The retirement system is broken, Teresa Ghilarducci says. Here's the solution she supports.

Following how the U.S. retirement system has evolved over time is like watching a "tale of two Americas" emerge — one where workers of different economic classes are pushed "further and further apart," said Teresa Ghilarducci, labor economist and author of the book "Work, Retire, Repeat: The Uncertainty of Retirement in the New Economy."

"The people in the bottom don't get to retire, and they die sooner. The people at the top are living longer, they're healthier and they have the money to retire," she said in a March 6 LinkedIn Live with Pensions & Investments' senior reporter Rob Kozlowski.

The U.S. at one time had what Ghilarducci described as a "working system," but several developments upended that system.

A big disruption came when the Professional Air Traffic Controllers Organization went on strike in 1981. Then-President Ronald Reagan and his administration attacked the union and its collective bargaining system, she said.

It "took the wind out of the sails of most of the other unions," she said. Also, an increasing openness to trade and a big disruption in exchange rates "really led to a collapse of what we and other people called a 'shared prosperity,'" Ghilarducci said.

The emergence of the 401(k) in the late '70s, too, began to take hold, leading to the "overwhelming substitution'' of such plans for a traditional defined benefit plan, she said.

But there was no promised or hoped-for expansion of the 401(k) system, with regulations to tweak the defined contribution plan so that it could have the best elements of the defined benefit plan as well as new elements, she said.

Data from the Bureau of Labor Statistics as well as the University of Michigan's Health and Retirement Study has showed Ghilarducci year after year that the loss of the defined benefit plan and having only an individual retirement account or a 401(k) plan "made life completely different for workers."

For those without an IRA or a 401(k) plan, there was an equal chance of being poor in retirement, and if they had a defined benefit plan, they had "almost no chance" of being poor in retirement, she said.

"This experiment we've had since the '80s — what is that, 40 years? — has just really failed."

Incremental changes should no longer be on the agenda, she said. While tweaks to the existing 401(k) system, such as SECURE 2.0 have been made, she said there haven't been changes to broaden access.

Plus, "we don't have a really high Social Security monthly amount," and as a result, most people are moving into retirement with not enough money and "all this inequality" is being created, Ghilarducci said.

A "fake solution" to the 401(k) system has emerged, which Ghilarducci said has "coalesced into a hope" that if employees worked longer, they could still secure their financial future without the need to redesign the pension system or put more money into Social Security. That narrative also stresses that working longer helps people stave off cognitive decline and gives a purpose to their lives.

That might be fine for those who have less labor-intensive jobs, such as financial analysts, but Ghilarducci said that working longer isn't always an option for those in physically demanding jobs, such as warehouse or healthcare workers.

"We have a system where we're kind of sentencing a big portion of older employees to be in pain for most of their days," Ghilarducci said.

Many people also don't get to decide when they retire, she said.

"Most people who are retired said they were pushed out, so you can't even choose to work longer," she said.

There's a downside, too, for the economy, she said, because if older workers stay in their jobs, it then becomes harder for younger generations to join the labor force.

"Every other country knows that and has a system that lets people off-ramp from work," she added.

A member of the academic advisory board at the Government Accountability Office, Ghilarducci said the agency has come up with the elements that make up a "good pension system."

Ideally, this system helps workers accumulate enough money to retire, allows them to have good investments and helps them to deaccumulate their money to make it last for a lifetime. "If the system fails on one or more of those aspects, it's a failed system," she added.

For the 80 million people who do not have access to an employer-sponsored retirement plan such as a 401(k) plan, Ghilarducci endorses the Retirement Savings for Americans Act of 2023, which contains those three elements. Presented by the Senate, this bipartisan solution would give these workers a retirement plan "a lot like the Thrift Savings Plan," which is available for federal employees, including members of Congress, she said.

In this plan, these people could put money in an account they would own and be able to take with them if they switch employers.

"If you have low-enough income, you qualify" for a 5% government match that "stays in your account, and it just kind of sits there on top of Social Security, following you around your working career," Ghilarducci said.

"By the time that you retire, you have enough to keep your head above poverty," she added. "If you're (a) low-income worker or stay in (the) middle class or upper-middle class, it's elegant. It really is elegant ... It's also something we can get out. It's not rocket science."