, beginning with enhancing financial literacy in the population, helping people to save more and invest smarter, and to better manage longevity.”
“Plan sponsors can also do more to make pensions more flexible, for instance by linking retirement ages and contributions to funding levels,” writes Mitchell near the end of the research paper, which is titled, “Building Better Retirement Systems in the Wake of the Global Pandemic.”
Moreover, writes the professor, “policymakers could enhance the decision-making environment by providing better data to price insurance products, and by formulating better forecasts and establishing plans to respond to the aging population’s needs.”
In addition, she writes that “raising retirement ages, incentivizing continued work, and helping people save more are also likely to be part of the solution.”
“Strengthening safety net programs is also likely to be critical in helping those who cannot work and lack private insurance,” Mitchell adds as another idea that may help ease pain in the wake of the pandemic.
The paper states in an opening “abstract” that due to COVID-19 “retirees, along with those hoping to retire someday, have been shocked into a new awareness of the need for better risk management tools to handle longevity and aging.”
The paper’s aim, it says, is to give “an assessment of the status quo” before the coronavirus hit, evaluate how retirement systems are doing now, and to “examine insurance and financial market products that may render retirement systems more resilient for the world’s aging population.”
In looking what policymakers can do to help solve increased problems for retirement plans in the pandemic’s wake, Mitchell also says that “evaluating retirement security is likely to require the development of a consistent and economically coherent set of guidelines for measuring and forecasting social security and pension assets and liabilities, as well as the assessment of long-term care needs for the aging population.”
At another point in the paper, Mitchell steps back to look at COVID-19’s frightening impact on the world economy as a whole. She says that “still unknown is how the world will pay for the trillions in stimulus efforts rolled out amid a massive global recession,” and “fewer still have thought about how global retirement systems will need to be reimagined in the wake of the global pandemic.”
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