The United States is notorious for having a low savings rate, a challenge that is becoming more prominent as baby boomers start hitting retirement age. One of the biggest financial questions today is whether the nation can avoid a looming retirement crisis. To better understand possible solutions to this problem, [email protected] interviewed Roger W. Ferguson Jr., CEO of TIAA-CREF, a top provider of retirement plans for workers in the education, research, medicine and culture fields with more than $800 billion under management. Ferguson, who is also a former vice chairman of the Federal Reserve, made his comments on the [email protected] show, which is part of Wharton Business Radio on SiriusXM channel 111.

An edited transcript of the conversation appears below.

Emergency Funds, Retirement
Photo by stevepb (Pixabay)
Retirement

[email protected]: Before we get into the retirement angle, your background includes a stint as the vice chair of the Federal Reserve. How much of an increase would you expect to see the first time or two that the Fed moves interest rates?

Roger W. Ferguson: Well, the Fed tends to move things historically [in increments of] 25 basis points, [a quarter of a percent]. And that’s what I would expect…. I don’t think, though, that they are on a path to move rates at every meeting. I think it will be a little bit of movement, and then [they’ll] watch and see how the economy reacts.

[email protected]: What are the real points of interest that [Fed Chairwoman] Janet Yellen and the Federal Reserve Bank presidents are watching in terms of the economy? Everybody talks about the number of jobs that are added to the economy each month; the labor participation rate; the actual unemployment number, which is skewed because of the numbers of people that have left the work force. Are there two or three data points that they really focus on when they’re thinking about making this decision?

Ferguson: I think the reality is they’re trying to get a broad gauge of how the economy is doing. And so, you’ve put your finger on the labor market indicators. Those have been ones that they have talked about a great deal. I think they’re also interested in businesses as well — so, [they’re] looking at things like industrial production, looking at the service sector to see how that’s holding up. They’re also interested in some softer things: measures of consumer confidence and business confidence. And finally, I think, they take a little bit of a signal from the financial markets themselves. They probably are well aware, for example, that stock markets in the U.S. have been doing quite well. And that leads to something called the wealth effect. So, they’re looking at many, many indicia.

The other thing is, they are certainly interested in inflation. The Fed has a dual mandate around maximum employment and low and stable prices. I think part of the challenge for them is that inflation has been relatively low and has been running below their 2% target. That disconnect, if you will, between labor markets that seem to be doing much better and inflation that still seems to be relatively low is I think one of the major points of discussion….

“There’s a recent Federal Reserve report that showed that one-third of Americans have no retirement savings at all.”

[email protected]: Let’s talk about retirement savings. People in many cases are either unable to save enough or not thinking about the process. You have said in other contexts that retirement savings needs to be something you start thinking about even while you’re still in college, and certainly as soon as you graduate.

Ferguson: This country is facing right now a retirement challenge, and if we don’t respond to it, it could become a retirement crisis.?Twitter  There’s a recent Federal Reserve report that showed that one-third of Americans have no retirement savings at all. And some observers say that for the first time, America’s saving deficit may send a majority of Americans to a retirement in which they are worse off than their parents.

Retirement should be an issue that people start to think about at a very, very young age. In our society, much of retirement depends on individual savings — as defined benefit plans are, for many people, a thing of the past. And what we’ve seen is, you can never start saving at too young an age. Indeed, if you haven’t started saving, you’re never too old to start saving either. So, this is an issue that really cuts across all generations. Gen Ys, millennials should be interested, Gen Xs for sure, and all of us aging baby boomers as well should be very focused on retirement.

[email protected] Financial literacy ends up being a big piece to this puzzle. The OECD’s PISA Study on global financial literacy came out a few months ago, and the United States is only in the middle of the pack. The report drew a lot of attention to the fact that we are not providing adequate financial literacy education to our kids, whether it’s in grade school, high school or college.

Ferguson: I think that’s absolutely right. And you make a number of very good points that I want to echo. First is to start thinking about financial literacy as we think about all other sorts of literacy and numeracy, if you will. There’s a role to play in elementary school, perhaps, but absolutely in high school. And it turns out that, at this stage, only half the states require some sort of financial literacy to get a high school diploma. So, certainly if the other half came along, that might be helpful. Having said that, one of the things that we know is that in high schools, the high school teachers often don’t feel they’re qualified to teach financial literacy courses. So, we have to educate the educators.

Once you get into college I would say the same story holds true. We at TIAA-CREF, in partnership with the Council of Graduate Schools, have launched a program called Enhancing Student Financial Education, in which we’ve given grants to 15 universities across the U.S. to implement financial literacy curricula. And we will be gathering data to find out what works, what doesn’t work, and hopefully, over the next year or so, be able to roll out some best practices to really try to crack the nut of financial literacy, at least at the college and graduate school level.

Obviously, it should just continue going past that. But this focus on financial literacy is one that I would absolutely say is very important to the future health of the United States.

[email protected]: You said the percentage of states that require some type of financial literacy course in high school is about 50%. Why isn’t the other 50% doing this? Resources? Teachers who don’t feel qualified? Whatever the reasons, wouldn’t that be something state legislators would want to bring up immediately to try and push through?

Ferguson: I think that’s right. There’s a role for government to play in this. At the state level, [it could be] legislators asking questions of local boards of education as to why it is they do not have a

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