TEXT OF INTERVIEW
Tess Vigeland: Roger Ferguson, welcome to the program.
Roger Ferguson: Thanks. Nice to be here.
Vigeland: We're here on the roof of your building on a beautiful, sunny day in the fall in New York. Tell us a little bit about what we are looking at here -- some of the famous buildings.
Ferguson: Okay. We're looking at a number of famous the buildings. Right over your shoulder Tess is the skyscraper they built right over the top of the New York City post office and then right behind that is a building is now called the Met Life building. It used to be the Pan Am building, 200 Park Avenue, a spectacular building. We can also see from here JPMorgan Chase, their Midtown office. And then we have up that way, that's Citibank building right there.
Vigeland: And I believe way over my right shoulder we have the Empire State building.
Ferguson: And there is exactly right, the antennae from the Empire State building right down there.
Vigeland: Well you've painted a picture for us of our surroundings here. I wonder if you would paint a picture for us of the retirement outlook today. Are we saving enough?
Ferguson: The answer is the retirement outlook for many people is uncertain. To answer your direct question, most Americans probably are not saving enough. More importantly though, this crisis is showing the vulnerabilities of the retirement system. We have seen 401(k)'s collapse. It's a very sad and painful joke that 401(k)s have gone to 201(k)s and maybe they've gone to 301(k)s -- not very funny for the people who have lived through that. And then the other leg of the retirement stool which is Social Security. That's also under a lot of stress. And so we have a number of challenges in the retirement world right now. Not just that we aren't saving enough, but that almost every element of the retirement system is under stress or is come under question.
Kai Ryssdal: You made a speech at the National Press Club a number of months ago in which you said, "We are at a pivotal moment in retirement security in this country." How do we make that pivot? We know the problems the recession and the financial crisis have brought. Now what do we do?
Ferguson: I think in order to make that pivot, Kai, we need to really have a plan. We need to adopt what I describe as the retirement system for the twenty-first century and be quite clear about what we are doing. And my proposal calls for three or four key elements.
First, obviously, we have to have more people in positions where they can save which is to say get people started savings earlier, get them into retirement systems automatically, so automatic enrollment.
Secondly, we do have to tell them how much they need to save. And retirement economists tell us that at this stage if you need to replace seventy to eighty percent of your pre-retirement income, you probably need to be saving somewhere around 10 to 14 percent. And when I say you, what I mean is the combination of the individual and the individuals' employer, so it's a joint responsibility.
The third element of a really good retirement system for the 21st century is an appropriate range of investment options. Fifteen to 20 investment options is what most professionals tell us is called for. If you have more than that, the behavioral economists tell us that people are stymied with too much choice, too few then obviously too few.
The fourth element of this system that I talk about is a guaranteed income for life. And this is an element of the system that people often overlook because many people think that the goal is to save and to build up as large a nest egg as possible, absolutely true, that's important. But then you have to think about how that comes back to you as income during your lifetime in retirement.
And then the final thing is that these costs must be kept under control for this entire system. All the data indicate that expenses in your retirement system are an important determinant of the outcome.
So that's the five elements and to make that pivot I think that you first have to start with being very explicit about what is called for.
Ryssdal: Is there something about people in this country that, you know, I mean we all have expenses and many people have lost their jobs and this has been an incredibly difficult time, and we have been non-savers in this country for a long time.
Ferguson: You make a very good point. We are in the midst of a very slow recovery from a very deep recession, there's no question. But even in the best of times I think people did not save enough and we saw that in all the national statistics. At points we have what was measured to be actually a negative savings rate. That was because people were looking at a range of different assets that seemed to go up in value year over year over year almost without fail and I think relying too much on things such as the equity they built up in their homes. Or frankly we've had 20 plus years of relatively good stock market performance and I think people got a little complacent about that as well. But finally and most as important, there was no one who was really educating individuals on what they needed to do.
Vigeland: For the people who really did save though, one of the common themes running through your plan is that we are all very much responsible for figuring out our own numbers. The demise of the pension has meant that it's really up to us to figure out what to do with the money that we do set aside for retirement and I wonder if we could get your thoughts on whether we are able to handle that responsibly? Because you look at what happened in the economic crisis and people of retirement age were too much in stocks, there were people bailed out at the bottom which is the opposite of what you are supposed to do. We haven't really learned any lessons yet.
Ferguson: Well Tess, you put your finger on a very important point. One of the other things that is an important part of the system is to get good advice, objective advice from a trusted expert, because handling one's retirement is as you point out, relatively complex. There's also just the natural human nature of people wanting to pile in when things look good and then bailing out, running for the exit when things look bad. So there's really a need for good, objective advice. In my shop we also offer non-commissioned advice. We also though have to make sure that people are well educated. So it's a combination of learning a bit more, increasing the level of financial literacy in the country while also providing as much objective, non-commissioned advice as we can possibly find.
Vigeland: I think if you asked most people they would say that they really don't pay a lot of attention to their retirement accounts. They may check them once a year, they may not. How often should we be doing that?
Ferguson: Well it depends on what you mean by check them. I do not encourage people to try and figure out their net worth every week. As the stock market goes up and down there is much too much volatility. Certainly once a year you want to check and see where you are. You probably want to do some reallocation depending on how things have unfolded during the course of the year. And importantly you have to really have a longer term plan and check year over year to see where you are against that much longer term outlook. So one has to be careful about being complacent, but on the other hand, I don't think it's wise to churn and burn and watch everything very closely on a week to week basis. That's more than I think many people can do.
Ryssdal: So who handles your retirement?
Ferguson: All of my retirement money is managed by my company at TIAA-CREF. I've got four very good advisors actually. I'm not sure one needs that.
Ryssdal: What do you say though to people who are now stuck in a place where because of circumstances and conditions in the economy, they don't have that retirement and are forced now to rely on Social Security and whatever else is out there?
Ferguson: Look, you raise a very serious issue Kai because a large number of Americans, far too many Americans who are unemployed. They started with too small a nest egg. One has to be very empathetic and to be honest with you, there is not an easy answer but there's an important answer which is to recognize that most people are going to live in retirement 20 or 30 years. And so wherever you are and whatever one can do to start getting out of that hole is going to be very important. But recognize as you say, that there are a number of people for whom the current time is not the best time. But the truth is there's never the best time to start planning for retirement. So whatever one can do, one should do.
But you're also correct that there are going to be a number of people who are going to be heavily reliant on Social Security. Now the other thing that we've seen is that Americans are clearly changing some of their plans. There is a recent Gallup poll I believe that about a third of Americans who are not yet 65 who are planning to work past the age of 65. Back in 1995 I think that same number was about 12 percent of Americans who expected to work past the age of 65. So it's quite clear that people are adjusting their expectations a bit and recognizing that they are perhaps going to have to work longer because of the crisis that we've just gone through.
Ryssdal: You have two kids right?
Ferguson: I have two kids.
Ryssdal: Is Social Security going to be around when they are of need?
Ferguson: The answer to whether that Social Security is going to be around depends very much on what policy makers do over the next several years because as you well know, the trustees have pointed out that in the not too distant future, Social Security is...the trust fund is going to start to be depleted. I think this year is the first year where the cash outlay exceeded income. And so to answer your question whether that is going to be around depends very much on what folks of your generation and my generation do over the next two to three years to turn to Social Security.
Ryssdal: Does it have to be around?
Ferguson: I think some form of Social Security does have to be around because we are talking about a very large and diverse country. And there are a number of people for whom Social Security is their only retirement system, and for many people, Social Security is an important component of their retirement system. And so I think it behooves us to and policy makers and others to turn their attention to shoring up the Social Security system.
Vigeland: One of the questions that we are getting a lot of these days is, "What should I be doing about the stock market?" People are very skittish about Wall Street. There's a lot of trust issues out there from Madoff to the Flash Crash of a few months ago. We have young investors writing in saying, "You know what? I'm not going to go there." That of course means that they're probably going to have to save more money. Older investors don't want to go there because they've already lost as much as they can possibly lose. What's your advice in terms of trying to figure out how much to be in that risky pool?
Ferguson: I think the reality is that every body has to be in that risky pool to some extent. The stock market over time has had a better return than fixed income. I emphasize over time because there is quite a bit of volatility in that market for sure. But I think people are going to be worse off if they don't have a portion of their incomes or their assets invested in the stock market than if they do. The challenge for them is to figure out how much risk they can afford to take given the size of their portfolio, given the size of their other forms of income. But I would absolutely advise everyone to continue to have some exposure in the stock market. The amount of exposure depends very much on one's risk appetite. This is an important part of diversification and without it, you are losing an entire asset class.
Vigeland: But determining your risk appetite is really difficult, especially after the last two years.
Ryssdal: It's just a scary proposition.
Ferguson: Absolutely it's absolutely a scary proposition, one won't deny that. But the question of should I avoid it altogether or should I confront it directly, the answer I think is you have to confront it directly because otherwise you leave yourself without one of the major sources of up-side potential in the investment world. But recognize that you need broad diversification. One should not think of a single investment class or stock class as the right thing, so growth versus value investing, etc. That range of discussions one really has to have. But to say that I'm never going to be exposed to the stock market again I think that is an imprudent form of being conservative.
Ryssdal: I wanted to ask you about this company's role as an institutional investor. It holds 400 something billion dollars in trust for other people's investments. You wield incredible amounts of power in the shareholder rights community, you guys just have a lot of pull. Why has that movement of getting shareholders more voice and more power in the decisions of corporations not been successful?
Ferguson: I think it hasn't been fully successful. I'll address your question. It hasn't been fully successful because not all shareholders take exactly the same perspective that we do. I think it has been successful to some degree when you get institutional investors such as ourselves taking a look at some very important issues and engaging with management. So the challenge I think is to get more institutional investors deciding to take what I think of as a responsible role as shareholders and engage directly with management and with boards around a number of key issues.
Ryssdal: So what are those key issues? What are the big issues in shareholder rights?
Ferguson: There have been a number of them, some that have merged relatively recently, others that are long standing. And our company I know that our participants have had a long standing interest in things such as environment, questions of how labor is being treated both domestically and internationally. More recently obviously questions of risk and risk management have become very important for shareholders as they think about financial services firms in particular. So there is clearly a range of them.
Ryssdal: How do the mechanics work here? Do you meet with fund managers and you guys talk about investment objectives and things like shareholder rights? Are you that detailed?
Ferguson: We have here an entire staff of people dealing with corporate governances and socially responsible investing. They go and meet directly with management of the companies in which we invest. We call it engagement. We try to be very responsible so we do not wave a red flag around it rather we take a more quiet but we think equally impactful approach.
Ryssdal: But what's your engagement with fund managers here?
Ferguson: Well obviously I do a number of things with our own internal fund managers. We generally set the parameters with how much risk they are supposed to take. We have them each identified with a particular type of investment so some of them are more value oriented, some of them are international, some to emerging markets. Our job here is to say to each one of those, this is the risk appetite that we as a company have and we evaluate them on how well they do on a risk adjusted return. Something that we call, that is known in the industry as the information ratio so that is the way that we really approach our fund managers.
Vigeland: I wonder if you would be willing to answer a couple of questions from our listeners that we solicited. We told them that we were going to be talking to you. Nathan Bishop of Albuquerque, New Mexico wrote in and said, "It seems to me that many people get stars in their eyes about double digit returns and early retirement. I'm out of here at 58 or 59. How does your company talk people out of taking inappropriate risks and maybe guide them to a more achievable goal?"
Ferguson: The first thing that we do is we have a very serious conversation with them about their risk appetite and we try to broaden that conversation so that they understand both the ups and the downs. Secondly, we look at their entire portfolio, so that we understand the assets that they have with us and the assets that they may have other places. And then we do something very important which is we do a modeling of the likely retirement outcome with various different scenarios. So they can then understand the stars in their eyes may not come to reality. What happens if you don't get those double digit returns, which frankly is more likely reality, and out of that I think they get brought back to earth, if you will about reality. But it really is an ongoing discussion of education, guidance, and advice.
Vigeland: And from our Facebook page, Tom Cote wrote in and wrote, "How do you know how much you will need to retire?" He is worried about not only under-saving but over-saving. And you can go with every calculator in the book and still not know how long you are going to live for example. You know...which is a question, they ask you that question in the calculators.
Ferguson: A couple things...one is most people should assume that they are going to live probably about 20 or 30 years in retirement which is not very concrete because it varies from person to person. As a society we have seen that we are living longer, and so I think that people may, if they aren't careful underestimate their life expectancy. You are absolutely right. At the end of the day, the calculator can give you a range of answers. That's why we also say to people, "Well you should think about replacing 70 to 80 percent of your pre-retirement income." because that really targets people in on a number. And then the other thing that we've seen, and the McKinsey study has shown this, sadly very few people seem to be over saving for retirement. The McKinsey study that I most recently saw showed that the average American maybe is short of retirement savings by something like 250 thousand dollars. And so while there may be a small handful who are over-saving, it looks as though the vast majority probably aren't saving enough. But again, it goes back to getting some good advice. But recognize that there are the probabilities that you'll live perhaps longer than many people expect in retirement.
Ryssdal: There are so many demands on our savings time though, there are so many things that you have to save for. Somebody told me once that what you ought to do is think about it like you have to think about at an airport when you are traveling with a kid and the stewardess comes by and says, "When the oxygen masks drop down, take care of yourself first and then take care of your kid." Right? So basically you've got college accounts, and you've got retirement, and you've got all sorts of other things. Prioritize for me how people ought to start thinking about that stuff.
Ferguson: Two or three things. First recognize that they are not necessarily in conflict. There are as you say priorities. I think one has to put a little something aside for retirement even as you are paying for your mortgage, paying for your children's education. And as you recognize that those other demands on your savings go away, you should increase what you're saving for retirement. One way to handle that is through what is called auto escalation, so that as your incomes go up, what you save for retirement goes up gradually as well. So that's one way to think about it is to put a little bit of it on an automatic pilot so that you aren't always forced to make these tradeoffs. But the reality is absolutely right. You need to set some priorities, first things first and for most of us...pay for that mortgage, pay for that kid's education, but think about yourself as well all along by putting away something for retirement and then as you are free from other obligations, increase the rate at which you save for your own retirement.
Vigeland: I know that the company has been holding a contest to get folks to give you some ideas to get the national savings rate to ten percent, I believe it is?
Ferguson: That's correct.
Vigeland: Can you share some of the answers with us that you have so far?
Ferguson: Thanks for asking me that. It's called "Raise the Rate." You can find it on the TIAA-CREF website and indeed we've had a range of ideas. Most of them have been what I would describe as micro. So frankly people are saying, "I'm going to give up a cup of coffee every week." I won't mention the brand name, but you can all guess which one.
Ryssdal: They're everywhere and they cost four dollars and...yeah.
Ferguson: Exactly right so imagine if you set aside a little bit of that. A number of people who have linked their savings with their concerns about the environment and decide that they are going to take public transportation. So that's the kind of thing we are seeing, a number of ideas that are really very much focused in on what I as an individual can do with my own lifestyle to save an extra five or ten dollars a week that then mounts up over time.
Ryssdal: So let's ask the macro question then. So you are a trained economist, how do we increase the national savings rate? And you don't get the prize if you win your company's contest.
Ferguson: No I do not get the prize. Increase the national savings rate has a bigger challenge if you will. But not to take away from the small ideas, so if every one did some of that, that would certainly help. We also are clearly going to have to change our mindset. It's back to the point that you raised earlier on Kai. We are a society of consumers. So part of this is going to be a big shift in national mindset towards putting aside more money for savings and just thinking about it more broadly in those terms. But there is no magic bullet around the national savings rate, this is one of the things that has vexed economists for some time now in the past and will probably continue for some time now going forward.
Vigeland: Well then of course, you do have the people who say, "Look, you tell me I'm supposed to save and then you tell me that if I don't spend my money, then the economy is going to get worse and worse and worse."
Ferguson: Right. Look, we're talking here at a very unusual time which is the turn-around from this very deep recession, and so both things are true. In order to keep the economy going, people are going to have to continue to spend appropriately. What we've been talking about though is a longer term perspective. And so as the economy heals, we are going to have to think of an American economy that is more balanced, away from consumption and more towards savings and investment. So one has to be able to keep both ideas in mind simultaneously.
Ryssdal: On that point though, you are a member of the presidents' economic recovery advisory board. I wonder if you would share with us how those meetings are going because it's tricky.
Ferguson: There's no question it's tricky. We give the president a range of advice, for example one of the groups that I was on just came out with a report on simplifying, streamlining the tax system and that seems to have certainly peaked everyone's interest or many people's interest. We have some early discussion around an infrastructure bank and that played into one of the president's recent initiatives. And so I'd say the conversations, though it is a tricky time, we are coming up with one or two ideas that seem to be of interest. The sad truth is there is no easy fix for the current, relatively gradual turn-around. There's not going to be a silver bullet that's suddenly going to get us back to maximum employment in the U.S. for some time to come.
Ryssdal: How concerned are you though as a guy whose job is taking care of the retirement of a huge chunk of the American people and a guy who advises the president of the United States on the economic recovery, how concerned are you about the deficit? Because it's getting bigger, people are talking about it a lot.
Ferguson: Again it goes to the issue of priorities. I think over the long term, a deficit of this scale is clearly not sustainable. But recognize that as many economists would suggest in order to get out of a recession, you do need some element of deficit spending, which is what we've had. So I think now the challenge, and it's a balancing act, is to figure how to gradually talk about and start gradually to reduce the deficit but not do it so quickly that we throw this nation into recovery off. So I think most economists as a long-term matter are concerned about the deficit. For this year and probably for next year, probably more focus should be put on getting this economy on a much more stable footing as opposed to trying to reign in this deficit which we all know is not sustainable in the long term.
Tess: I started out by asking you to paint a picture of retirement now. I wonder if you could now step back and give us a picture of retirement in the future. Is it as good as it has been? Is it better? Is it more difficult?
Ferguson: Well I think certainly getting is a bit more difficult for the reason that you pointed out. Our parents and grandparents, many of them worked in companies in which you had what was called a defined benefit plan. And so they knew how their retirement was going to unfold because that big company that had given them a job for 25 or 30 years was going to take care of them for another 20 years in retirement. As you've pointed out, we've reached a stage now where individuals have a much larger responsibility for their retirement, so in that sense it's a little more challenging. I do believe it can be as good though. And particularly if people just think about not just saving and asset accumulation, but also the earlier point I made thinking about how they are going to get a payout, how they're going to have guaranteed income for life. Save enough to convert and have guaranteed income for life and you end up in exactly the same place. The process is slightly more complicated but I do believe that over time we can create a society in which retirements are as good as they have been historically, but I emphasize over time. Not a quick turn around.
Ryssdal: It seems almost a fantasy this idea you have of guaranteed income for life.
Ferguson: No it's not a fantasy at all. Today it's known as an annuity. Our company provides annuities. More than a third of our participants take advantage of that option. I hope more will going forward. So these things do exist already. The challenge around annuities is that we've got to make some simpler, cheaper, easier to explain. They do exist, and they've got to be backed up by companies such as my own by being safer and securer and have a deep capital base.
Ryssdal: Meanwhile, people are still losing their jobs, they can't make the house payment, they can't make the car payment, they can't pay for the kids college and yet we as a society are expected to contribute to whether it's an annuity or whether it's a 403(b) or whatever it is. The oomph just isn't there, I mean you can only save just so much money.
Ferguson: The oomph is not there today. I will be the first to admit that the challenges of which you talk about are very real. But I believe in order to get this moving forward, we have to at least have a goal and objective of what we are trying to do. And so I'm not on your radio show telling people that whatever you do, today you must immediately ramp up your savings. I know that is not realistic for many people. You know if you don't have an income, the thought of saving from your income is not a realistic thought. As the economy turns, and it will continue to get better, I firmly believe we need to have a view of where it is that we are headed. Because what happened of the recent past is that defined benefit plans went away. The 401(k) which was never intended to be the main retirement system for most Americans became the main retirement system for many Americans. We discovered that wasn't wisely invested. And so I think what America needs now is step by step to get out of the recession is as it has been doing, continue on the path to recovery. As people get back on their feet, then they need to have some guidance about the kind of plan that they need overall, both as individuals and society. And so we are in the beginning moments of what I think will be a pretty long national discussion about what to do going forward to deal with both the retirement issue, the savings issue, aging populations, etc. So I'd be quite surprised if many of your listeners having listened to this, go in on Monday and change their behaviors.
Vigeland: Let's hope so!
Ferguson: But I would expect over the next several years we can get this dialogue going and people have a better sense of how to protect themselves for the future.
Vigeland: What are you hoping your retirement looks like?
Ferguson: I'm hoping my retirement looks very much, frankly like in some sense like my work, which is to say, I am one of those people who has been fortunate. I have a white collar kind of job and I expect that in my retirement that I will not be as fully engaged. But I want to be fully active, intellectually and physically around economic topics, retirement topics, financial literacy and providing ongoing guidance and advice to as many citizens as I can while still calling myself "retired".
Ryssdal: You spent a number of years, seven or eight years on the Board of the Federal Reserve. You served with Chairman Greenspan, Chairman Bernanke at the very end there. I'm wondering though if you have any thoughts about the early parts of this decade when interest rates were going down and Chairman Greenspan was lowering those interest rates and if you had it to do over again, would you have pulled him aside and said, "Hey Alan, this whole really low interest rate right now...really not a good idea."
Ferguson: You know I think it's important to think back to the information we had at those moments. And particularly in 2001, we had just come off of the bursting of the tech bubble, the 9/11 attacks here in New York, a great deal of uncertainty about the outcome, real concerns about deflation...And so a variety of people were saying interest rates low is what's important to create the right kind of cushion. The Fed started raising interest rates, signaling that long before it occurred. And the thing that was interesting was even as the Fed was raising short term interest rates, long term interest rates weren't going up. And so it goes back to one of the earlier conversations we were having, I think the big challenge around interest rates the earlier part of this century and the early part of this decade was these global imbalances and lower interest rates everywhere, not just at the short end of the yield curve which is what central banks control, but out at the ten year range as well. So it goes back to I think some of the issues that we've been talking about of global imbalances, the U.S. consuming too much, others saving too much and excess savings pouring back into the U.S. market.
Ryssdal: Do you subscribe to the belief that maybe rates were too low for too long?
Ferguson: That's an issue that's going to be debated for some time and as you probably saw Ben Bernanke two years ago gave a long speech taking just the opposite perspective on that one. There will be dissertations written about it, lots of things written about it. I think ultimately there were a number of forces that were at work. So global interest rates that were relatively low, imbalances, financial innovation frankly to some degree, a lack of financial literacy. So the kind of recession we are dealing with I think had many, many causes. Global interest rates were certainly one of them.
Ryssdal: As we sit here on this terrace surrounded by the buildings of JPMorgan, Citibank and the rest of the financial sector, where is the culpability for what happened to people's retirement accounts? Is it in these buildings around us? Is it with us?
Ferguson: I subscribe to a general view that nothing this complex happens because there was one guilty party. Right? You opened up with the fact by pointing out that the U.S. is not a savings economy. That's one of the things that happened. Secondly, there are some big swings in the way people work that led us away from defined benefit plans to 401(k) plans. There was I think, a lack of good advice and information and education for many people. So anything this complex Kai, I think has many, many points of failures. Some in the financial services sector, some with individuals, and frankly some that were just fundamental big shifts in the way America works and does business that are no one's fault in particular. So we've come to this place I think, through a combination of forces.
Ryssdal: So this is a little bit off topic, but have you ever called the marketing guys in and said, "This whole TIAA-CREF thing...you're killing us in marketing and branding!"
Ferguson: This company has been around for 92 years. We are very proud of the market that we serve which includes everybody in the not-for-profit sector. We are very importantly thinking about how to make sure people understand what that mouthful of letters stands for. What it stands for is safety and security, work with people to get them safely to and through retirement. So that's our brand.
Ryssdal: So maybe you're thinking about it?
Ferguson: I'm thinking about our brand image, there's no question about that.
Ryssdal: Roger Ferguson...thanks so much for your time.
Ferguson: Thank you. It's been a pleasure.