The workplace is changing rapidly, and more and more leaders in government and private industry are required to lead those who are geographically separated. Globalization, economic shifts from manufacturing to information, the need to be closer to customers, and improved technological capabilities have increased the geographic dispersion of many organizations. While these organizations offer many exciting opportunities, they also bring new leadership challenges that are amplified because of the separation between leaders and followers. Although much has been researched and written on leadership in general, relatively little has been focused on the unique leadership challenges and opportunities presented in geographically separated environments. Furthermore, most leaders are not given the right tools and training to overcome the challenges or take advantage of the opportunities when leading in these unique settings.

A survey of leaders within a geographically dispersed military organization confirmed there are distinct differences in how remote and local leaders operate, and most leadership tasks related to leading those who are remote are more difficult than with those who are co-located. The tasks most difficult for remote leaders are related to communicating, mentoring and building personal relationships, fostering teamwork and group identity, and measuring performance. To be effective, leaders must be aware of the challenges they face when leading from afar and be deliberate in their engagement.

Although there are unique leadership challenges in geographically dispersed environments, most current leadership literature and training is developed on work in face-to-face settings. Leading geographically dispersed organizations is not a new concept, but technological advances over the last decade have provided leaders with greater ability to be more influential and involved with distant teams than ever before. This advancement has given leaders not only the opportunity to be successful in a moment of time but ensures continued success by enhancing the way they build dispersed organizations and grow future leaders from afar.

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In July 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act, a far-reaching and still-controversial piece of legislation that was intended to reduce the odds of a repeat of the worst financial crisis in generations.  Five years later, is it working as hoped? Did it go too far—or not far enough? Are there parts that should be revisited? What remains on the U.S. and global financial-stability to-do list? 

On July 8, the Hutchins Center on Fiscal and Monetary Policy hosted a conversation with Treasury Secretary Jack Lew to address those and other questions about financial stability and the economy.

 Follow the conversation at @BrookingsEcon or #DoddFrank

Video

• Dodd-Frank at 5: A conversation with Treasury Secretary Jacob J. Lew
• Secretary Jack Lew on Dodd Frank
• Secretary Jack Lew on the $10 bill
• Secretary Jack Lew on Greece
• Secretary Jack Lew on China

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• Dodd-Frank at 5: A conversation with Treasury Secretary Jacob J. Lew

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• Uncorrected Transcript (.pdf)

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• 20150708_dodd_frank_lew_transcript

In the months leading up to the 2015 United Nations climate change conference in Paris starting November 30, global businesses have pledged to do their part for proactive climate action. To "capture and catalyze" these commitments, the UN Framework Convention on Climate Change, in conjunction with the government of Peru, launched the Non-State Actor Zone for Climate Change (NAZCA). NAZCA is an online portal that showcases commitment to action by companies, investors, cities and subnational regions to address climate change. To date, more than 2,000 companies—from Baosteel Group Corporation to Exxon Mobil Corporation to Taiwan Semiconductor Manufacturing to Wal-Mart Stores, Inc.—have made voluntary commitments to reduce emissions, increase energy use efficiencies and invest in renewable energy sources.

IT sector stands out 

Proactive action by businesses to combat global climate change is not new. Over the past decade, businesses have increasingly engaged in voluntary climate action to share best practices, network, promote market mechanisms, and set greenhouse gas emission reduction targets. Despite this, not all businesses are eager participants. My recent paper on the role of the Global 500 companies in transnational climate governance shows that, after controlling for political economic and institutional factors at the country level, global businesses operating in the information technology (IT) sector are twice as likely as other firms to engage in proactive climate action. Next to the consumer staples sector, the IT sector has the highest share of global companies engaging in proactive climate action compared to the energy, health care, industrials, materials and utilities sectors.

Among the notable IT companies worldwide that have taken proactive climate action, including public disclosures of their carbon emissions, are Apple Inc., Google Inc., Hitachi, Ltd., LG Innotek, Microsoft Corp., Ericsson and Telefonica.

There are several reasons why IT companies are in a better position than other corporations to play a proactive role in climate change mitigation. First, IT companies, as a sector, tend to be wealthier, not only in terms of asset holdings but also profitability. They also employ a larger number of workers than other companies. Large and well-endowed corporations are better able to afford the costly investments necessary for deploying renewable energy and for undertaking carbon emissions management. According to my findings, wealthy corporations that employ a large number of workers have two to four time higher odds of proactive climate action than companies with smaller asset holdings and employee base.

Complementary capabilities

Second, my research also shows that, more often than not, when a company demonstrates a commitment to sustainability through complementary capabilities and competencies, namely investments in environmental R&D and/or certification with the ISO 14001 environmental management standard, the odds are higher that the company also engages in voluntary climate action and carbon disclosure. For example, a larger share of companies in the IT sector (75 percent) are certified with the ISO 14001 environmental management standard than Global 500 companies excluding IT (54 percent). A similar pattern, albeit less pronounced, is also true of investments in environmental R&D by IT companies compared to other global companies (56 percent versus 48 percent).

Wealth endowment and complementary capabilities aside, IT companies are more likely than other Global 500 companies to have an in-house managerial- or executive-level sustainability officer. Close to half of all IT companies have formally created a position of a vice president of sustainability or a chief sustainability officer compared to about 40 percent of other global businesses. These in-house champions of sustainability policies and initiatives play a critical role in helping to align corporate vision and allocate the necessary resources toward sustainability efforts.

Among the world’s largest companies by revenue, Apple Inc. (rank 15^th) is a leader in proactive climate action: Apple has pledged to "maintain 100% renewable energy in datacenters… [and] maintain carbon neutrality of purchased electricity for U.S. corporate facilities achieved in 2014 through renewable energy purchases and onsite generation and procurement." In 2014, Apple hired Lisa Jackson, a former administrator of the U.S. Environmental Protection Agency as its vice president of environmental, policy, and social initiatives, reporting directly to CEO Tim Cook. Along with Jacky Haynes, Apple’s senior director of social and environmental responsibility who specializes in supplier responsibility, Jackson has brokered a relationship with the Beijing-based Institute of Public & Environmental Affairs to train Apple facilities workers as part of Apple’s new Environmental, Health, and Safety Academy and to proactively publish emissions data of Apple’s supplier facilities in China. By committing to voluntary climate action, Apple and other corporations signal to consumers that they are socially responsible companies, not only to preempt public scrutiny but to gain an advantage in the "market for virtues."

Apple and Microsoft Corp. are the only two private sector entities that earned the U.S. Environmental Protection Agency (EPA)’s Green Power Partner of the Year award in 2015, which recognizes leadership in green power use and overall strategy and impact on the green power market.

Other IT companies, such as Autodesk, BT, Infosys, Salesforce and SAP have recently joined forces with Aviva, IKEA, Starbucks, Walmart, Marks and Spencer, Johnson & Johnson, among others, as part of RE100, a collaborative initiative of businesses, to set long-term target on powering their operations entirely with renewable energy.

Living up to promises

The fact that so many companies are recognizing the dangers of climate change and setting ambitious climate action goals is laudable. The biggest challenge will be seeing that they live up to their promises, especially given the voluntary nature of initiatives such as NAZCA. To thwart greenwashing, national governments and global governance organizations have an important role to play to keep the IT sector and other businesses accountable. The first step that NAZCA has taken is to invite "partnerships with others who would…make assessments of this type." A significant next step would be to publish guidelines and best practices for third-party monitoring and verification in order to strengthen the link between pledges for proactive action and ultimate follow-through by corporations. IT companies, as leaders in proactive climate action, should be at the forefront of working to establish best practices for adherence to voluntary commitments for mitigating global climate change.

Last June, Brookings senior fellow Elaine Kamarck and I published a paper laying out the rise of short-term thinking in U.S. corporations. We argued that this trend was bad for the economy, and we suggested policies that would at least slow it down and diminish its effects.

Since then, additional research on short-termism has emerged, and an increasing number of corporate leaders are expressing concern about the trajectory of U.S. firms. Last November, for example, the Boston Consulting Group documented a worrisome decline in the corporate activities and investments designed to discover and nurture future growth opportunities. This turn away from exploratory activities may not immediately affect investors, said the BCG report: in the short term, companies can maintain earnings and shareholder returns by “cutting costs, increasing dividends, and pursuing share buybacks.” (As Kamarck and I showed, this is what is happening across our economy.) But in the long run, BCG researchers found, firms that invest in exploration boost revenues and total returns far faster than do those who are content to exploit their existing lines of business and return most of their earnings to shareholders in the form of dividends and buybacks.

A few days ago, Laurence Fink, the chief executive of the world’s largest investment fund and a long-time foe of short-termism, sent a letter to the heads of S & P 500 companies and large European corporations. He noted that in the twelve months ending September 30 2015, buybacks had risen by 27 percent over the previous year, when buybacks already stood at record levels. “Today’s culture of quarterly earning hysteria,” he declared, is “totally contrary to the long-term approach we need.” And he warned corporate executives that in the absence of well-considered long-term plans for investment and growth, they would expose their firms “to the pressures on investors focused on maximizing near-term profit at the expense of long-term value.”

Many influential investors agree with Fink, and they are joining forces. On February 1, the Financial Times reported that since last summer, the world’s largest asset managers—Warren Buffett, Jamie Dimon, the chief executive of JPMorgan Chase, and the heads of BlackRock, Fidelity, Vanguard, and Capital Group, among others—have been holding secret meetings to frame proposals that would encourage longer-term investments while reducing friction with shareholders. These proposals, which are reportedly some months away from final agreement and publication, may well involve changes in boards of directors, executive compensation, and shareholder rights.

The summit participants plan to support these changes for the companies in which they invest. Given the pools of funds they control, which amount to many trillions of dollars, their coordinated action may well represent a turning-point in the struggle to reorient corporate strategy toward the long term.

The leaked information in the Panama Papers from the law firm Mossack Fonseca has captured the headlines for weeks and will continue to do so as further names are exposed. The scandal has placed Panama in the limelight and provided an unprecedented glimpse into the world of hidden money and tax avoidance. To understand its broader context, it is vital that we distinguish between legal corruption, like that exposed by the Panama Papers, and illegal corruption, like that exposed by the Unaoil scandal. Governments must seize the moment to take decisive action against both.  

The U.S., the U.K., and a range of other countries will announce commitments to combat corruption at the Anti-Corruption Summit on May 12, championed by Prime Minister David Cameron as a game-changing event. The question is whether these commitments will deliver concrete actions that target the most costly kinds of corruption that flourish globally today.  

Unfortunately, the world often engages in “summitry” filled with communiques, calls for coordination and exchanging information, or creating another toothless generic initiative, which offer media and photo opportunities that fulfill particular political objectives for some leaders. Let us see if it’s different this time.

Mossack Fonseca, and its home country Panama, are just a couple nodes in the vast and complex set of “enablers” of corruption and tax evasion around the world.     

For those seeking secret shelters and corporate shells, the mighty U.S. (which unsurprisingly doesn’t feature much in the Panama Papers) is one of the world’s most appealing destinations: Setting up a shell corporation in Delaware, for instance, requires less background information than obtaining a driver’s license. As seen in the chart below, this opacity, coupled with the size of the U.S. as a haven, means that it has been ranked the third most secretive jurisdiction among close to 100 assessed by the Financial Secrecy Index. Panama is 13th.

Figure 1: Financial Secrecy Index 2015 (Select jurisdictions, from the Tax Justice Network)

Source: The Tax Justice Network’s Financial Secrecy Index http://www.financialsecrecyindex.com/introduction/fsi-2015-results

This graph depicts the top 40 worst performing jurisdictions as well as four select better performing jurisdictions (right of dashed line). The Index combines a qualitative secrecy score based on 15 indicators and a quantitative measure of a jurisdiction's share in global financial services exports. 

And the U.K. is an important enabler of corruption: It has stood by as its offshore jurisdictions and protectorates operate as safe havens for illicit wealth, which the Panama Papers make clear. The British Virgin Islands, for example, were the favored location for thousands of shell companies set up by Mossack Fonseca.  

The Panama Papers speak only indirectly to core aspects of today’s global corruption challenge, which are neither about Panama nor taxes. We ought to view the resulting scandals in a broader light, and recognize the immense, complex webs of corruption that increasingly link economic and political elites around the globe.

Grand corruption

The most powerful figures who engage in high-level or “grand” corruption are hardly running scared following the Panama leak. These figures include kleptocrat leaders as well as oligarchs who wield enormous influence on government affairs. Often, these players interact and collude, forming high-powered public-private networks that make the traditional notion of corruption as an illegal transaction between two parties look like child’s play.

Corruption in these elite networks far transcends the unethical behavior of the typical tax avoider, as it involves the abuse of power to accumulate power and assets, often via the direct plunder of public resources, asset stripping, or large-scale bribery. The multi-billion-dollar scandal embroiling the Brazilian oil giant Petrobras illustrates the complexity of colluding networks, and how grand such corruption can inflict political and economic damage of historical proportions on a country. 

The oil sector provides many more illustrations of grand corruption. Few company officials may have been more relieved by the Panama Papers leak than those at Unaoil, whose own scandal had just erupted. Unaoil is an “enabler” company incorporated in Monaco that bribed and influenced government officials in various countries on behalf of multinational companies vying for lucrative procurement contracts. While overshadowed by the Panama leaks, the Unaoil case is at least as emblematic of the challenges in tackling global corruption. For instance, it shows the deeply ingrained practice of Iraqi government officials seeking bribes for the award of contracts and the willingness of companies to provide them.

Corrupt elites, including those embroiled in the Unaoil scandal, often use structures like shell corporations and tax havens (along with real estate and other investments) to hide their ill-gotten funds. However, even if the Panama Papers leak prompts more scrutiny on illicit financial flows and the reform of these opaque financial structures, grand corruption will continue in many locations.  It is noteworthy that the political fallout has been concentrated in relatively well-governed countries that do have accountability and anti-corruption systems in place, as illustrated by the resignations of the prime minister of Iceland, the industry minister of Spain, and the head of Chile’s Transparency International chapter. 

In sharp contrast, President Vladimir Putin brushed off the leaked Russian information as a Western anti-Putin conspiracy; in China, discussion and dissemination were muffled by media censorship; and, in Azerbaijan, exposure of details on President Aliyev’s family mining interests will hardly dent his hold on power. While reforms leading from the Panama leaks will hopefully deter tax dodgers and unethical corporations and individuals from hiding dirty assets, powerful corrupt leaders will continue to enjoy impunity.

Legal corruption and state capture   

The Panama Papers shed a sliver of light on the type of corruption that is perhaps most damaging and difficult to tackle: legal corruption and state capture. Around the world, powerful economic and political elites unduly influence laws and policies, shaping the rules of the game for their own benefit, or what has been called the “privatization of public policy and lawmaking.” This generates huge rents for the elite, increases their power, and exacerbates a country’s political and economic inequality.

Resource-rich countries provide many illustrations. In Angola, the Democratic Republic of Congo, Nigeria, and Venezuela, for example, political elites have used state-owned resource companies to serve patronage agendas, often—though not exclusively—through legal means.

In many industrialized countries, an example of state capture is the tax system itself. It is in the interest of elites to safeguard a worldwide network of secret offshore companies and tax havens as places to hide wealth—whether acquired legitimately or illicitly. The evidence on tax avoidance from the U.S. is telling: According to Zucman, since the 1950s the effective rate of corporate tax has decreased from 45 to 15 percent, whereas the nominal rate has only decreased from 50 to 35 percent. And U.S. companies make full use of foreign tax havens: According to a new Oxfam report, the top 50 American multinationals reported in 2008 that 43 percent of their foreign earnings came from five tax havens, accounting for only 4 percent of the companies’ foreign workforces. Further, Bourguignon reports that federal tax rates on the richest Americans fell by 15 percent between 1970 and 2004.

Risks of legal corruption in the U.S. run high because private money can so easily sway public affairs. Following the 2010 Citizen United ruling by the Supreme Court, private funds from deep pockets increasingly dominate the conduct of electoral campaigns. The avenues for private money to influence public officials may widen further, if forms of bribery traditionally considered illegal become legalized. A forthcoming Supreme Court decision could make it legal for public officials to receive gifts and other benefits from private individuals (potentially overturning the corruption conviction of a former Virginia governor for doing exactly that).  

Upfront, there are no easy solutions, especially because powerful decision-makers benefit from this status quo. But there is the opportunity, and public pressure, to reform.  As mentioned, the cause of tackling corruption often attracts token gestures, and David Cameron’s announcement of a new global anti-corruption agency could be at high risk of falling into this category. Rather, countries like the U.S. and U.K. must take firm action to reform their own practices, and push for the same from their partners such as the U.K. crown dependencies and overseas territories, the European Union and G20 members, and the recipients of overseas aid.

First, take legal corruption and state capture seriously. 

Transparency can be one game changer, especially if it addresses the channels of influence through which policy becomes “privatized.” Disclosures of campaign finance contributions, conflicts of interests, assets held by (and tax returns filed by) politicians and public officials, and parliamentary deliberations and votes can all discourage abuse and reveal hidden networks at play. Encouragingly, the Organisation for Economic Co-operation and Development (OECD) recently issued their first salvo, the report “Financing Democracy,” focusing on a few selected case studies, and as a next step it should be empowered to develop standards and carry out assessments on political finance for all OECD countries.

Transparency will only help if citizens can actively scrutinize and engage with their governments. Civic space is under attack in many jurisdictions, with activists and journalists facing intimidation, prosecution, or worse. Securing rights of expression and assembly should be the business of any international actor concerned with anti-corruption or economic governance. For instance, when considering funding requests from governments with weak records on protecting civil society—like Angola and Azerbaijan—the World Bank and International Monetary Fund as well as donors like the U.S. should prioritize civic accountability as well as broader transparency reforms.

Furthermore, grand corruption will not decline without more effective prosecutions and other sanctions that target bribe-takers, as well as the facilitators and middlemen of corruption, be they lawyers, accountants, or fixers like Unaoil. Of course, law enforcement authorities should also remain vigilant against bribe-paying companies; and governments—including OECD members implementing to varying degrees the OECD foreign bribery convention—would do well to emulate the active enforcement of the U.S. Foreign Corrupt Practices Act (FCPA) in this regard. But bribe-takers and facilitators have not faced sufficient scrutiny and sanction.

Second, get rid of shadowy corners.

Lessons yielded by recent events from the 2008 financial crisis to the Panama Papers suggest that major global players should not allow large corners of the global economy to escape scrutiny. The U.S. and the U.K. (with its offshores), should heed the calls for dismantling secrecy and tax havens. Seeds of effort, such as the U.S. government’s decision to require banks to know the identities of the individuals behind shell companies, are now coming to light, but broader efforts, including legislation, will also be required.  

Beneficial ownership transparency should become standard operating procedure, with governments following the example of the U.K., the Netherlands, and others in setting up public registries, and joining the movement toward a global registry. In the case of resource-rich countries, establishing sector-specific registries may be the right place to start. This practice is now mandated by the Extractive Industries Transparency Initiative.

Within the extractive sector, home country governments should subject commodity traders to payment disclosure requirements when doing business with governments and state-owned companies. Governments of countries like Switzerland, the U.K., and Singapore that are home to corporate actors shoulder significant responsibility, especially in the current era of low commodity prices, when traders are entering into profitable new deals with cash-strapped resource-producing countries. Shining light in dark corners like these will render them less susceptible to abuse.

Third, prioritize transparency and scrutiny when public resources are allocated.

Whenever a government allocates resources for exploitation, it ought to do so in a fully transparent fashion. The Open Contracting Partnership has made great strides in defining a gold standard for such reporting, including guidance on issues such as open data, corporate identifiers, and beneficial ownership reporting.

Natural Resource Governance Institute research on oil and mining sector corruption shows that multiple types of high-value allocations require scrutiny and contract disclosure. These include the allocation of exploration and production licenses, but also on export, import, or transport rights, which have been associated with corruption in countries such as Indonesia, the Republic of Congo, and Ukraine. And most of the oil sector cases prosecuted under the U.S. FCPA have arisen around the award of service contracts, a segment of the oil industry where the Unaoil and Petrobras scandals also took place. Transparency should be the default setting for any transactions that allocate public resources. Further scrutiny is also needed on the abuse of (mis-)managed exchange rate regimes that generates rents for the few and creates major economic distortions, such as currently in Nigeria, Venezuela, and Egypt.

Concrete impact will also require a major attack on impunity since transparency and freedom of expression are necessary, but insufficient. And governments including those of the U.S. and the U.K. should adopt reforms to address legal corruption and various forms of opacity—whether addressing the capture by money in politics or the “dark corners” among oil traders headquartered in Geneva and London. 

An ambitious commitment to tackling corruption and impunity is not only needed now, but demanded by societies, as events in Brazil and elsewhere show. This is a potentially “game-changing” global moment to make real progress.  

This piece is also available in Spanish and French. 

Capitalism has provided unprecedented wealth and prosperity around the world, but a growing community is raising concerns about whether the promise of the capitalist system to achieve a more shared and durable prosperity can be achieved without systemic changes in the way for-profit corporations are governed and managed. The change in public opinion has become evident among workers, consumers, and investors, as well as through new policies enacted by elected officials of both parties: more than ever before, the public supports businesses that demonstrate positive social change and sustainable development. These new attitudes have begun to take root in corporations themselves, with a growing community of investors, business leaders, and entrepreneurs expressing a fiduciary duty to create value not only for shareholders but for society. However, businesses and investors seeking to harness these opportunities face significant institutional and normative barriers to achieving their goals.

In a new paper, the co-founders of non-profit B Lab, Andrew Kassoy, Bart Houlahan, and Jay Coen Gilbert, write about this overarching culture shift, the importance of and impediments to effective impact governance and impact management to make this shift meaningful and lasting, and how a rapidly growing community of responsible businesses has overcome these barriers, is maximizing its social impact, and is creating pathways for others to follow. The impact and growth of the B Corp movement will be maximized not only through increased adoption by business leaders, but also through the unique roles played by research institutions, the media, policy-makers, investors, and the general public. With enough support, this movement may soon transform shareholder capitalism into stakeholder capitalism, in which businesses can more easily live up to their potential to create a more shared and durable prosperity for all. 

This paper is published as part of the Center for Effective Public Management’s Initiative on 21st Century Capitalism. It is one of more than a dozen papers written by academics and practitioners about the changing role of the corporation and the importance of improving corporate governance. The authors of this paper are the co-founders of B Lab, a nonprofit organization that oversees the certification of B Corporations, and a major subject of this paper. The perspectives put forth in this paper are solely those of the authors, based on their professional expertise in this area.

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The Syrian uprising has changed significantly since the first signs of localized armed resistance began emerging in late April 2011. Western states and regional countries opposed to President Assad’s rule failed to manage the formation of an organized and representative political and military opposition body over the past three years. Instead, fragmentation of first the opposition, and then the conflict as a whole, has come to pose numerous serious threats to regional and international security and stability.

In a new Policy Briefing by the Brookings Doha Center, Charles Lister analyzes the Western-backed opposition, the spreading influence of jihadi militants, and the evolving capabilities of pro-government forces. With a definitive military victory seemingly out of reach for all sides of the conflict, Lister argues these parties will remain at a standoff until a political solution is reached. However, as armed groups multiply on either side, even an agreement between government and opposition will be unlikely to end the violence.

Lister concludes that Western and regional countries should focus on two core policy objectives. First: the international community should bolster a cohesive opposition that can challenge the Assad regime in battle as well as in negotiations. Second: the international community should aid Syria’s neighbors in managing the violent spillover of the conflict, particularly curtailing the potential for Syria-based jihadi groups to expand their operations beyond the country.

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From 2006 to 2011, Qatar was highly active as a conflict mediator within the greater Middle East, seeking political consensus in Lebanon as well as securing a key peace agreement regarding the Darfur conflict. What were the drivers of Qatari mediation during this time, and how successful were Qatari negotiators in their efforts? How has Qatar’s foreign policy during the Arab Spring affected its ability to act as a mediator? How might Qatar expand its mediation capacity in the future?

In an Analysis Paper, Sultan Barakat weighs the prospects for renewed Qatari mediation efforts in a changing regional landscape. He holds that Qatar’s turn towards a more interventionist foreign policy during the Arab Spring shifted the country’s focus away from mediation, while backlash against the country’s positions has limited its ability to engage with the region’s conflicts.

Drawing on interviews with government officials, Barakat concludes that Qatar’s efforts were much aided by financial resources and wide-ranging political ties which helped drive initial mediation efforts, yet were hampered by a lack of institutional capacity to support and monitor such mediation.

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Nearly two years after ousting President Muhammad Morsi, Egypt’s military continues to crack down on the Muslim Brotherhood. Much like during Egypt’s 1952-54 political transition, the recent interactions between the powerful armed state bureaucracy and the influential religious organization have had a major impact on the country’s political trajectory. In both instances, the military and Muslim Brotherhood initially cooperated before ultimately clashing violently. How has each entity determined what approach to take toward the other? What does a continued imbalance in civil-military relations mean for Egypt’s future?

In a new Brookings Doha Center Analysis Paper, Omar Ashour examines the legacies and patterns of cooperation and conflict between the leaderships of Egypt’s military and the Muslim Brotherhood. Relying on extensive field research, he analyzes how each entity has made its critical decisions regarding the other by applying various decision-making models. Ashour considers the impact of cost-benefit analysis, organizational dynamics, factional disputes, and psychological factors to gain a deep understanding of the leaders’ motives.

Read "Collusion to Crackdown: Islamist-Military Relations in Egypt"

Ashour concludes that Egypt's prospects for social stability and economic recovery will remain bleak if the relationship between the military and the Muslim Brotherhood is not redefined within institutional, democratic rules of political competition. He argues that Egypt’s military should embrace a balanced civil-military relationship to realize broad, long-term benefits and avoid otherwise inevitable and costly clashes with segments of Egyptian society. As for the Muslim Brotherhood, Ashour recommends that it reevaluate its recent decisions and work to develop a sustained, solid, and cross-ideological civilian front that can pressure the military to leave politics and allow for democratization.

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The need to confront and drive back the forces of the Islamic State (IS) has pushed long-term reform efforts in Iraq far down the list of priorities. Yet pressing economic reforms – such as restructuring and rebuilding the country’s energy sector – increasingly seem a strategic necessity, as oil prices have fallen far below government projections. How can politicians be persuaded to invest in Iraq’s long-term future at a time of imminent security threats? How can the efforts to reform the Iraqi electricity network be harnessed to reestablish government authority in newly retaken areas?

Luay Al-Khatteeb and Harry Istepanian address these questions through analysis of past attempts at electricity sector reform. They argue that even before IS advances plunged Iraq into a deep political and security crisis, divisions within the Iraqi parliament and various government agencies had stymied efforts at reform. Still, they note that improving the provision of electricity is a clear opportunity to improve basic services to its citizens, boosting government legitimacy and acceptance in areas under its control, especially as it seeks to retake territory from IS.

Khatteeb and Istepanian hold that a comprehensive strategy is needed, one that incorporates an expanded role for the private sector, rationalized electricity tariffs, and a host of technical fixes to improve efficiency. Ultimately, they contend, much will depend on whether the government of Prime Minister Haidar al-Abadi views the IS threat as an excuse for inaction or an impetus for change.

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The recent fall in world oil prices undoubtedly has an impact on the politics of the Middle East, where many states rely heavily on oil to fund their governments and to float their economies more generally. One can cite serious domestic and regional disruptions that have followed severe oil price declines in the recent past. Will the current period of dropping prices result in domestic upheaval and regional war? Is the price drop part of a Saudi power play against its regional rivals?

Read Sultans of Swing? The Geopolitics of Falling Oil Prices

In this Policy Briefing, F. Gregory Gause, III answers the above questions by analyzing the regional impact of previous declines in the price of oil. He argues that Saudi Arabia is merely continuing its policy of only considering production cuts to arrest falling prices if other producers join them. Gause also finds that, despite memorable exceptions, oil-dependent regimes are actually more stable than their non-oil counterparts, including during periods of lower prices.

In considering the Middle East, Gause identifies a pattern of the region’s oil producers negotiating agreements on production cuts, rather than coming to blows, when faced with low prices. He stresses that if Iran, and perhaps Russia, approach Saudi Arabia about negotiating an oil deal, the United States should encourage such talks, and be ready to expand them to include the largest strategic picture of the Middle East.

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Over the past few years, higher education has been a frequent casualty of the violent conflicts sweeping the Middle East. Campuses have been bombed in Syria, Gaza and now Yemen; occupied or closed in Libya and Iraq; and been the subject of severe police crackdowns across the region. What institutional measures can both regional entities and international bodies take to protect institutions of higher learning in the Arab world? Beyond this, how can strategies of protection be incorporated into programs of reconstruction and development for this much-maligned sector?

Read "Houses of wisdom matter: The responsibility to protect and rebuild higher education in the Arab world"

Sultan Barakat and Sansom Milton, in a new Brookings Doha Center Policy Briefing, contend that higher education is often an unrecognized casualty of these conflicts, with priority given to more pressing humanitarian needs. They assert that the protection and rebuilding of such institutions across the Middle East forms a crucial response to present concerns, helping to shelter and develop strategically vital youth populations. Crucially, they hold that an action plan for higher education in the Arab world cannot end at rebuilding shattered classrooms or rescuing individual scholars.

Ultimately, Barakat and Milton argue for a regional approach to defending and advancing higher education, as a key tool to combat violent extremism, address economic challenges, and encourage social stability. A strategy of “building back better” would allow higher education to serve as an engine for regional revitalization, living up to the historical example set by the region’s centuries-old institutions of higher learning.

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Indian Prime Minister Narendra Modi’s recent visit to the United Arab Emirates revealed New Delhi’s intention to bolster bilateral relations with the Gulf states. It was the first visit by an Indian prime minister in over 30 years, demonstrating the country’s renewed focus on expanding ties with the region it has always called “West Asia.” Although India and the Middle East share a long history of trade, immigration and cultural exchange, relations have yet to reach their full potential.

Read "Dealing with Delhi: How culture shapes India’s Middle East policy"

In this policy briefing, Kadira Pethiyagoda highlights the importance of an under-reported aspect of the relationship – culture. The author explains the role it plays in India’s policies toward the region, particularly under the current government, and argues that Gulf states need to understand the impact of Indian values and identity. Pethiyagoda provides recommendations on how the Gulf states can, through better understanding the cultural drivers of Indian foreign policy, build stronger ties with India, thereby advancing both economic and strategic interests.

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In 2011, Libya’s revolution knocked most of its oil production offline for months, resulting in a loss of nearly 2 percent of global production and a corresponding increase in oil prices. The security of energy exports and energy transit from the Middle East and North Africa (MENA) region, given its paramount importance to the global economy, has long been a concern. The current, very unsettled political situation in the region has made that concern even more salient.

Read "Risky Routes: Energy Transit in the Middle East"

In a new Brookings Doha Center Analysis Paper, Robin Mills identifies the key points of vulnerability in MENA energy supply and transit, including the pivotal Strait of Hormuz and a number of important pipelines. Mills also assesses the impact of possible disruptions on both the global economy and MENA states themselves.

Mills argues that to mitigate such disruptions, infrastructural, institutional, and market approaches must be used together. Mills highlights the need for improved assessments of the viability of various infrastructure projects and calls for the development of regional institutional arrangements that can better manage transit crises as they arise.

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Americans who use defined contribution retirement savings plans (for example, 401(k) or 403(b) plans) or Individual Retirement Accounts will see their retirement security enhanced by two recently announced regulatory initiatives. The first is a series of Treasury Department/IRS proposed regulations that such individuals to use annuity-like guaranteed lifetime income products. The second is a final Department of Labor rule requiring complete fee disclosure to employers sponsoring retirement saving plans. Together, the two initiatives will give current retirement savers and future retirees more flexibility in structuring their retirement incomes, while making it possible to avoid excessive or hidden fees.

Four Treasury/IRS proposals, which were developed under the leadership of our former RSP colleague Mark Iwry, deal with several of the most pressing issues faced by employers and savers that currently reduce the use of annuities. The first proposal would reduce barriers to giving retiring savers the option of annuitizing part of their account balances. Currently, people need to annuitize either the entire balance or none at all. People are naturally wary of annuitizing the entire amount because it leaves them with little in the way of a cash cushion for emergencies. By choosing to annuitize part of the balance, people can retain a lump sum for emergency or other purposes.

A second proposal would remove a technical impediment to using longevity annuities, an annuity that is typically purchased close to retirement but does not begin to pay benefit until the retiree reaches age 85 or a similar age. Longevity annuities enable retirees to manage their money for a set period of time, secure in the knowledge that the longevity annuity will provide income after that, should they live longer than expected.

The third proposal would allow an individual to begin to partially annuitize their savings well before retirement. Starting to annuitize early by buying small pieces of an annuity over twenty or so years allows the saver to avoid having to make a “once and for all” decision and allows the savers to spread out the interest rate risk over time. This option had been subject to a requirement that the saver get a notarized statement from his or her spouse (if any) concerning whether the annuity covers just the saver or both the saver and his or her spouse. The proposal allows this to be handled by the issuing insurer when payments would begin rather than when purchases begin.

The fourth proposal would apply to relatively rare case where the employer has both a retirement savings plan and a traditional defined benefit pension, and would allow an employee to buy a low-cost annuity through the employer’s DB pension.

These four regulatory changes are positive developments. The changes announced today eliminate unintentional barriers to the use of lifetime income products without dictating how individuals should use them. Some may choose to partially annuitize at retirement, some to use longevity annuities to protect them in later years, and some to begin to buy annuities well before retirement. Whatever the choice, the proposals open up new options to future retirees, and should encourage even more market innovations.

At about the same time, the Department of Labor released final regulations requiring providers to disclose all direct and indirect fees to the employer sponsoring a 401(k) plan. The regulations will add needed transparency on fees that will enable increased competition to produce better results for employers and employees.

Despite removing a required template of charges, the new regulations nevertheless give employers a complete and accurate picture of all charges they have to pay, including indirect fees paid by the provider to others. Currently, many indirect fees are not disclosed even though they may reduce the earnings of participants. Endorsed by industry and consumer groups, the disclosures will enable employers who use this information properly to meet their fiduciary responsibility to choose a responsible fee level. What is even more important, the full disclosure will enable employers to structure their 401(k) plan so that individual savers can get the best returns possible, and not be subject to unreasonable fees.

While much more remains to be done to improve retirement savings plan, the steps taken by the proposed Treasury/IRS regulations and the Department of Labor’s final regulations will help savers to improve retirement security.

Editor's Note: this article originally appeared in the 2012 Print Version of AARP: The Journal.

Using one platform to offer a variety of services

Known in the UK under the term “corporate platform” to indicate that it expands options available on the employer’s benefit platform, the development allows employees to use the employer’s retirement savings mechanism to save and invest for additional nonretirement purposes. When the corporate platform is fully implemented, employees will be able to man­age almost all of their investments and savings plans from one location, thus giving them a con­solidated view of their entire financial status. If carried to its full potential, the expanded saving platform will allow employees to shop for sav­ings products, among options that are available on the platform, instead of having to seek them out from individual suppliers—a search that often takes up work hours. Of even greater value, it gives employees one source to go to for indi­vidualized advice or financial literacy training.

The enhancement has special significance in the UK, where by fall 2012, the larger employers that don’t offer any other type of pension or retirement savings plan, must begin to automatically enroll their employees into basic retirement savings accounts. This requirement is causing a great deal of discussion about the future role of employer-provided benefits, as well as recon­sideration of the fees and services included in a traditional package. The platform enhancements allow an employer to differentiate its employee benefit package from the required basic account structure. It also gives younger employees a benefit of more immediate value, than they would have from a retirement savings account that they won’t access for a good 40 years.

Presentations from a variety of service providers at an October 2011 summit hosted by Pensions Insight, a UK trade journal, showed that the platform can be easily customized to meet the special needs of a specific workforce. Using a single computer interface, employees can select from a wide variety of savings and investment options that are appropriate for their income level and stage of life. Thus, an upper income manager who manages his or her own finances could see more sophisticated products, while an entry-level worker sees more basic sav­ings products. Live presentations by financial professionals who explain what is available on the computer platform add to the system’s value and increase its use.

A place to provide choice and to build financial literacy

The platform will have special value for moderate- and lower-income employees. While higher salaried employees may appreciate the opportunity to build their investments, the real value of the platform will be to enable moder­ate- and lower-income workers to find savings opportunities that they might otherwise miss because they don’t know where to go, are uncertain about what is a fair price, or for a variety of other reasons. Because employees tend to believe that services included on the corporate platform are implicitly endorsed by the employer, they usually have greater faith that the services are from legitimate providers at a fair price.

Employees at all levels can also use the site to receive guidance on individual products or basic financial literacy training. Individuals can choose from a range of options, from short videos on a specific topic by experts or fellow employees, to longer connected courses designed to meet the needs of specific age or income groups. Use is increased when employ­ees receive emails or text messages geared to birthdays or other life events, or generated after the employee visits a specific part of the website.

Understanding the value of peer evaluations to motivate others, some providers include a place where employees can post feedback about spe­cific products or savings choices. These postings help to guide other employees’ decisions and build the reputation of the platform as a source of unbiased information. The site can also include links to outside advisors who can answer specific questions, guide employees to another site for more information, or perform other services either online or over the telephone.

Differing age groups can be contacted and guided through different technologies. At the UK platform summit, David Harris, of Tor Financial Consulting, showed that younger employees preferred different communication methods than either older workers or the usual way employers provide information. However, the platform is able to use a wide variety of methods and is equally effective no matter which is used.

The platform’s value to international policy makers

Although the UK’s platform is intended as an enhancement to employer-provided benefits, it can also be used for a wide variety of policy goals, as the basic structure can be easily adapted to meet almost any nation’s specific tax and savings system. In the United States alone, policy experts have proposed dedicated savings accounts for nonretirement purposes ranging from unemployment benefits and retraining, home purchases, health care, and long-term health care coverage, to repaying student loans or building college balances for children or grandchildren. However, if all of these various accounts were established and funded, it is doubtful the employee would have any money left for food, clothing, and shelter.

Rather than having a host of specific savings programs, employees may be better served by more flexible accounts usable for a variety of purposes, as outside developments or chang­ing needs dictate. The platform concept would allow individuals to choose which purposes they need to save for and how much to save for each. Combined with targeted guidance or education, this structure could expose individuals to pos­sibilities they might not have considered before.

The structure is ideally suited to employment situations, but it could also be used by the self-employed or by consultants at sites aimed specifically at them and sponsored by trade associations, unions, or even government agen­cies. While their circumstances may preclude payroll deductions, the same products could be offered through direct debits to bank accounts.

The added value of nudge

The flexibility of the platform allows it to be used by employees with all levels of financial sophistication, but new participants would benefit from a variation on automatic enroll­ment that places certain amounts, in addition to the retirement savings amount, into a general savings account or similar vehicle. The automatic savings amounts deducted need not be large, and where the law allows, could vary according to employee age, with a larger proportion of the overall deduction going to nonretirement purpose for younger employees and to retirement for older ones.

As with automatic retirement enrollment, the employee would have the ability to vary amounts, divide the total among various accounts, and even stop all future contributions. However, automatic enrollment would offer workers direct experience with the nonretire­ment side of the platform. By varying enrollment in various accounts according to employees’ age, automatic enrollment could encourage them to consider saving for various purposes, such as a first home, college tuition for children, or additional health services.

Improving retirement security

Although the platform is applicable to a wide variety of other uses, its primary purpose is to build retirement security. Before retirement, the platform helps employees understand how to save, what they have, and how much more they need for a comfortable lifestyle. The other savings provide funds that can be used in the event of an emergency, thus helping to reduce leakage from retirement accounts in countries that allow early access to that money. At retire­ment, the platform helps individuals to see what other assets are available, and what loans or other liabilities must be factored in. In the UK, it is also being used to encourage individuals to use annuities and add them to their invest­ments. The UK experience can help to guide US policymakers in their efforts to increase the use of similar products.

The enhanced information and flexibility of the corporate platform should help individuals to better understand their finances and how to meet their goals. It moves retirement savings plans from a minor part of employees’ financial lives, to a central feature that has many more uses than just an event many years in the future. This promotes regular use of the platform, and a fuller understanding of what is necessary for a comfortable retirement.

Event Information

Australia's mandatory Superannuation Guarantee requires its citizens to save at least 9 percent of their income towards retirement. In many Asian nations, economic growth has spurred reexamination of pension systems to meet the needs of rapidly evolving societies. Would a mandatory savings plan be more effective than the current U.S. voluntary system? How have Asian nations have restructured their pension systems to deal with legacy costs? And what can Americans learn from the way Australia uses both employer and employee representatives to shape investment choices?

On September 17, the Retirement Security Project at Brookings and the AARP Public Policy Institute hosted a discussion of what the United States might learn from retirement savings systems in Australia and Asia. Opening speakers included Nick Sherry, who helped shape the Australian system as a cabinet minister and ran a Superannuation fund in the private sector, and Josef Pilger, an advisor on pension reform to both the Malaysian and Hong Kong governments and many industry providers. Steve Utkus, David Harris and Benjamin Harris, retirement experts from both the United States and the United Kingdom, considered how reforms in Australia and Asia can shape the American debate and whether this country should adopt key features from those foreign systems.

Audio

• Retirement Savings in Australia, Asia and Beyond: What are the Lessons for the United States?

Transcript

• Uncorrected Transcript (.pdf)

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• 20130917_retirement_savings_transcript

Event Information

Longevity annuities—a financial innovation that provides protection against outliving your money late in life—have the potential to reshape the retirement security landscape. Typically bought at retirement, a longevity annuity offers a guaranteed stream of income beginning in ten or 20 years at a markedly lower cost than a conventional annuity that begins paying out immediately. Sales have grown rapidly and it will be even easier to purchase the annuities in the future given new Treasury regulations. While economists have touted the attractiveness of longevity annuities as a way to ensure the ability to maintain one’s living standards late in life, significant barriers to a robust market remain—including lack of consumer awareness, questions about product value, and employer concerns with taking on fiduciary responsibility by offering these products to their employees.

Can longevity annuities overcome these barriers to find widespread popularity among Americans retirees? On November 6, the Retirement Security Project hosted a panel of experts to discuss the potential for these products to contribute to the economic security of older Americans, in addition to policy reforms that could lead to greater take-up by retirement plan sponsors and consumers alike. Following a presentation by Katharine Abraham that laid out the issues, two panels of prominent experts added their insights on the promise and challenges of this burgeoning market.

Video

• Better Financial Security in Old-Age? The Promise of Longevity Annuities
• Understanding Longevity Annuities
• Eliminating Barriers to Market Development
• Longevity Annuities Are Not Necessarily Niche Products
• The Adverse Selection Issue

Audio

• Better Financial Security in Old-Age? The Promise of Longevity Annuities

Transcript

• Uncorrected Transcript (.pdf)

Event Materials

• 06_retirement_longevity_annuities_abraham_harris
• longevity_annuities_presentation_abraham
• 20141106_longevity_annuities_transcript

In the 2015 State of the Union Address, President Obama made retirement security a priority for his Administration by promoting the Automatic IRA, a retirement savings plan that originated at the Retirement Security Project. The proposals would increase the ability of part-time workers to join their employer’s plan and improve tax incentives for businesses that either start an Automatic IRA or other type of retirement plan or add automatic enrollment to an existing plan.  

Only about half of all American workers have access to a payroll deduction retirement savings plan at work. For part-time workers, fewer than four in ten have the opportunity to save at work. And while these individuals could in theory save on their own in an IRA, the best estimate is that only about one in twenty eligible to contribute to an IRA actually do so on a regular basis.

Last year, the President announced the creation of My Retirement Account, or “MyRA.” Similar to the R-Bond discussed in a recent AARP Public Policy Institute paper written by William Gale, David John and Spencer Smith, MyRA would allow individuals to save up to $15,000 in a government bond account similar to the one offered as an option to federal employees through the Thrift Savings Plan.

Now, the White House proposes to build on the MyRA.  Because the Automatic IRA would require employers with more than 10 employees to offer retirement accounts, about 30 million more workers would have the opportunity to save for retirement via payroll deduction. Using automatic enrollment, a mechanism that both works and that employees strongly support, the Automatic IRA would serve as a permanent retirement savings plan, rather than a starter account like MyRA.

To further increase the number of retirement savers, the Obama Administration also proposes to allow part-time employees who have worked for the employer for at least 500 hours a year for the past three years to make voluntary contributions to the employer’s plan.  Currently, employers are allowed to exclude any employee who works less than 1,000 hours per year. 

And to encourage employers to offer retirement plans, the existing tax credits for small employers who start a new retirement plan or pension would be greatly expanded.  Small employers who create an Automatic IRA would be eligible for a $3,000 tax credit, while those who open another type of retirement plan would be eligible for a $4,500 tax credit.  And just adding automatic enrollment to an existing plan would earn a small employer a tax credit of $1,500.

While these proposals would all need the approval of congress, they may well be able to rise above the usual political maneuvering.  For instance, both left and right have made positive comments about the Automatic IRA, and businesses should support the call for expanded tax credits to cover their costs in implementing the plans.

Most important, the president continues to make retirement security a priority with practical solutions that would allow many more Americans to build retirement security through their own efforts.  His proposals promote the kind of values and self-reliance that both sides of the political spectrum find attractive.

American experience strongly suggests that the coming UK pension freedoms sound better in theory than they will work in practice. After nearly a decade where the UK has been the gold standard for retirement savings policy, it is about to take a step that it may regret.

As annuity purchases are not required, very few Americans buy them, feeling that they are spending a great deal of money for a comparatively small monthly income. Even those in traditional DB pension plans usually take a lump sum if they are allowed to do so. As a result, many US retirees spend unwisely, trust the wrong financial advisor, or make other financial mistakes.

Many people greatly overestimate how long their savings will last. Most others assume (often wrongly) that they can manage their own money as well as anyone else or that they can live comfortably on Social Security alone. U.S. Social Security pays a benefit that depends on the retirees’ individual income history. The average annual amount is about $13,000 (GBP 8,700).

One survey found that in West Virginia, a state with a relatively low average income, 78% of those near retirement and 67% of those at retirement would likely outlive their financial assets. Workers with lower incomes are most at risk. A recent national study found that by the 20th year of retirement, more than 81% of Americans with incomes up to $27,000 would run short of money, as would 38% of those earning up to $42,000, and 19% of those with incomes up to $65,000.  Even 8% of those with the highest incomes could not meet their expenses.

Advice alone is not likely to help. US experience shows that literally every minute that passes after general advice is given reduces the chance that the consumer will act on it – even when they have decided to do so. And even a significant number of those who consult with a financial planner fail to act on that guidance.

What does show promise is income illustration. In a 2014 U.S. survey, 85% of plan participants found estimates of the income they could anticipate from their retirement savings useful, and 35% said that they would save more. Income illustrations change the framing of retirement saving from gross amounts saved to retirement income.  Annuity-like products become insurance against running out of money, something Americans are increasingly concerned about.

Two other potential developments may help. One is longevity insurance, an annuity that provides income only after a set age. Purchasing a policy defines how long one must make retirement savings last, and the retiree is protected against running out of money. Because longevity insurance is deferred, one can receive higher amounts of monthly income for a lower cost.  In 2014, $50,000 would buy $275 a month at age 65 or $1200 a month starting at age 80.

Another idea is an automatic enrollment trial annuity. As developed by several Brookings Institution colleagues and me, new retirees would automatically use part of their savings for a two year annuity unless the retiree refused it. The rest of their savings would be available as a lump sum. After the trial period, the annuity would become permanent if they did nothing or they could cancel it and take the rest of their money as a lump sum.

The many annuity horror stories from the UK show a definite need for change, but the coming reforms go too far. US experience suggests that too many UK retirees are likely to see their savings exhausted all too quickly. There are alternatives that could do a better job of protecting retirees.

Increasingly, many Marylanders are unprepared for retirement.

The US has the broadest range of retirement savings options in the world. There are thousands of retirement products offered. But most Marylanders don’t use them.

The need is growing. The Baby Boomers are the largest generation in history. They will live longer in retirement than any generation in history.

But – financially – many are not prepared. Many have virtually no retirement savings: more than a third those within ten years of retirement age have saved less than $10,000. $10,000 invested and spent over the average person’s retirement works out to about $1,000 of income per year. Even with Social Security, that’s not much to live on.

Fears about retirement are the #1 economic concern. Many Marylanders know they’re unprepared – and they’re worried about it. Concerns about retirement security are now more broadly based than the cost of health care, fear of job loss or other economic concerns – and have been for over a decade.3 Those concerns have grown since the financial crisis, even though the stock market has recovered. Many know they’ll have to defer retirement—and many fear they will never be able to afford to retire at all.

The key to retirement saving is having a retirement plan and contributing to it every paycheck. But many businesses, including most smaller businesses, don’t offer retirement plans. As a result 1,000,000 Marylanders working in private businesses across the State don’t have a retirement plan. There are, of course, individual retirement accounts (IRAs) -- but almost no one uses them who didn’t get access through an employer-based plan via payroll deduction.

Having a plan is essential, but not a panacea. Even when plans are available, many employees don’t join. Many who do contribute and save less than they need to meet their own goals. Even with plans, many will need to save more.

The challenge continues at retirement, because most of these plans are paid out in a single lump sum payment—few plans offer reliable retirement income for life that traditional pensions do. Since most retirees do not consult financial advisors and are not financial experts themselves, some who live longer than average or are unlucky in their investments will find that they haven’t saved enough and will exhaust their savings.

They will, of course, have Social Security. That’s why it’s so important that Social Security be both preserved and strengthened. But the average monthly benefit in Maryland is about $1,300 and for most people Social Security covers only a fraction of their basic needs in retirement. Most Marylanders will need additional income from retirement savings – and the State of Maryland can help them get it.

Other states and other governments are making it easier for people to save and for private employers to help them do it. Maryland should, too. Acting now will save Maryland taxpayers millions in the future.

California, Massachusetts, and Illinois have already enacted legislation. Illinois created a new program that requires employers who have no retirement plan to automatically enroll their employees in a state-created program. Massachusetts authorized a program for uncovered employees of non-profits. California created a board to plan and propose program similar to that in Illinois. Similar legislation is being or has been introduced in some fifteen other states – states all across the country with varying political orientations, populations, and economic bases.

Although there are many variations under consideration, these programs generally provide for an automatic payroll deduction of a set amount unless the employee opts out. Funds are to be invested professionally and may be pooled to achieve higher returns and lower costs. Those who cannot or do not want to make complex financial decisions are not required to do so – their contributions are placed automatically into a reliable fund or set of funds.

In order to ensure that employers – many of whom are small businesses – can participate in a program, it must be designed to help them avoid significant disruption, expense or administrative burden. This can be accomplished by enabling employers to use current payroll processes to help their employees to build retirement security, without requiring employers to make contributions themselves.

If Maryland doesn’t act now, Maryland taxpayers will face higher costs for decades to come.

These plans are designed to be self-sustaining: their operating costs are paid for by plan contributions and the State would not assume any obligations. In practice, however, these plans will end up saving taxpayer funds: If Maryland doesn’t act now, Maryland taxpayers will face higher costs for decades to come, as retirees are forced to turn to State assistance instead of living on their own savings.

There are many ways to improve retirement security. The key is for businesses to help their employees save, without becoming overburdened themselves.

Task Force is not recommending any one approach, but strongly recommends that Maryland join other states, by developing and implementing a plan that helps Marylanders have more secure retirements.We recommend development of a specific state-based program that meets Maryland’s needs from the options discussed in our report.

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Since it was created in 1935, Social Security has grown from covering about half of the work force to covering nearly all workers.  The largest remaining exempted group is a subset of state and local government workers (SLGWs).  As of 2008, Social Security did not cover about 27 percent of the 23.8 million SLGWs (Congressional Research Service 2011).  Non-coverage of SLGWs is concentrated in certain states scattered around the country and includes workers in a diverse set of jobs, ranging from administrators to custodial staff.  Some police and fire department employees are not covered.  About 40 percent of public school teachers are not covered by Social Security (Kan and Alderman 2014).    

Under current law, state and local governments that do not offer their own retirement plan must enroll their employees in Social Security.  But if it does offer a retirement plan, the state or local government can choose whether to enroll its workers in Social Security.  

This paper reviews and extends discussion on whether state and local government workers should face mandatory coverage in Social Security.^[1]  Relative to earlier work, we focus on links between this issue and recent developments in state and local pensions.  Although some of the issues apply equally to both existing and newly hired SLGWs, it is most natural to focus on whether newly hired employees should be brought into Social Security.^[2]  

The first thing to note about this topic is that it is purely a transitional issue.  If all SLGWs were already currently enrolled in Social Security, there would not be a serious discussion about whether they should be removed.  For example, there is no discussion of whether the existing three quarters of all SLGWs that are enrolled in Social Security should be removed from coverage.

Bringing state and local government workers into the system would allow Social Security to reach the goal of providing retirement security for all workers.  The effects on Social Security finances are mixed.  Bringing SLGWs into the system would also help shore up Social Security finances over the next few decades and, under common scoring methods, push the date of trust fund insolvency back by one year, but after that, the cost of increased benefit payments would offset those improvements. 

Mandatory coverage would also be fairer.  Other workers pay, via payroll taxes, the “legacy” costs associated with the creation of Social Security as a pay-as-you-go system.   Early generations of Social Security beneficiaries received far more in payouts than they contributed to the system and those net costs are now being paid by current and future generations.  There appears to be no convincing reason why certain state and local workers should be exempt from this societal obligation.  As a result of this fact and the short-term benefit to the program’s finances, most major proposals and commissions to reform Social Security and all commissions to shore up the long-term federal budget have included the idea of mandatory coverage of newly hired SLGWs.

While these issues are long-standing, recent developments concerning state and local pensions have raised the issue of mandatory coverage in a new light. Linking the funding status of state and local pension plans and the potential risk faced by those employees with the mandatory coverage question is a principal goal of this paper.  One factor is that many state and local government pension plans are facing significant underfunding of promised pension benefits.  In a few municipal bankruptcy cases, the reduction of promised benefits for both current employees and those who have already retired has been discussed.  The potential vulnerability of these benefits emphasizes the importance of Social Security coverage, and naturally invites a rethinking of whether newly hired SLGWs should be required to join the program.  On the other hand, the same pension funding problems imply that any policy that adds newly-hired workers to Social Security, and thus requires the state to pay its share of those contributions, would create added overall costs for state and local governments at a time when pension promises are already hard to meet.  The change might also divert a portion of existing employee or employer contributions to Social Security and away from the state pension program. 

We provide two key results linking state government pension funding status and SLGW coverage. First, we show that states with governmental pension plans that have greater levels of underfunding tend also to have a smaller proportion of SLGW workers that are covered by Social Security.  This tends to raise the retirement security risks faced by those workers and provides further fuel for mandatory coverage.  While one can debate whether future public pension commitments or future Social Security promises are more risky, a solution resulting in less of both is the worst possible outcome for the workers in question.  Second, we show that state pension benefit levels for career workers are somewhat compensatory, in that states with lower rates of Social Security coverage for SLGWs tend to have somewhat higher pension benefit levels.  The extent to which promised but underfunded benefits actually compensate for the higher risk to individual workers of non-Social Security coverage is an open question, though.  

Mandatory coverage of newly hired SLGWs could improve the security of their retirement benefits (by diversifying the sources of their retirement income), raise average benefit levels in many cases (even assuming significant changes in state and local government pensions in response to mandatory coverage), and would improve the quality of benefits received, including provisions for full inflation indexation, and dependent, survivor and disability benefits in Social Security that are superior to those in most state pension plans.  The ability to accrue and receive Social Security benefits would be particularly valuable for the many SLGWs who leave public service either without ever having been vested in a government pension or having been vested but not reaching the steep part of the benefit accrual path.  

Just as there is strong support for mandatory coverage in the Social Security community and literature, there is strong opposition to such a change in elements of the state and local government pension world.  The two groups that are most consistently and strongly opposed to mandatory coverage of newly hired SLGWs are the two parties most directly affected – state and local governments that do not already provide such coverage and their uncovered employees.  Opponents cite the higher cost to both employees and the state and local government for providing that coverage and the potential for losing currently promised pension benefits. They note that public pensions – unlike Social Security – can invest in risky assets and thus can provide better benefits at lower cost.  This, of course, is a best-case alternative as losses among those risky assets could also increase pressure on pension finances.

There is nothing inconsistent about the two sides of these arguments; one set tends to focus on benefits, the other on costs.  They can be, and probably are, all true simultaneously.  There is also a constitutional issue that used to hang over the whole debate – whether the federal government has the right to tax the states and local government units in their roles as employers – but that seems resolved at this point.

Section II of this paper discusses the history and current status of Social Security coverage for SLGWs.   Section III discusses mandatory coverage in the context of Social Security funding and the federal budget.  Section IV discusses the issues in the context of state and local budgets, existing pension plans, and the risks and benefits to employees of those governments.  Section V concludes.

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In recent weeks, the Obama Administration has taken the two most important steps in nearly a decade to increase access to retirement savings for more than 55 million Americans who currently do not participate in a retirement saving plan.

The Treasury Department's myRA program, launched this month, will help new savers and the self-employed start accounts without risk or fees. And earlier this week, the Department of Labor clarified rules that will make it easier for states to create retirement savings plans for small business employees.

myRA

The new myRAs provide another way for new savers to build small nest eggs. They will also help consultants, contract employees, and part-time workers save for retirement or for emergencies. 

For employees, myRAs are payroll deduction savings accounts designed to meet the needs of new savers and lower income workers.  They have no fees, cost nothing to open, and allow savers to regularly contribute any amount.  Savings are invested in US Treasury bonds, so savers can’t lose principal, an important feature for low-income workers who might otherwise abandon plans if they face early losses.  Those who are not formal employees and thus lack access to an employer-sponsored plan can participate in myRA through direct withdrawals from a checking or other bank account. 

As the growing “gig economy” creates more independent workers, the myRA will be a valuable entry to the private retirement system.  These workers might otherwise retire on little more than Social Security. All workers can build myRA balances by redirecting income tax refunds into their accounts. Because a myRA is a Roth IRA (that is, contributions are made from after-tax income), savers can withdraw their own contributions at any time without penalties or tax liability.  

When a myRA reaches $15,000, it must be rolled into another account, and Treasury may make it possible for workers to transfer these savings into funds managed by one of several pre-approved private providers.  MyRAs won’t replace either state-sponsored plans or employer-related pension or retirement savings plans.  However, they will make it possible for new and lower-income savers as well as the self-employed to build financial security without risk or fees.  

State-Sponsored Retirement Savings Plans

The DOL announcement gave the green light to several state models, including Automatic IRAs, marketplace models, and Multiple Employer Plans.  About two dozen states are considering these plans and, so far, Illinois and Oregon have passed “Secure Choice” plans based on the Automatic IRA, while Washington State has passed a marketplace plan.

DOL’s proposed Automatic IRA rules (open for a 60 day comment period) would let states administer automatic enrollment payroll deduction IRAs provided that the plans meet certain conditions for selecting or managing the investments and consumer protections.  States would also have to require businesses to offer such a plan if they don’t already offer their employees a pension or other retirement savings plan. Companies that are not required to offer an Automatic IRA or other plan, but decide to join the state plan voluntarily could still be subject to ERISA. The Retirement Security Project at the Brookings Institution first designed the Automatic IRA, which was proposed by the Administration before being adopted by some states.

In a separate interpretation, DOL allowed states to offer marketplace plans without being subject to the Employee Retirement Income Security Act (ERISA).  These plans are essentially websites where small businesses may select pre-screened plans that meet certain fee or other criteria.  Under the DOL guidance, these marketplaces may include ERISA plans, but states cannot require employers to offer them.   However, if states sponsor a marketplace model, they could also require employers without other plans to offer Automatic IRAs.

Finally, DOL’s rules let states administer Multiple Employer Plans (MEPs), where individual employers all use the same ERISA-covered model plan.  MEPs are usually simplified 401(k)-type plans. Because the state would be acting on behalf of participating employers, it could assume some functions that would otherwise be the responsibility of the employer. These include handling ERISA compliance, selecting investments, and managing the plan.

The Retirement Security Project has issued a paper and held an event discussing ways states could create small business retirement savings plans. The paper is available here and the event is available here.

Together, the two initiatives—the new MyRA and the state-sponsored plans-- could greatly increase the number of American workers who’ll be able to supplement their Social Security benefits with personal savings.