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Roger Ferguson Jr. Examines US Retirement Security

Students at the Tepper School of Business, in the thick of early career development, recently stepped back to consider a very different topic — retirement. They were attending the W.L. Mellon CEO Speaker Series to hear Roger Ferguson Jr., president and CEO of TIAA-CREF, shed light on this urgent social issue.

“The W.L. Mellon CEO Speaker Series is an opportunity for our students to hear from some of the country’s most respected and accomplished CEOs,” said Tepper School Dean Robert Dammon in opening the presentation. “The series adds a significant amount to the educational experience that we give our students here at Carnegie Mellon.”

He then introduced Ferguson, noting that before the distinguished speaker took the helm of TIAA-CREF, a leading provider of retirement services with nearly $600B under management, in 2008, he served as vice chairman of the Board of Governors of the U.S. Federal Reserve System. Ferguson also is a fellow of the American Academy of Arts & Sciences.

Dean Dammon pointed out that as the only governor in Washington D.C. on 9/11, Ferguson led the Federal Reserve’s initial response to the terrorist attacks. “Dr. Ferguson’s actions have been credited with keeping the U.S. financial system functioning during that crisis,” he remarked.

Ferguson took the podium, observing that ties between Carnegie Mellon and TIAA extend beyond their joint founder, Andrew Carnegie. Ferguson had, while at the Federal Reserve, developed lasting connections with prominent Tepper School faculty members, including Allan Meltzer, Marvin Goodfriend and Chester Spatt.

He began his presentation, which was focused on financial security in retirement, by commenting that our country’s staggering retirement savings deficit presents “tremendous implications for all of us.” He outlined underlying factors, including a private sector shift from traditional employer pension plans to employee 401(k)s — which Americans are not using to save adequately — as well as public sector state and local unfunded pension liabilities estimated at $1 trillion.

Ferguson stated that our aging population — due to increased life expectancy coupled with declining birth rates — is an issue driving much discussion around retirement policy. “The upshot is that there are going to be fewer and fewer people working and they will be supporting more and more people who are retired, which is a recipe for big fiscal challenges,” he maintained.

The U.S., he added, is expected to experience a decline from the current 3.3 workers for every Social Security beneficiary to 2.1 in 2040, at which time the fund may be exhausted.

“We in the U.S. need to undertake reforms urgently to get the retirement system back on stable footing,” Ferguson asserted, and enumerated items including major structural changes in Social Security, Medicare and Medicaid, extending our working lives and the necessity to save more.

Ferguson next commented on the real need to improve financial literacy, which is already surprisingly low, and more so within minority groups. Women, he also pointed out, end up with half the retirement savings of men because they earn less, spend more years out of the workforce and live longer.

He posed the question — what can the financial sector do to address these issues? His answers included: restoring trust in what is one of the least trusted sectors; improving governance with a long-term view and insuring that top management models appropriate behavior through a culture of risk management, accountability and compliance; ensuring regulators recognize the existing risk-taking culture; and helping shareholders to understand the value in a longer-term perspective.

“When I think about the mistakes that have been headline news in financial services, an awful lot of it has been due to culture — both of risk-taking and short-termism,” he said.

“What does this mean for you?” Ferguson then asked the audience. “You’re here at CMU, at the Tepper School. You’re obviously going to be leaders as you step out from this great school,” he said, then advised the students to continue building financial literacy, to save as much as possible and to hold on to values.

As students came to the microphone with questions, he addressed the issue of rising income inequality, which he noted has been growing for some time, and that while solutions would most likely be driven by education, they still would be long-term and complicated.

On the role of financial institutions in improving education, he saw a position involving financial literacy; leveraging behavioral economics to help consumers make beneficial choices; developing consumer friendly products; and again, increasing trust.

Responding to the prevailing short-term focus of financial institutions, Ferguson addressed the quarterly “hunger for earnings per share growth” surrounding public companies. He noted that companies, fund managers and investors must take a longer-term view that incorporates strategy and value.

“At the end of the day,” he said, “so much depends on individual investors changing their behavior, as well.”

And finally, he addressed the realities of goal setting regarding the decline in workers per retiree, and touched on possibilities, including a change in qualifying age and an increase in productivity itself, a particularly difficult achievement.

“One of the reasons I love being at Carnegie Mellon is because many of the increases that we’ve seen in productivity in American society have had to do with things that you folks are very close to on this campus,” he said, “such as technology and organizational design.”

“Not only do we need your savings,” he smilingly remarked in closing, “but we need your brain power.”