Alicia Munnell Praises DOL Rollover Rule, Blasts New Social Security 2100 Act

Alicia Munnell, professor of management sciences at Boston College and director of its Center for Retirement Research, minces no words in her assessment of temporary benefit increases included in the newest proposed version of the Social Security 2100 Act. 

“It’s terrible,” she tells ThinkAdvisor in a recent interview. “That will cause dissatisfaction among workers who are entering the retirement phase. … [The act] is moving from a wonderful piece of legislation to a silly piece of legislation.”

However, in the interview, the economist praises the Labor Department’s proposal that would require a fiduciary standard when advising on rollovers from 401(k) plans to IRAs.

“Financial services firms have a big incentive for people to take their money out of a 401(k) …and move it to higher-fee investments,” she says. “That’s where [they] make money.”

But “if [the assets are put] in a high-fee investment, inevitably that’s not going to serve the interest of the participants,” Munnell adds.

Before joining Boston College in 1997, Munnell was a member of the President’s Council of Economic Advisers and assistant secretary of the Treasury for economic policy. Earlier, she was with the Federal Reserve Bank of Boston for 20 years, rising to senior vice president and director of research.

In the interview with Munnell, who was speaking by phone from Boston, she notes how the projected total depletion of the Social Security Trust Fund has been long expected — but the date has moved ever closer.

Here are excerpts from our conversation:

THINKADVISOR: The most important change in the proposed new Labor Department rule covers extending protection on rollovers from 401(k) plans to IRAs, you write. Why is that one the most critical?

ALICIA MUNNELL: My suspicion is that companies are no longer making much money on 401(k) plans, and the chance to make money is to have participants roll their balances over to an IRA, where their money can be invested in high-fee funds.

If there’s any loophole that allows somebody to do anything other than work in the saver’s best interest, then I’m glad it’s closed.

I gather that this recommendation on whether they should roll over and when, is often a one-shot affair. That seems to be omitted from the general precautionary mandate to make sure the action is in the saver’s best interest.

“The force of inertia would lead participants to leave their balances in 401(k)s and that taking the trouble to move their funds suggests a strong motivating force,” you write. Such as?

A lot of advertising. That’s where the financial services firms make money: They have a big incentive for people to take their money out of a 401(k), which is under fiduciary protection and has generally well-selected investment options, and move it to high-fee investments.

It’s where that money is put that’s important. If it’s in a high-fee investment, inevitably that’s not going to serve the interest of the participants.

You write that a new version of the Social Security 2100 Act that calls for temporary benefit increases is a bad idea. Why?

It’s terrible. When you do a temporary change, one of two things happen: Either you keep it and adopt it permanently, in which case, it costs a lot of money — and we haven’t restored balance to the program. Or you don’t keep it, and it creates chaos.

The Social Security Administration is strained already from a low operating budget. To introduce change that has to be programmed in and then deleted will just cause chaos. 

Also, you’re going to get people saying, “How come my benefits didn’t go up as much this year as they did last year?” or “How come I’m not getting the benefit that my brother got?”

It will cause great dissatisfaction among workers who are entering the retirement phase.

“Resurrect the original [2100 Act] legislation and put it on the table,” you recommend. Why?

I loved the original. I thought it was great. It had a little sprinkling of expansions. 

But now we have constraints. The president has said he doesn’t want taxes raised on households earning under $400,000. 

That means you can’t raise the payroll tax rate. I think you could use that as one component of the package but not put the whole burden on that lever. But that avenue is shut off.

The new version of the 2100 Act is moving from a wonderful piece of legislation to a silly piece of legislation.

Sen. Bill Cassidy, R-La., and Sen. Angus King, I-Maine, have a plan to create a fund outside Social Security that would invest in equities and use the earnings to help pay promised Social Security benefits. What do you think of it?

Not much. I was very much a fan, when we used to have a [sizable] Trust Fund, to invest [a portion of its assets] in equities. We would be in much better shape if we had done that in the 1990s. We wouldn’t be facing the Trust Fund’s depletion right now.

Going forward, we won’t have a Trust Fund. It’s going toward zero.

To have a Trust Fund of any meaningful size, you’d have to raise taxes enough not only to solve short-term and long-term financing problems of the system but also to build up cash flow.

I guess you could raise taxes a lot in the beginning and less toward the end. But that doesn’t seem likely.

We missed the opportunity to invest the Trust Fund in equities. There isn’t going to be a Trust Fund. And it’s very hard to understand where that money would come from [to invest in equities] outside the system.

I think that Sen. Cassidy himself has backed away from this one.

Please elaborate on why this was a missed opportunity.

The projections were that the Trust Fund was going to get bigger and bigger. If we had taken a portion of those assets in the 1990s or the 2010s and invested that in the stock market, it would have improved the balance in the whole system. 

We wouldn’t be facing the exhaustion of the Trust Fund in 2030.

Had there been proposals to invest in equities?

Oh, yes. It was definitely proposed in the 1990s.

But basically there was a lot of concern that it would disrupt the market, or there would be stock picking or that if would make it seem like there was, sort of, magic money.

If you can improve the outlook by putting a little in the stock market, why not put a lot in the stock market?

But each of those concerns can be overcome and controlled. I think it would have been a great thing to do.

Was it surprising that the Trust Fund would head to zero?

It was always projected to be exhausted at some point. The exhaustion date has moved.

Calculations show that we’re not going to have enough money to pay promised benefits with current sources of revenue.

So we have to make a decision about whether we want to maintain the benefits and raise more revenue or cut benefits down to the level of existing revenues or something in between.

I think we should maintain the benefits. I’m not against some fooling around for high earners, but basically most people rely on Social Security.

When will action be taken?

I can’t imagine that Congress is going to do anything till 2030. 

Life is a little chaotic right now. We can’t even pass a budget.