"Out of ammo?" The Economist recently asked of monetary policymakers. Stephen Roach has called the move by major central banks – including the Bank of Japan, the European Central Bank, and the Bank of Sweden – to negative real (and, in some cases, even nominal) interest rates a “futile” effort that merely sets “the stage for the next crisis.” And, at the February G-20 finance ministers meeting, Bank of England Governor Mark Carney reportedly called these policies “ultimately a zero-sum game.” Have the major advanced economies’ central banks – which have borne the burden of sustaining anemic post-2008 recoveries – really run out of options?

It certainly seems so. Central-bank balance sheets have swelled, and policy rates have reached their “near zero” lower bounds. There is plenty of cheap water, it seems, but the horse refuses to drink. With no signs of inflation, and growth still tepid and fragile, many anticipate chronic slow growth, with some even fearing another global recession.

But policymakers have one more option: a shift to “purer” fiscal policy, in which they directly finance government spending by printing money – a so-called “helicopter drop.” The new money would bypass the financial and corporate sectors and go straight to the thirstiest horses: middle- and lower-income consumers. The money could go to them directly, and through investment in job-creating, productivity-increasing infrastructure. By placing purchasing power in the hands of those who need it most, direct monetary financing of public spending would also help to improve inclusiveness in economies where inequality is rising fast.

Helicopter drops are currently proposed by both leftist and centrist economists. In a sense, even some “conservatives” – who support more public infrastructure spending, but also want tax cuts and oppose more borrowing – de facto support helicopter drops.

Recently, more radical proposals have surfaced, reflecting a sense of urgency and widespread disappointment with the impact of current monetary policy. Beyond advocating higher minimum wages, some are calling for “reverse income policies,” with governments imposing across-the-board wage increases on private employers – a move that would drive up prices and defeat deflationary expectations. The fact that economists whose views typically fall nowhere near those of the far left are even thinking about such interventionism shows just how extreme circumstances have become.

I favor all of these proposals, in some form. The details of their implementation would obviously have to vary, depending on each economy’s circumstances. Germany, for example, is in a strong position to implement a reverse income policy, given its huge current-account surplus, though there would undoubtedly be major political barriers. More spending on education, skills upgrading, and infrastructure, however, is a no-brainer almost everywhere, and is politically more feasible.

But there is another dimension of the challenge that has so far not been emphasized nearly enough, despite the warnings of Carney, Roach, and others. Zero or negative real interest rates, when they become quasi-permanent, undermine the efficient allocation of capital and set the stage for bubbles, busts, and crises. They also contribute to further income concentration at the top by hurting small savers, while creating opportunities for large financial players to benefit from access to savings at negative real cost. As unorthodox as it may sound, it is likely that the world economy would benefit from somewhat higher interest rates.

Raising interest rates cannot, however, be a stand-alone policy. Instead, small policy-rate increases must be incorporated into a broader fiscal and distributional strategy, implemented alongside more public spending on infrastructure and skills upgrading, as well as some gentle forms of income policies, employing, for example, “moral suasion.”

Even with such an approach, however, major central banks would have to coordinate their policies. If a single major central bank attempted to introduce higher interest rates, its economy would immediately be “punished” through currency appreciation, declining competitiveness, and falling exports, all of which would undermine aggregate demand and employment.

If the major central banks decided to increase their policy rates simultaneously, these spillover effects would cancel one another out. A coordinated move, perhaps raising rates in two modest 25 or 30 basis-point increments, would be neutral in terms of exchange rates and short-term competitiveness, even as it moved real interest rates back into positive territory. If successful, this effort could eventually be followed by further small increases, creating space for more traditional monetary-policy “ammunition” to be deployed in the future.

Success also hinges on the simultaneous pursuit of fiscal expansion worldwide, with each country’s efforts calibrated according to its fiscal space and current-account position. The expansion should finance a global program of investment in physical and human infrastructure, focusing on the two key challenges of our time: cleaner energy and skills for the digital age.

A coordinated and well-timed policy package could boost global growth, improve capital allocation, support a more equitable income distribution, and reduce the danger of speculative bubbles. The various meetings in the run-up to the G-20 summit in China, including the spring meetings of the International Monetary Fund and the World Bank, would be ideal forums for designing such a package, and advancing its implementation.

Economic orthodoxy and independent actions have clearly failed. It is time for policymakers to recognize that innovative international policy cooperation is not a luxury; sometimes – like today – it is a necessity.

       

       

       

       

       

       

The mayoral election in Baltimore has brought local economic development strategies to the forefront. In a city in which inequality—by income, by race, and between neighborhoods—has increased in the past five years, the candidates have made it clear that more action must be taken to close disparities and improve economic outcomes for all residents. In a podcast segment, I commend the much-needed focus on equity but argue that the mayoral candidates should not lose sight of another critical piece of the equity equation: economic growth. Citing lessons from my recent paper, I outline strategies that Baltimore’s presumptive leaders should pursue—as well as several they should abandon—to place the city’s residents on the path to a more prosperous, equitable future.

Listen to the full podcast segment here: 

       

       

April 15 is tax day, but not many Americans will be lining up at the post office or logging onto TurboTax as midnight approaches. Taxpayers who receive refunds often file well ahead of the April 15 deadline. And according to new research, many of those refund dollars are already spent or spoken for.

Early filing is particularly common among taxpayers who claim the Earned Income Tax Credit (EITC), which supplements earnings for low-income workers and their families. EITC recipients often receive substantial refunds, especially in relation to their income. According to new data available through our EITC Interactive, nationwide 26.8 million taxpayers benefited from the EITC for the 2013 tax year, and they claimed a total of $64.7 billion from the credit. Combined with other credits and over-withholding these families received, the average refund for EITC filers topped $4,100 that year. As the accompanying map shows, that amount approached $4,500 or more in many southern states.

I thought of those large refunds while reading a fascinating new book by sociologist Kathryn Edin and her colleagues, titled, It’s Not Like I’m Poor: How Working Families Make Ends Meet in a Post-Welfare World. The book provides insights from in-depth interviews with 115 families with children in the Boston area who claimed the EITC. It examines their household budgets and how the families view and use the credit. The authors find that these families rely greatly on their tax refunds to close the gap between the wages they earn and the daily costs of living in an expensive region like Greater Boston. For some, a large tax refund also enabled them to purchase something normally confined to middle-class families, such as a special birthday present for a child or dinner out at a restaurant.

One of the authors’ central findings, however, was that EITC recipients bear a considerable amount of debt—95 percent of the families studied had debt of some kind. The most common (66%) was credit card debt, with the typical family owing nearly $2,000. Considerable shares of families also had utility, car, or student loan debt.

Their indebtedness was not surprising given that wages covered on average only about two-thirds of monthly expenditures. The authors classified one-quarter of families’ refund spending as dedicated to debt/bills, but other ways families  spend the money—such as repairing a car or paying ahead on bills—point to the lack of financial cushion EITC recipients endure throughout the year.

For the families Edin and colleagues studied, the average tax refund represented a staggering three months of earnings. Despite that, the authors report that many families expressed that they preferred the "windfall" versus receipt of payments over several months, partly because the lump sum held out the prospect of helping them save. But one has to wonder if the EITC, now routinely referred to as the nation's most effective anti-poverty policy, best supports families' financial security in this form, as its recipients fall further behind each month.

We should experiment with new ways of delivering EITC recipients' tax refunds that preserve some of its windfall aspect while also periodically delivering portions of the credit throughout the year. A small periodic payment pilot is underway in Chicago, and early findings suggest that advance payments of taxpayers' anticipated EITC helped them meet basic needs, pay off debt, and reduce financial stress relative to similar families not receiving such payments. It’s time to try making the EITC more than an annual boom in a bust-filled financial cycle for low-income families. 

       

Antimicrobial resistance is one of the most significant threats to public health globally. It will worsen in the coming decades without concerted efforts to spur the development of new antibiotics, while ensuring the appropriate use of existing antibiotics. Antimicrobial therapy is essential for treating and preventing bacterial infections, some of which can be life-threatening and acquired as a result of
critical medical interventions, including surgery, chemotherapy and dialysis. However, the international rise in antimicrobial resistance has weakened our antibiotic armamentarium and multi-resistant bacteria now cause over 150,000 deaths annually in hospitals around the world (WHO, 2013). Unfortunately, the evolution of drug-resistant pathogens is unavoidable due to random genetic changes in the pathogens that can render antibiotics ineffective. While antibiotic therapy can succeed in killing susceptible pathogens, it also inadvertently selects for organisms that are resistant. Because each exposure to antibiotics contributes to this process, efforts to restrict antibiotic usage only slow the development of resistance. Ultimately, innovative antimicrobial drugs with diverse mechanisms of action will be needed to treat emerging resistant pathogens.

Combating resistance

Inappropriate use of antibiotics contributes significantly to the acceleration of resistance. Needlessly exposing patients to antibiotics (for example, for viral or mild infections likely to resolve on their own), the use of overly broad-spectrum antibiotics and suboptimal doses of appropriate therapy hasten the evolution of resistant pathogens. While affordable, rapid and accurate point-of-care diagnostics are essential for determining appropriate therapy for many bacterial diseases, routine clinical use will be limited if the tests are too expensive or not accessible during routine clinical encounters. In the absence of a clear diagnostic result, many health care providers prescribe empiric broadspectrum therapy without knowing exactly what they are treating. Although inappropriate use is widespread in many parts of the world, where antibiotics are available without a prescription or oversight by a health care provider or stewardship team, overuse abounds even where antibiotic prescribing is more tightly regulated.

Studies conducted in the USA indicate that around 258 million courses of antibiotics are dispensed annually for outpatient use (Hicks, 2013) and up to 75 per cent of ambulatory antibiotic prescriptions are for the treatment of common respiratory infections, which may or may not be bacterial in origin (McCaig,1995). Recent evidence suggests that over half of these prescriptions are not medically indicated. For example, 60 per cent of US adults with a sore throat receive an antibiotic prescription after visiting a primary care practice or emergency department, despite the fact that only ten per cent require treatment with antibiotics. This is particularly troubling given the availability of rapid tests that can detect Group A Streptococcus, the bacteria responsible for the ten per cent of cases that require antibiotic treatment.

The overuse of antibiotics has been driven largely by their low cost and clinical effectiveness, which has led many patients to view them as cure-alls with few risks. This perception is reinforced by the fact that antibiotics are curative in nature and used for short durations. However, the clinical effectiveness of these drugs decreases over time, as resistance naturally increases, and this process is accelerated with inappropriate use. Moreover, there are numerous consequences associated with the use of antibiotics, including over 140,000 emergency department visits yearly in the USA for adverse incidents (mostly allergic reactions; CDC, 2013a). In addition, antibiotics can eliminate protective bacteria in the gut,
leaving patients vulnerable to infection with Clostridium difficile, which causes diarrhoeal illness that results in 14,000 deaths every year in the USA (CDC, 2013b). It is estimated that antimicrobial resistance costs the US health care system over US$20 billion annually in excess care and an additional $35 billion in lost productivity (Roberts et al., 2009).

The inappropriate use of antimicrobial drugs is particularly concerning because highly resistant pathogens can easily cross national borders and rapidly spread around the globe. In recent years, strains of highly drug-resistant tuberculosis, carbapenem-resistant Enterobacteriaceae and other resistant pathogens have spread outside their countries of origin within several years of their detection. Because resistant bacteria are unlikely to stay isolated, stewardship efforts must be improved globally and international attention is needed to improve surveillance of emerging pathogens and resistance patterns.

A major challenge for clinicians and regulators will be to find stewardship interventions that can be scaled-up and involve multiple stakeholders, including providers, drug manufacturers, health care purchasers (insurers), governments and patients themselves. Such interventions should include practical and costeffective educational programmes targeted towards providers and patients that shift expectations for antibiotic prescriptions to a mutual understanding of the benefits and risks of these drugs.

Educational programmes alone, however, will not be sufficient to lower prescribing rates to recommended levels. Pushing down the inappropriate use of antibiotics also warrants stronger mechanisms that leverage the critical relationships between the stakeholders. For example, health care purchasers can play an important role by using financial disincentives to align prescribing habits with clinical guidelines that are developed by infectious disease specialists in the private and public sectors. This type of approach has the potential to be effective because it includes multiple stakeholders that share responsibility for the appropriate use of antibiotics and, ultimately, patient care.

Key obstacles to antibiotic development

The continual natural selection for resistant pathogens despite efforts to limit antibiotic use underscores the need for new antibiotics with novel mechanisms of action. To date, antimicrobial drug innovation and development have not kept pace with resistance. The number of approved new molecular entities (NME) to treat systemic infections has been steadily declining for decades (see Figure 1). Some infections are not susceptible to any antibiotic and in some cases the only effective drugs may cause serious side effects, or be contra-indicated due to a patient’s allergies or comorbidities (e.g. renal failure). There is significant unmet medical need for therapies that treat serious and life-threatening bacterial diseases caused by resistant pathogens, as well as some less serious infections where there are few treatment alternatives available (e.g. gonorrhoea).

Antibiotic development for these areas of unmet medical need has been sidelined by a number of scientific, regulatory and economic obstacles. While the costs and complexity of any clinical trial necessary for approval by drug regulators can be substantial, in part due to the large study samples needed to demonstrate safety and efficacy, the infectious disease space faces a number of unique clinical challenges. Patients with serious drug-resistant infections may be in need of urgent antibiotic therapy, which can preclude efficient consent and timely trial enrolment procedures; prior therapy can also confound treatment effects if the patient is later enrolled in a trial for an experimental drug. In addition, many patients with these pathogens are likely to have a history of longterm exposure to the health care setting and may have significant comorbidities that render them less likely to meet inclusion criteria for clinical trials.

Emerging infections for which there are few or no treatment options also tend to be relatively rare. This makes it difficult to conduct adequate and well-controlled trials, which typically enrol large numbers of patients. However, clinical drug development can take many years and waiting until such infections are more common is not feasible. Another issue is that it may also not be possible to conclusively identify the pathogen and its susceptibility at the point of enrolment due to the lack of rapid diagnostic technologies. Ultimately, uncertainty about the aetiology of an infection may necessitate trials with larger numbers of patients in order to achieve sufficient statistical power, further compounding the challenge of enrolling seriously ill infectious disease patients in the first place.

The need to conduct large trials involving acutely ill patients that are difficult to identify can make antibiotic development prohibitively expensive for drug developers, especially given that antibiotics are relatively inexpensive and offer limited opportunities to generate returns. Unlike treatments for chronic diseases, antibiotic therapy tends to last no longer than a few weeks, and these drugs lose efficacy over time as resistance develops, leading to diminishing returns. The decline in antimicrobial drug innovation is largely due to these economic obstacles, which have led developers to seek more durable and profitable markets (e.g. cancer or chronic disease) in recent decades. There are only a handful of companies currently in the market and the development pipeline is very thin. Changes to research infrastructure, drug reimbursement and regulation are all potentially needed to revitalise antibiotic innovation.

Opportunities to streamline innovative antibiotic development

In the USA, several proposals have been made to expedite the development and regulatory review of antibiotics while ensuring that safety and efficacy requirements are met. In 2012, the US President’s Council of Advisors on Science and Technology recommended that the US Food and Drug Administration (FDA) create a ‘special medical use’ (SMU) designation for the review of drugs for subpopulations of patients with unmet medical need. Drug sponsors would be required to demonstrate that clinical trials in a larger patient population would need much more time to complete or not be feasible. A drug approved under the SMU designation could be studied in subgroups of patients that are critically ill, as opposed to the broader population, under the condition that the drug’s indication would be limited to the narrow study population. The SMU designation was discussed at an expert workshop convened by the Brookings Institution in August 2013. Many participants at the meeting agreed that there is a pressing need to develop novel antibiotics and that such a limited-use pathway could support the appropriate use of newly approved drugs.

The Infectious Diseases Society of America developed a related drug development pathway called the Limited Population Antibacterial Drug (LPAD) approval mechanism. The LPAD approach calls for smaller, faster and less costly clinical trials to study antibiotics that treat resistant bacteria that cause serious infections. Both the SMU and LPAD approaches would allow drug developers to demonstrate product safety and efficacy in smaller patient subpopulations and provide regulatory clarity about acceptable benefit–risk profiles for antibiotics that treat serious bacterial diseases. The US House of Representatives is currently considering a bill¹ that incorporates these concepts.

A recent proposal from the drug manufacturer industry for streamlined antibiotic development is to establish a tiered regulatory framework to assess narrow-spectrum antibiotics (e.g. active versus a specific bacterial genus and species or a group of related bacteria) that target resistant pathogens that pose the greatest threat to public health (Rex, 2013: pp. 269–275). This is termed a ‘pathogen-focused’ approach because the level of clinical evidence required for approval would be correlated with the threat level and feasibility of studying a specific pathogen or group of pathogens. The pathogen-focused approach was also highlighted at a recent workshop at the Brookings Institution (Brookings Institution, 2014). Some experts felt that the approach is promising but emphasised that each pathogen and experimental drug is unique and that it could be challenging to place them in a particular tier of a regulatory framework. Given that pathogen-focused drugs would likely be marketed internationally, it will be important for drug sponsors to have regular interactions and multiple levels of discussion with regulators to find areas of agreement that would facilitate the approval of these drugs.

Antibiotics with very narrow indications could potentially support stewardship as well by limiting use to the most seriously ill patients. Safe use of these drugs would likely depend on diagnostics, significant provider education, labelling about the benefits and risks of the product, and the scope of clinical evidence behind its approval. Because these antibiotics would be used in a very limited manner, changes would potentially need to be made to how they are priced and reimbursed to ensure that companies are still able to generate returns on their investment. That said, a more focused drug development programme with regulatory clarity could greatly increase their odds of success and, combined with appropriate pricing and safe use provisions, could succeed in incentivising antimicrobial drug development for emerging infections.

Endnote
1 H.R. 3742 – Antibiotic Development to Advance Patient Treatment (ADAPT) Act of 2013.

References
Barnett, M. L. and Linder, J. A., 2014. ‘Antibiotic prescribing to adults with sore throat in the United States, 1997–2010’. JAMA Internal Medicine, 174(1), pp. 138–140.

Brookings Institution, 2013. Special Medical Use: Limited Use for Drugs Developed in an Expedited Manner to Meet an UnmetMedical Need. Brookings Institution. Available at: www.brookings.edu/events/2013/08/01-special-medical-use

Brookings Institution, 2014. Modernizing Antibacterial Drug Development and Promoting Stewardship. Available at: www.brookings.edu/events/2014/02/07-modernizing-antibacterialdrug-development [Accessed 11 March 2014].

CDC, 2013a. Antibiotic resistance threats in the United States,2013 [PDF] CDC. Available at: www.cdc.gov/drugresistance/threatreport-2013/pdf/ar-threats-2013-508.pdf#page=25 [Accessed 16 January 2014].

CDC, 2013b. Clostridium difficile. Antibiotic resistance threats in the United States, 2013 [PDF] CDC. Available at: www.cdc.gov/drugresistance/threat-report-2013/pdf/ar-threats-2013-508.pdf#page=50 [Accessed 16 January 2014].

Hicks, L. A. et al., 2013. ‘US Outpatient Antibiotic Prescribing, 2010’. New England Journal of Medicine, 368(15), pp. 1461–1463.
Infectious Disease Society of America, 2012.

Limited Population Antibacterial Drug (LPAD) Approval Mechanism. Available at: www.idsociety.org/uploadedFiles/IDSA/News_and_Publications/IDSA_News_Releases/2012/LPAD%20one%20pager.pdf [Accessed 5 March 2014].

Infectious Disease Society of America, 2012. Limited Population Antibacterial Drug (LPAD) Approval Mechanism [PDF] Infectious
Disease Society of America. Available at: www.idsociety.org/uploadedFiles/IDSA/News_and_Publications/IDSA_News_Releases/2012/LPAD%20one%20pager.pdf  [Accessed 18 January 2013].

Kumarasamy, K. K., Toleman, M. A., Walsh, T. R. et al.,2010. ‘Emergence of a new antibiotic resistance mechanism in India,
Pakistan, and the UK: A molecular, biological, and epidemiological study’. Lancet Infectious Diseases, 10(9), pp. 597–602.

McCaig, L. F. and Hughes, J. M., 1995. ‘Trends in antimicrobial drug prescribing among office-based physicians in the United
States’. Journal of the American Medical Association, 273(3), pp. 214–219.

President’s Council of Advisors on Science and Technology, 2012. Report to the President on Propelling Innovation in Drug
Discovery, Development and Evaluation. Available at:www.whitehouse.gov/sites/default/files/microsites/ostp/pcast-fdafinal.pdf    [Accessed 5 March 2014].

Rex, J. H. et al., 2013. ‘A comprehensive regulatory framework to address the unmet need for new antibacterial treatments’. Lancet Infectious Diseases, 13(3), pp. 269–275.

Roberts, R. R., Hota, B., Ahmad, I. et al., 2009. ‘Hospital and societal costs of antimicrobial – Resistant infections in a Chicago
teaching hospital: Implications for antibiotic stewardship’. Clinical Infectious Diseases, 49(8), pp. 1175–1184.

WHO (World Health Organization), 2010. Fact Sheet: Rational Use of Medicines [webpage] WHO. Available at:
www.who.int/mediacentre/factsheets/fs338/en [Accessed 28 February 2014].

WHO (World Health Organization), 2013. Antimicrobial Drug Resistance [PDF] WHO. Available at: http://apps.who.int/gb/ebwha/pdf_files/EB134/B134_37-en.pdf [Accessed 6 March 2014].

WHO (World Health Organization), 2013. Notified MDR-TB cases (number per 100,000 population), 2005–12. WHO. Available at:
https://extranet.who.int/sree/Reports?op=vs&path=/WHO_HQ_Reports/G2/PROD/EXT/MDRTB_Indicators_map [Accessed 28 February 2014].

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• Antibiotics Stewardship and Innovation

       

       

       

       

       

       

       

Renewable energy is an important source to tackle against climate change, as the latest IPCC report has pointed out. However, due to the existence of multiple market failures such as negative externalities of fossil fuels and knowledge spillovers of new technology, government subsidies are still needed to develop renewable energy, such as solar photovoltaic (PV) cells. In the United States, there have been various forms of subsidies for PV, varying from the federal level to the state level, and from the city level to the utility level. California, as the pioneer of solar PV development, has put forward the biggest state-level subsidy program for PV, the California Solar Initiative (CSI). The CSI has planned to spend around $2.2 Billion in 2007–2016 to install roughly 2 GW PV capacity, with the average subsidy level as high as $1.1/W. How to evaluate the cost-effectiveness and incentive pass-through of this program are the two major research questions we are pursing.

Our cost-effectiveness analysis is based on a constrained optimization model that we developed, where the objective is to install as much PV capacity as possible under a fixed budget constraint. Both the analytical and computational results suggest that due to a strong peer effect and the learning-by-doing effect, one can shift subsides from later periods to early periods so that the final PV installed capacity can be increased by 8.1% (or 32 MW). However, if the decision-maker has other policy objectives or constraints in mind, such as maintaining the policy certainty, then, the optimally calculated subsidy policy would look like the CSI.

As to the incentive pass-through question, we took a structural approach and in addition used the method of regression discontinuity (RD). While in general, the incentive pass-through rate depends on the curvature of the demand and supply curve and the level of market competition, our two estimations indicate that the incentive pass-through for the CSI program is almost complete. In other words, almost all of the incentive has been enjoyed by the customer, and the PV installers did not retain much. Based on the RD design, we observe that PV installers tend to consider the CSI incentive as exogenous to their pricing decision.

The relative good performance of the CSI in terms of both the cost-effectiveness and the incentive pass-through aspect are tightly related to its policy design and program management. International speaking, the biggest challenge for the design of any PV subsidy program is the quick running out of the budget, and in the end, it looks like customers are rushing for the subsidy. Such rushing behavior is a clear indication of higher-than-needed incentive levels. Due to the policy rigidity and rapid PV technological change, the PV subsidy policy may lag behind the PV cost decline; and as a result, rational customers could rush for any unnecessarily high subsidy.

Due to the high uncertainty and unpredictability of future PV costs, the CSI put forward a new design that links the incentive level change and the installed capacity goal fulfillment. Specifically, the CSI has designed nine steps to achieve its policy goal; at each step, there is a PV capacity goal that corresponds to an incentive level. Once the capacity goal is finished, the incentive level will decrease to the next lower level. Furthermore, to maintain the policy certainty, the CSI regulated that every step-wise change in the incentive level should not be higher than $0.45/W, nor smaller than $0.05/W, together with other three constraints.

A good subsidy policy not only requires flexible policy design to respond to fast-changing environment, but also demands an efficient program management system, digitalized if possible. For the CSI, the authority has contracted out a third-party to maintain a good database system for the program. Specifically, the database has documented in detail every PV system that customers requested. Key data fields include 22 important dates during the PV installation process, customers’ zip code, city, utility and county information, and various characteristics of the PV system such as price, system size, incentive, PV module and installer. All information is publicly available, which to some extent fills in the information gap held by customers and fosters the market competition among PV installers. For customers to receive the incentive, their PV systems have to pass the inspection of the local government, and also to be interconnected to the grid. On the supply side, the CSI has also certified and created a list of PV installers that every customer can choose from.

Although the CSI has ended in 2014 due to fast PV cost reduction starting from 2009, its experience has been transferred to other areas in the United States and in Europe. It is highly possible that other similar new technologies and products (e.g. the electric car and the battery) can adopt the CSI policy design, too. In summary, a good and successful policy may need to be simply, clear, credible, foreseeable, flexible, end-able, and incentive-compatible. The PV subsidy policy in China still has a long way to go when compared to the CSI.

       

       

       

       

Baltimore provides a prime example of how metropolitan areas around the nation are turning to clean, green industries as a source of vibrant, sustainable growth. Expert Jennifer Vey outlines how such communities can identify their assets and capitalize on them to revitalize their economies.

Video

• Baltimore as a Case Study in Metro Economic Recovery

Audio

• @ Brookings Podcast: Baltimore as a Case Study in Metro Economic Recovery

      

While falling off the "fiscal cliff" (of automatic spending cuts and tax increases if Congress fails to act) could hurt the economy, expert William Gale says the actual result, if coupled with a temporary economic stimulus, would be greater incentives to make a better long-term budget deal.

Video

• William Gale: Combine Going Over the Fiscal Cliff with a Stimulus

       

       

Development ministers and experts will meet at the Fourth High Level Forum on Aid Effectiveness in Busan, Korea, in November 2011 to assess their efforts to improve the impact of aid. A recent survey by the Organisation for Economic Co-operation and Development (OECD) shows that little progress has been made since they met in Accra in 2008 for their Third High Level Forum. The many good intentions to improve coordination among donors, to enhance the alignment of aid programs with the priorities of aid recipients, and to develop effective partnerships in practice have turned out to be difficult to implement.

If anything, the challenge has become greater: the number of aid agencies keeps rising, as does the number of aid-supported projects, while average project size continues to drop. According to the OECD, more than half of the 90,000 official aid projects implemented annually are now well below $100,000 in size. With so many small interventions, most of them one-time, without links to each other, driven by the short-lived preferences of individual agencies and individuals in agencies, it is no surprise that the lofty goals of aid ministers go unrealized and that the cumulative impact of the many well-intentioned small aid projects is minimal at best.

It doesn’t have to be that way. There are examples of successful development programs that have lifted millions of people out of poverty, have greatly improved health conditions and have generated new business and employment opportunities. Examples such as the Mexican government’s national program of cash transfers to poor households (“Progresa- Oportunidades”) which conditions assistance on whether children attend school and mothers take their infants for health check-ups; the multi-donor program to eradicate the deadly river-blindness disease in West-Africa; the community based microcredit and employment programs of Grameen Bank and BRAC in Bangladesh; the Chinese government’s program for the development of the loess plateau with support of the World Bank; or the program of rural poverty reduction in the highlands of Peru supported by the International Fund for Agricultural Development (IFAD) – these are just a few examples of cases where the impact of development programs has been at a scale such that it made a real and lasting difference in the lives of millions of people. And success at scale is also possible in fragile and conflict-affected states as a recent review by the Brookings Institution for the Australian aid agency AusAID has shown.

This raises three questions that development ministers should consider as they prepare for and meet in Busan: What made these success stories possible? Why are they the exception rather than the rule? What needs to be done the make scaling up the norm? Let us take these questions in turn.

What made these success stories possible? Each case has its own ingredients of success, but three dimensions are common to them all:

• The programs pursued a scaling up pathway towards a long-term goal: Few successful programs followed a blueprint for long-term scaling up from the start, but they all built on the recognition that if the early steps were successfully piloted, subsequent steps needed to systematically replicate and scale up what works, adapting the approach in the light of lessons learned at each of the earlier project. A key element in this connection is that the long-term objective of scale impact is part of the program concept from the beginning; that monitoring and evaluation are designed to test not only whether an idea works, but also to measure progress against the long-term goal; and that an effort is made to identify the drivers, to create the spaces and to chart a suitable scaling up pathway for programs to move from small pilot to impact at scale.
  
  
• The programs benefitted from strong and sustained drivers for scaling up: Specifically, they had strong leadership with a clear vision of the need for large scale impact, with ideas that were suited to the challenge, ready to learn from experience, willing to stay engaged for the long haul, championing the cause, building partnerships with other like-minded actors and politically savvy in overcoming obstacles. This leadership could come from public officials, such as the President of Mexico and his Deputy Minister of Finance in the case of “Progresa”, from private individuals, such as the founders of Grameen Bank and BRAC, from a community of national experts and community leaders, as in the case of the Peru Highlands Development Program, from outside aid donors, as in the case of the West-African River- Blindness program, or be part of a wellestablished system of experimentation with replication of success as established in China’s approach to economic growth.
  
  
• The programs created the space for sustained growth: As programs expanded successfully they managed to open up financial and fiscal space by keeping costs down and finding suitable financing mechanisms; they pursued policy reforms that created favorable legal and regulatory conditions; they created the institutional space by identifying appropriate organizational approaches and building institutions for managing the programs at scale; they adapted approaches to the specific cultural realities; and they created political coalitions and operational partnerships that made it possible to grow and sustain the initiative. In the case of “Progresa- Oportunidades” the Mexican government designed a program with a long-term goal of universal coverage of all poor, but started with carefully designed pilots, which were subjected to detailed evaluation against control groups and adapted as needed during the 5-10 year scale-up phase. It created the required fiscal and financial space by abandoning other less successful social programs and by seeking the support of international financial institutions. The government also insulated “Progresa-Oportunidades” from political controversy by carefully monitoring and documenting its positive impacts and by legally assuring that it did not get caught up in party politics. Finally, it designed an institutional approach suitable for phased nation-wide scale-up with minimal bureaucratic obstacles.

Why are these success stories the exception rather than the rule? The first explanation for the lack of systematic and effective focus on scaling up lies in the nature of governmental and bureaucratic incentives and the resulting planning and implementation mechanisms in the developing countries themselves. Typically, governmental plans set out broad targets, policies and implementation modalities, but they generally do not link specific interventions, projects and programs or individual agency budgets and investment plans with the longer-term goals set forth in national or sectoral plans. Moreover, whenever governments or heads of agencies change, the new leadership has a strong tendency to discard the programs supported by the former incumbents and instead to pursue new ideas and new programs. Finally, the practice of methodically evaluating the impact of programs is poorly understood in most countries, and in any case is not well appreciated, since politicians and agencies like to claim success, but prefer not to acknowledge failures in their programs. Contrast this with the incentives for scaling up in the private sector: In a competitive market a successful new initiative, i.e., one that makes a profit, will be replicated and scaled up either by the firm that pioneered it, or by competitors who see the opportunity to garner some of the potential profit for themselves.

The second explanation can be found in the way aid agencies work. While some donors help governments with advice and technical assistance to develop a longer-term national, sub-national and sectoral plans and improved budgeting and investment planning mechanisms, the aid agencies’ own operational modalities and incentives tend to operate just like those of governments: Their operational policies, programming, management and staffing do not encourage support for systematic scaling up. On the contrary, they tend to focus on innovative initiatives and even discourage replication of successful projects and programs. They do not reward effective monitoring and evaluation against longer-term objectives. They rotate managers and staff frequently and with little attention to ensure appropriate hand-over. And the incentives for staff are to start new projects rather than focusing on implementing and building on ongoing ones. And while partnerships, coordination and handing off programs to the clients are encouraged at the level of ministers and agency heads, in practice staff have little incentive to pursue these avenues, since they take time, effort and even budgetary resources, increase risks of delay and of loss of institutional identity and control, and since fiduciary requirements for procurement and disbursements are not harmonized among donors.

What needs to be done to make scaling up the norm? Let us start with aid agencies. Donors have an obligation to do no harm, and it can be argued that their proliferation of small, one-time, uncoordinated and unevaluated interventions do more harm than good. They certainly represent an opportunity forgone, namely the opportunity to support a systematic focus on scaling up successful development interventions. Indeed, this represents an obligation that should be reflected in the mission statements of all official aid organizations, as well as in those of the larger non-governmental organizations and foundations that provide development assistance A recent assessment of donor performance in terms of their attention to scaling up concluded that donors need to address five critical gaps in their operation approach:

1. Institutional information gap: Aid agencies should review and develop their institutional approaches to scaling up.
2. Evaluation gap: Evaluations of donor projects should include an assessment of the scaling up practices of donors.
3. Incentives gap: Donors need to develop internal and external incentives (e.g., operational policies and staff incentives; replication funds, competitions) to help drive the scaling up process.
4. Partnership gap: Donors should expand the use of programmatic approaches and instruments with joint funding of programs designed to bring donors together so they can help scale up successful interventions;
5. Ownership gap: Ultimately, scaling up is a country’s job; donors need to help by setting an example, build capacity and hand off to agents in the country.

In their turn, the governments of developing countries need to make scaling up of successful interventions an explicit part of their national planning and programming, need to implement rigorous monitoring and evaluation as learning and accountability mechanisms for the political and agency leadership, and need to find ways to ensure that successful programs do not fall victim of the electoral cycle.

The good news is that progress is being made. There is now a well established body of evidence that scaling up can and does work, even in fragile states. There exists a framework for analyzing, planning monitoring and evaluating scaling up approaches, building on the scaling up pathway, drivers and incentives concepts as summarized above. Examples of governments focused on scaling up success show that it is possible to pursue this avenue to development, with China the outstanding case in point. And some aid agencies have begun to focus systematically on scaling up in their operational mission, strategy, policies, processes and incentives, among them IFAD, the Global Fund to Fight AIDS, Tuberculosis and Malaria, and the Bill and Melinda Gates Foundation. The United Nations Development Program has made scaling up an explicitcriterion in its evaluation of its programs. And the Gesellschaft für Internationale Zusammenarbeit (GIZ) recently issued practical guidelines for scaling up.

What is needed now, and what development ministers and agency heads should focus on in Busan and beyond, are the following three important priorities to ensure that an operational focus on scaling up becomes the rule, not the exception, in the way governments and aid agencies work:

1. Developing country governments commit themselves to introduce the scaling up objective and practice into their own planning, implementation, evaluation and accountability mechanisms.
2. Official donors and large private donors commit to introduce the objective and practice of scaling up into their mission statements, operational policies and evaluation practices.
3. Donors specifically commit to assist development partners through their technical and financial assistance to implement systematic approaches and incentive mechanisms that help drive the scaling up of successful development interventions. Scaling up success is not rocket science. It is a simple, intuitively appealing concept. And yet in practice it has been an orphan in the development literature and practice. Fortunately, this is now changing. We do not need complex models and metrics, nor do governments and aid agencies need sophisticated operational instruments. What we need is for scaling up to become the accepted goal at the political and institutional level. We need a clear vision of scaling up pathways, an assessment of the needed drivers and spaces for scaling up. And we need a readiness to evaluate progress against ultimate and intermediate goals and to adjust the scaling up pathway in light of the lessons learned.

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The Muslim Brotherhood has faced a great deal of opposition in the Middle East in recent years, with Egypt, Saudi Arabia, and the United Arab Emirates all declaring it to be a terrorist organization. Jordan’s Muslim Brotherhood, which has historically operated as a loyal opposition to the palace, has also come under fire as regional instability has dampened Jordanians’ appetite for protest and reform. While the group still enjoys significant public support, it is facing a number of internal tensions, culminating in its recent split. How can the Jordanian Muslim Brotherhood retain its political clout? Can it play a role in stabilizing and strengthening Jordan?

Read The Muslim Brotherhood in Jordan: Time to reform

In this new Policy Briefing, Neven Bondokji discusses the various reform efforts undertaken by Jordan’s Muslim Brotherhood since 2010, and argues that it urgently needs to see them through. She identifies key challenges, including the division over the Zamzam reform initiative, overlap between the movement and its affiliated political party, the inclusion of women, the ongoing ideological shifts in the movement’s political discourse, and generational tensions. Additionally, Bondokji examines how Jordan’s East Banker-Palestinian fault line is manifested within the Brotherhood.

Bondokji makes a series of recommendations, including that the Muslim Brotherhood ensure the independence of its political party’s leadership and decision-making, actively engage in and disseminate discourse on plural politics and policy debates, and introduce new leaders and styles of communication. She also asserts that Jordan’s government must empower political parties and allow for a more representative parliament. The application of such reforms, Bondokji concludes, would allow Jordan’s Muslim Brotherhood to be an asset in the country’s efforts against destabilizing extremism.

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Thank you for allowing me to testify before you today on the need to improve retirement savings opportunities for employees of private sector small businesses and ways to structure such an effort.

I am David John, a Senior Strategic Policy Advisor in AARP’s Public Policy Institute, AARP’s internal think tank. In addition, I am a Deputy Director of the Retirement Security Project at the Brookings Institution. Before I joined AARP last year, I was a Senior Research Fellow at the Heritage Foundation for almost 15 years.

My testimony this afternoon will focus on three areas: first, that there is a very real and growing retirement security problem in the United States; second, that the existing products and efforts are not resolving this problem; and third, that there are some approaches that Oregon could take that are compatible with existing law and would help future retirees to have a more comfortable retirement. These proposed actions would also help both your state and the country as a whole avoid the high costs of doing nothing. Let me be clear from the start that simply talking about increased education is not enough. This is a problem that will require action to improve.

The Problem Facing Us

Oregon and our nation face a serious problem if a large proportion of our workforce remains unable to save for retirement through an employer-related payroll deduction plan. This situation affects both those approaching retirement and those who are just starting their careers. However, older workers may have much higher access to defined benefit plans, and thus be much better off than younger employees who will have nothing to rely upon other than savings and Social Security.

Social Security is the foundation of retirement security both here and nationwide. In Oregon alone, its benefits keep hundreds of thousands out of poverty, but for most people, Social Security’s average benefit level of about $1,300 a month[1] does not provide enough for a comfortable retirement. That is about $15,600 a year. Economic security requires both Social Security benefits and sufficient additional savings to supplement them.

The lack of savings—and the opportunity to save at work through payroll deduction—is where the problem lies. Various industry groups and columnists have claimed that all is well, and that there really is not a problem. However, on close examination, there are holes in their figures, and they often focus on today’s retirees and those close to retirement, people who are much more likely to have a traditional defined benefit pension plan than younger workers who need to be saving now will have.

Even then, the numbers are not pretty. National data from the non-partisan Employee Benefit Research Institute (EBRI) show that in 2013, 51 percent of workers aged 45–54 had less than $25,000 in total savings and investments.[2] These are people between 10 and 20 years from retirement. Among workers aged 55 and above, those within 10 years of retirement, 43 percent had less than $25,000 in total savings and investments. These household savings numbers exclude home equity and defined benefit pensions (if any). Savings of that amount will not take an individual through one year of retirement, much less the 20 plus years that most healthy 65-year-olds are likely to experience.

Interestingly, the question in 2014 was revised to separate out those with access to an employer-sponsored retirement savings plan or pension and those without.[3] The answers showed once again the value of such a plan and the cost of not having one. About 62 percent of employees with access to a retirement saving plan through their employer had more than $25,000 saved, and 22 percent had $100,000 or more. However, 94 percent of those without access to such a plan had under $25,000 in total savings and investments, and only 3 percent had $100,000 or more.

Just to place these numbers in perspective, any amount of retirement savings is certainly better for a retiree than no retirement savings at all, but it takes a significant amount gradually built over a long period of time to build a significant level of financial security. Retirement savings of $100,000,[4] a sum that only 30 percent of the workers age 45–54 and only 42 percent of those age 55+ in the EBRI survey will equal or exceed, buys additional monthly income of $589 ($7,100 annually) for men at age 65 and $552 a month ($6,600 annually) for women at that age.[5] That would give men with $100,000 in retirement savings and average Social Security benefits a monthly retirement income of about $1,800 ($22,700 annually) and women with the same savings and Social Security benefits a monthly income of $1,750 ($22,200). Neither figure is likely to produce a comfortable retirement, and the EBRI data suggest that even that is out of reach for well over half of all Americans.

Admittedly, these are rough numbers, and many people will receive higher-than-average Social Security benefits. However, many other people will end up receiving much less than average. We know from other research that five groups are most likely to undersave: small business employees, lower-income individuals, women, younger workers, and members of minority groups. However, the problems are not limited to just these five groups. By the way, the recent column by Robert Samuelson[6] that repeats industry assurances that all is well cited the Investment Company Institute (ICI) as saying that the median value of IRA and 401(k) accounts held by people aged 55–64 is $100,000.[7] If that is true, then half of all those with such accounts would have annual retirement incomes equal to or less than the $22,000-plus level I just mentioned if they receive average Social Security benefits.

To make matters worse, when calculating the average amount in such accounts, researchers usually exclude those who have no account at all. In the case of the ICI data Samuelson cites, it appears that approximately 25 percent of households aged 55–64 did not have either a 401(k) or an IRA. They face an even worse future.

How can industry researchers present the existing retirement system as working very well? The answer is by using selective statistics. As an example, the EBRI study includes a question asking how many employees have saved for retirement.[8] The answer for 2013 is 66 percent of all workers and 74 percent of those aged 55 to 64. If one stopped there, the picture would look very good. It is only when one digs in deeper and asks how much they have saved that the true problem becomes evident. Similarly, other studies[9] that show no serious problem focus on today’s retirees, who had much more access to a traditional defined benefit pension than tomorrow’s retirees will. While many of today’s retirees are comfortable, their success does not imply that younger workers will automatically have the same future.

Access to Workplace Savings Is Essential

It is not that people do not want to save or cannot save. They do. The problem is often the lack of access to a convenient savings plan, and the inability to understand the many savings options that exist.

The existence of a workplace retirement savings plan is important. A recent Boston College Center for Retirement Research paper[10] found that access to a workplace retirement savings plan or pension is second only to having a job as the most important factor in assisting moderate- to low-income individuals to build retirement security. A wide variety of research shows that only about half of the U.S. workforce has the ability to save for retirement or has a pension at work. While there are a variety of data sources, each with its own strengths and weaknesses, another Boston College study[11] found that the coverage statistics are comparable between data sources when the same standards are applied. This included a study of IRS records[12] that appeared to show otherwise.

Regardless of the exact percentage point used to estimate coverage, the sad fact is that millions of Americans currently lack the ability to save for retirement at work through payroll deduction. This is especially true for small business employees. A recent U.S. Government Accountability Office (GAO) study[13] found that only about 14 percent (one in seven) of businesses with 100 or fewer employees offer their employees such a plan, and that between 51 percent and 71 percent of the roughly 42 million people who work for a small business lack the ability to save for retirement.

PPI research shows that about 642,000 Oregonians between the ages of 18 and 64—about 47.6 percent—are employed by a company that does not offer a pension or retirement savings plan.[14] The Oregon number is slightly better than the 51.1 percent national figure. That translates into 57 million Americans who are employed by the private sector and cannot save for retirement at work. These are not just younger employees who are new to the workforce. They include midcareer individuals who move from a large company that offered a retirement plan to a smaller company that does not. Often, these midcareer workers end up with a gap in their savings history that damages their ability to build economic security.

The Need for Better Coverage Is Widely Acknowledged

AARP is certainly not the only organization to recognize the need to increase the number of people able to save for retirement through a payroll deduction plan or account. Here, in Oregon, the Retirement in Reach Coalition[15] is a broad-based collection of business, professional, labor, and civic groups that have come together to help more Oregonians to save.

Nationally, a number of organizations, including many prominent research institutions, have written about the number of people who lack the ability to save for retirement and the need to improve coverage. Please note that these organizations do not necessarily support any specific solution or, indeed, any solution at all. However, all have written about either the need to expand coverage or how retirement security would be improved through greater coverage. As an example, Putnam Investments CEO Robert L. Reynolds has written about the need to improve the ability to save in a short paper titled “Three Steps that Could Shore up Retirement.”[16] The paper noted that “today—two years since the first boomers turned 65—the Employee Benefit Research Institute estimates that 49% of American workers are still ‘not confident at all’ or ‘not too confident’ about having enough money in retirement, 57% of pre-retirees have less than $25,000 saved for the future, and 32% of all workers do not have access to a retirement saving plan at work.”

The paper’s Step Two was: “Access to workplace savings for all workers. Any worker paying FICA taxes should have access to a retirement savings plan at work.”

Other organizations that have either issued papers or made statements about the number of people who lack an employer-sponsored retirement savings or pension plan include the following: the Brookings Institution’s Retirement Security Project,[17] the New America Foundation,[18] the Aspen Institute,[19] the U.S. Chamber of Commerce,[20] the Heritage Foundation,[21] and the Urban Institute.[22]

Again, this is not to imply that any of these organizations endorse any approach that Oregon might decide to take on retirement savings or that they support any part of my testimony. I mention them solely to show that concern about limited opportunities to save for retirement is widespread.

Those without an Employer-based Plan

In theory, everyone without an employer-based plan could save in an IRA, but EBRI research estimates that only about 1 out of 20 actually does so regularly.[23] In addition, payroll deduction is viewed as very important for encouraging retirement savings by people at every income level[24]. Overall, 61.5 percent of those surveyed in the EBRI 2011 Retirement Confidence Survey said that payroll deduction was very important for encouraging them to save for retirement, and another 27.8 percent said that it was somewhat important. Together, 89.3 percent said that it was either very or somewhat important. Further, the survey also found that a significant number of those currently saving would either stop or reduce their saving if payroll deduction was not available. It is much easier for people to save regularly if their savings are deducted from their paycheck before they receive it. Otherwise, the press of immediate bills tends to crowd out savings for longer-term goals.

Another factor in the extremely low savings rate among those who can use only an IRA is availability and trust. Especially in low-income neighborhoods, there are often no financial institutions nearby other than check-cashing outlets. Low-income individuals are often reluctant to go to financial outlets in other areas as they may feel that they are not welcome or that they will be treated poorly. Another drawback that applies to individuals of all income levels is the fear that they will be taken advantage of. Because financial professionals will know much more about the subject than their potential customers and may use unfamiliar terms, people have a very real fear that they will be talked into something that benefits the financier rather than the saver.

In addition, behavioral research shows that when people are faced with an important decision where they are uncertain what to do, they do nothing. This inertia factor is especially present in financial decisions like retirement savings.

These are reasons why an approach that focuses solely on additional education is extremely unlikely to succeed. Such an approach does nothing to increase the number of local financial outlets or opportunities to save. In addition, such financial literacy training often uses the same complex terms that potential savers find confusing. There is a value to training, but only in addition to expanded access to retirement savings.

On the other hand, when employees are presented with a plan at work that is structured in a way that provides guidance, they take the opportunity to save. This is true at all income levels. The Boston College study on why lower-income people are less likely to save that I mentioned earlier[25] showed very similar take-up rates between income levels. Eighty-six percent of those with incomes under 300 percent of the poverty line participated in a retirement savings system or pension if they were offered one and were eligible, compared to 95 percent of those with higher incomes.

Existing Products Are Not the Solution

Opponents of a state-sponsored retirement savings effort often cite the number and kind of existing products that are currently available to small businesses. A joint IRS/U.S. Department of Labor publication[26] lists seven types of retirement savings plans that are currently available. Unfortunately, most of them are both expensive and complicated or require the employer to make a contribution. Only one that is not widely available really enables small businesses to offer their employees an opportunity to save without saddling them with high costs or requiring savings.

Both the traditional 401(k) and the automatic enrollment 401(k) are excellent solutions for employers who are willing to offer them. However, the GAO found[27] that smaller employers can pay much higher administrative costs than those paid by larger employers. In addition, they can be complicated and require employers to play a more active role than many are willing to do.

Three other plans, the SEP IRA, the SIMPLE IRA, and the safe harbor 401(k), are either totally financed by employer contributions or require employers to make contributions. In addition, another of the seven options—a profit-sharing plan—is both completely financed with employer contributions and doesn’t require regular funding. While this plan does allow for profit sharing in good years, it does not necessarily include regular contributions that an individual can use to finance a retirement income.

The seventh type of retirement savings account available to small businesses is the payroll deduction IRA. It does not require (or allow) any employer contribution, or saddle the employer with complex regulatory burdens or impose significant costs. All the employer has to do is make it available to employees, deduct the contributions from their paychecks, and then send it to the financial provider. Unfortunately, it is not widely available or sold, as it offers financial services companies only limited income potential. Oregon can help to change that situation.

Another type of retirement savings tool, MyRA, was announced in President Obama’s January State of the Union speech. MyRA has some very positive features,[28] but it is not a solution or a substitute for anything Oregon might decide to do to help more people to save for retirement. A key weakness is that an individual can only have a maximum of $30,000 in MyRA. That is not nearly enough for any appreciable improvement in financial security. Second, MyRA savings will be deposited only in government bonds. While that investment is completely safe, it does not allow any real investment growth. An individual with just a MyRA is likely to get little more than the inflation-adjusted amount they contributed.

Why Oregon Should Be Concerned about This Problem

This is a state problem because doing nothing will mean higher state and local taxes for your children and grandchildren. Low-income retirees will need state and local services financed by state and local taxes for health care, housing, senior centers, and a host of other services. As Oregon ages and the baby boomers retire, the demand from this population for additional state government services will only grow. However, there is a simple, low-cost alternative to taxpayer-funded government services.

What Oregon Can Do to Help

The statute that created the Oregon Retirement Savings Task Force includes the limitation that you cannot recommend anything that might be contrary to the federal Employee Retirement Income Security Act (ERISA). Some would have you believe that this limits you to proposing additional employee education. This is not the case.

While ERISA as it is currently written does limit Oregon’s options, there are still avenues open to the state that would help to directly increase the number of Oregonians who can save for retirement at work. Oregon could still sponsor a payroll deduction IRA[29] that could be available at low cost to every resident of the state who is not currently covered by another retirement savings or pension plan. Such an account could be available through either state-managed investments or one or more private sector providers chosen and monitored by a state agency.

The state, the employer, or any private sector provider would not be responsible for the performance of the savings, and there would be no promised retirement benefits. All of the savings would come from and be owned exclusively by the individual saver. It would be up to the saver to monitor his or her eligibility and compliance with contributions rules. The small costs of such a program could be paid out of fees assessed on the accounts, or the start-up costs could be subsidized by the state.

A key fact is that the only liability faced by the employer would be to collect and forward individual contributions to the provider or agency on a timely basis. In theory, such contributions could be forwarded using the same schedule as the state currently uses to collect its income tax revenues. Federal law limits the role of the employer to encourage its employees to save for retirement through providing general information about the payroll deduction IRA program. The employer is also allowed to answer any questions about the program or to refer them to the IRA provider and provide any informational materials written by the IRA provider, as long as no endorsement by the employer is provided. At all times, the employer must remain neutral about the provider.

This is not a perfect plan, and it does not include features that many who support increased access to retirement savings would like to see. However, we believe that such a plan would be legal and, if combined with an educational program, could increase retirement savings among Oregonians. As federal law either changes or is reinterpreted, additional features and services could be added. This would be a starting place, not a final destination.

Automatic Enrollment

At this point, any Oregon plan would probably not require the use of automatic enrollment. However, as both state and federal law evolve, it would be helpful to explore encouraging that feature in any retirement savings plan. Under automatic enrollment, an employee continues to have total control over his or her retirement savings decisions, but unless the employee decides otherwise, he or she is enrolled and saves a set percentage of income in a specific investment choice. Automatic enrollment uses behavioral economics to make inertia work for the employee. These features work. The five groups mentioned earlier that are most likely to undersave (women, younger employees, small business employees, lower-income employees, and minority groups) all see their participation rates climb from very low levels to close to 90 percent.

And employees like automatic enrollment. A 2007 survey[30] of automatically enrolled workers showed that 95 percent found that it made saving easy. Eighty-five percent started to save earlier than they would have without it. Almost all of the employees who were automatically enrolled and remained in the plan said that they were satisfied with the process (97 percent) and were glad their company offered automatic enrollment (98 percent). Even those who were automatically enrolled and decided not to save liked the feature, with 90 percent being satisfied with the process and 79 percent being glad their company offered automatic enrollment.

Conclusion

Again, thank you for allowing me to testify today. Improving the ability to save for retirement through the increased availability of payroll deduction savings would address a real need both here in Oregon and nationwide. From a policy standpoint, an active program that increases the access that small business employees have to payroll deduction retirement savings plans would help the nearly 650,000 Oregonians who don’t currently have such an opportunity. It would enable them to build economic security through their own efforts.

BEST PRACTICES:

• A universally available payroll deduction IRA that is available to any Oregonian who currently lacks an employer-provided retirement savings or pension plan.
• A very short list of available investments that includes both a stable value fund and a balanced or target date fund. New savers would go into a previously designated investment unless they chose otherwise. Savers wishing other investments would be able to find other IRA accounts.
• Regular statements that clearly indicate investments, earnings, fees, and account balance. A number indicating the monthly retirement income that such a plan could produce if the current amount is saved would be very helpful.
• A coordinated statewide education program that explains the accounts and how to use them as well as the value of saving for retirement.
• Financial literacy classes in every school.

      

I appreciate this opportunity to share my thoughts about ways that retirement plans can provide clear, concise and objective information to participants that enables them to make appropriate decisions.  However, I would go beyond that to provide information that also motivates employees towards actions that will prove to be in their long-term best interest.

General Thoughts about Participant Communications

The shift from traditional pensions to the current defined contribution system places most of the responsibility for making decisions on the participant.  Automatic enrollment and similar features assist them by combining several formerly potentially complex decisions about whether to participate, how much to save and what investment vehicle to use into one question that the employee can effectively answer by doing nothing.  While the result may not be optimal in all situations, it is certainly better for the saver than not saving at all or waiting until he or she has all of the answers – a day that for many may never come.  For these reasons, automatic enrollment and escalation are extremely popular with both those who accept the automatic choices and those who opt out.

Unfortunately, at this time, automatic mechanisms are not available for every decision that an employee might need to make between starting to save and retirement.  Over time, additional mechanisms that are in development will further simplify these plans, but they are not available yet.  Today’s automatic mechanisms also do not necessarily affect the attitudes that participants may have about their saving balances and how they might be used.  To assist in these areas, effective participant communication is needed.

In order to be effective, communications and notices to employees must have a consistent message that regularly appears throughout an employee’s career.  No single notice, no matter how effectively worded or how timely it is provided, will be as effective as a regular series of messages.  And in order to be effective, notices and statements need to be geared to the needs of the participant rather than to provide legal cover to the plan sponsor for any unanticipated situation.  This requires that they be short, clear, simple and to the point. 

This need for regular communication as opposed to a single notice or series of notices is especially true for withdrawal options.  Whether the participant is leaving the employer or retiring, they need to have key information well in advance of when it is needed.  Otherwise, the saver may be influenced by others who are not acting in their best interests or make a decision based on advice from well-meaning, but poorly informed family friends.

An effective participant education plan for lifetime plan participation and effective withdrawal options should have at least three separate parts, which are detailed below.  These include effective information contained in the quarterly statement; notices at the time an employee leaves the plan due to a job change, and a pre-retirement education campaign. 

While all three must have consistent messages, they should also be tailored for specific circumstances.  What follows is a general discussion, as effective model forms require field-testing in focus groups and similar settings.  Unfortunately, forms developed by financial professionals with a deep understanding of key issues often gloss over important background information or have technical wording that confuses non-professionals. 

Another problem with many individual statements and notices is that they contain too much information.  The professionals who developed them recognize the limitations of projection models and seek to compensate by providing a range of results using differing assumptions.  Unfortunately, this either further confuses the reader or appears as a dense block of type that is usually completely skipped.  It is far better to provide a simple illustration with clear warnings of its limitations than to flood the employee with complex information that will be ignored.

Improved Statements with Income Illustrations and Social Security Information

The most important participant education tool is the quarterly statement they receive.  Properly structured, these statements can set the stage for more specific notices before an employee leaves the employer due to either a new job or retirement.  Today’s statements are often too long and inadvertently cause the employee to focus on account balances rather than seeing the retirement plan as a source of future income.  In many cases, they also fail to note that income from the plan should be added to Social Security for a better estimate of total retirement income.  Two major innovations would be to add both income illustrations and to combine 401k statements with the existing Social Security statement.

Income illustrations: Most of today’s quarterly statements focus almost exclusively on the amount that an individual has saved and how much he or she has gained or lost in the previous quarter.  This focus damages the ability of a participant to see the plan as anything other than a savings account.  Faced with a lump sum of retirement savings that may be a much higher amount than an individual has ever had and little or no practical experience about how to translate that amount into an income stream, it would be very easy for a worker to assume that he or she is much better prepared for retirement than is actually the case.  An income illustration would help savers to make earlier and better decisions about how much they may need to save and how best to manage their retirement assets.

The illustrations should also encourage participation both by including both current and projected balances and by showing the additional income that could be expected if the saver slightly increased his or her contributions. 

Including income illustrations for both current and projected retirement savings balances would have a greater incentive effect than just including current balances.  For younger employees, the very small amount of income that would be produced from their current retirement savings balances may discourage them from further savings and thus have the opposite effect of what is in their long-term best interest and the objective of this disclosure.  Including an income illustration for projected balances that assumes continued participation provides a clearer picture of the extent to which the amount that the individual is saving will meet his or her retirement income needs.

Studies show that an illustration of the additional income that can be derived from a higher level of saving is likely to stimulate the participant to increase his or her savings rate.  Plan sponsors should be encouraged to also include balance projections and income illustrations that show how much retirement income an individual would have if they modestly increased the proportion of their income that they contributed to their retirement savings plan.  For instance, in addition to the income illustrations based on their current balances and projected balances assuming their current savings rate, there might be an illustration based on saving an additional one percent of income and another three percent of income. 

Combining Social Security Statements with Quarterly Statements: As a further way of moving the focus of quarterly statements away from lump sums and investment returns and towards retirement income, an accurate estimate of projected Social Security benefits could be added to at least one annual quarterly statement containing an income illustration.  Some 401(k) providers already simulate Social Security benefits and provide this information to account owners, but these providers lack the income and work history data to make a truly accurate projection.  Collaboration between SSA and 401(k) plan administrators could result in adding information from the once annual Social Security statement to at least one 401(k) quarterly report each year.

Two sets of concerns about using Social Security information would need to be addressed: concerns about privacy and concerns about accuracy. Previous discussions of similar proposals failed because of privacy concerns, as many individuals do not want employers to have access to their Social Security information. Account holders’ privacy is a concern for 401(k) providers too, and providers go to great lengths to protect the confidential data in the quarterly statements. To assuage concerns about the data from SSA, Social Security data could be provided directly to 401(k) administrators rather than employers and included on an annual 401(k) statement only if the administrators meet certain SSA-developed privacy standards. Individuals could have control over this decision through the ability to opt in to the service or to opt out, if the service were automatic. This should preserve individual choice and satisfy persons especially concerned about privacy.

To ensure accuracy and consistency, income illustrations of balances in the 401(k) and SSA projections would need to be produced using compatible methodologies that allow the projected monthly income estimates to be combined for a complete picture of estimated retirement income. This is not a terribly difficult problem.  This reform will give people important information about how to plan their futures. They desperately need this information, and providing it should be fairly simple and cost-effective.

Using an Enhanced Statement as a Base for Additional Guidance and Education

An enhanced quarterly statement with a consistent message that retirement plan participation is intended as retirement income will set the stage for more effective education when the participant leaves the employer.  The current statement format that focuses on aggregate savings amount and the performance of investments sends the message that the balances could be used for other purposes.  This encourage leakage when employees change jobs and may leave the impression that the savers has sufficient resources to use part or all of that money for other purposes.

While the information on investment returns is important and should remain on the statement, it should be de-emphasized, with the focus moving to retirement income that it can provide.  As an aside, let me be clear that I do not favor eliminating the ability to withdraw savings before retirement in the event of an emergency.  For one thing, doing so would reduce participation, and could hurt vulnerable populations that have no other major source of savings.  However, the purpose of the quarterly statement should be to inform savers of their future retirement income, and its orientation should be towards that goal.

Encouraging Participants to Preserve Savings When They Move to a New Job

Several studies show that the biggest source of leakage occurs when employees change jobs.  Part of the reason for this loss of savings may be the way that employers handle the discussion about retirement assets upon separation.  A discussion that is centered on the open question of what should we do with your money may encourage savers to simply ask for their money as a lump sum.  This is especially true if the participant is not informed of the tax consequences of an early withdrawal and the potential effect on future retirement income.

On the other hand, if the participant has received a consistent message that the account is for retirement income, and is informed of the potential consequences of withdrawing the money, they would be less likely to take the funds and more likely to leave the money in the current employer’s plan or to roll it into a plan offered by the new employer or an IRA.  Of course, part of this decision would be determined by whether the current employer is willing to allow the money to remain in their plan or if they would prefer it to be moved to another location.

As a side note, the process of combining retirement savings from one employer to another would be much easier if there is a simple mechanism that can be used to make such transfers.  As I can testify from personal experience, it can be extremely complex to roll retirement money from one employers’ plan to another’s even for those of us who work in this field.  Plan administrators from both the sending and receiving plans make this process overly difficult in part because one party needs to know if it is a legitimate transfer as opposed to a withdrawal, and the other needs to know that the money it is receiving has the proper tax status.  While it is beyond the scope of today’s hearing, it is definitely worth the effort for regulators and if necessary legislators to simplify the process and encourage automatic rollovers between employers.

Contents of Model Notices for Participants Changing Employers:

Given this background, a disclosure notice provided to employees who are moving to another employer should include specific information about several topics.  However, a one-shot notice will be far less effective than an educational campaign that includes information about how poor decisions when changing jobs can adversely affect retirement security.  This information should not be limited to when an employee departs; it should also be included in regular communications.

When an employee moves to another employer, he or she needs to know:

• Ability to retain fund in the account or roll them into another account: The employee should be informed that moving the money to another retirement account, ideally that of the new employer, is the best option.  He or she should also be informed if the current plan is willing to continue to hold the money.  Information about how to effect the rollover and/or a third party willing to assist with the transaction can be provided on a separate sheet.
• Tax consequences of withdrawing the money: An early withdrawal from a traditional account is usually subject to both income taxes and a penalty.  The employer should be informed of both the combined marginal rate and the total amount of retirement money that will be lost by taking the money out of the system.
• Effect on retirement security of withdrawing the money: Using an income projection, the participant should be shown that a withdrawal will potentially reduce their income at retirement by a certain dollar amount.  They should also be shown how long it will take to replace that amount of saving.
• Potential costs of moving to the wrong IRA provider: Moving from a relatively low administrative cost employer plan into an IRA with higher fees could have a major effect on the eventual retirement income.  Participants should be informed of this and offered a separate sheet discussing how to tell if an IRA provider has appropriate fee levels.  This can ge general information rather than tailored to the specific employee.
• Continuing to save at the same rate in the new employer’s plan: Finally, the employee should be encourage to start saving in the new employer’s plan at least at the same level that they have been contributing to the plan of the current employer.

These disclosures do not need to be extremely detailed or presented in legal terms.  If the participant cannot immediately understand what is being said, the information is essentially useless.  To relieve employers’ worry about legal liability, a model form that protects them from liability would be worth creating.  However, this information is important, and could have a major effect on whether the money leaks out of the retirement system or remains in it.

Finally, the term “model form” does not need to mean a single form.  In cases where a great deal of information needs to be available, one form could summarize the situation, while others provide more detailed information about certain subjects.  However, this does not mean that these other forms should be written in long, legalistic language.  Both the summary form and others should be in clear, concise language with appropriate graphics.

Assisting Participants to Make Appropriate Decisions When They Retire

Decisions about how to translate retirement savings into an appropriate income strategy can be among the most complex that an individual faces.  Even those of us who work in the field can find the decision about whether to use an annuity or longevity insurance to supplement other strategies daunting.  This confusion is only made worse by the focus of today’s quarterly statements on lump sums and investment performance.

Ideally, retirement income disclosures would be combined with an automatic enrollment-like withdrawal strategy that the employee could adopt simply by not opting out.  Unfortunately, while this is the subject of much research by both many groups and companies, it is not currently available.

To be most effective, education on retirement income strategies should not be delayed until the participant reaches a specific age.  Rather, it should begin with the design of the quarterly statement and continue with regular discussions of how to create a retirement strategy throughout an employee’s career.  Even if the participant does not pay much attention for many years, the information will form a backdrop that will be recalled when he or she starts to think about retirement.

Because retirement income strategies are complex, the notices should include both a short summary sheet and individual longer notices on specific topics.  Covered information should include:

• An overview sheet with general information: A general discussion of how to think of retirement income as well as the general elements that can be combined to provide an appropriate amount of secure income.
• The role of Social Security: Social Security pays an inflation-indexed annuity that serves as the basis for retirement income strategies.  Employees should be given information about how much they can expect, how to apply for benefits, and the value of delaying their benefits. 
• What income options are in the employer plan: If the employer plan offers any income options, they should be disclosed and explained.  If not, the employee should be informed that they would need to go outside the plan and given advice on how to select a provider (see below).  This would include the potential problems of turning the money over to a broker to manage.
• How long an individual is likely to live: Most people have no idea how long they could live in retirement.  A brief discussion of the average longevity for their specific gender and birth cohort along with a notation that average longevity means that half of them will live longer would be helpful.
• Longevity insurance and how to use it:  Longevity insurance can be a valuable part of a retirement income plan.  How to think about it and choose a policy would be valuable.
• Using immediate annuities and how to buy one: This is a separate discussion from longevity insurance.  While few of today’s retirees may be interested in immediate annuities, information on how to select one should be included.
• Positives and negatives of a phased-withdrawal system: Most retirees will use a phased-withdrawal system for at least some of their retirement income.  This would briefly explain the value of one, the drawbacks of withdrawing a set percentage of savings each year, and how to choose a plan.
• How to choose a financial advisor: Hopefully, may employees will seek the advice of a professional.  If the employer does not provide access to an adviser, tips on how to select one and what questions to ask would be useful.

Again, this is complex information, and employers should also be encouraged to sponsor seminars and counseling sessions for retiring employees.  As mentioned repeatedly, the value of this information and the employee’s receptivity to it would be much greater if it has been part of a regular communications strategy that is simple and accessible.

A Consistent Message Will Enhance Retirement Security

The contents of individual notices are important, but they will be much more effective if they are placed in the context of a communications strategy with a consistent message.  Making the focus of participant education the fact that the purpose of saving in the plan is to produce retirement income rather than lump sums will help participants understand the importance of rolling over their money when changing employers and of developing a sound income strategy when they retire.

       

       

       

       

Baltimore police officer Edward Nero, one of six being tried separately in relation to the arrest and death of Freddie Gray, has been acquitted on all counts. The outcome for officer Nero was widely expected, but officials are nonetheless aware of the level of frustration and anger that remains in the city. Mayor Stephanie Rawlings Blake said: "We once again ask the citizens to be patient and to allow the entire process to come to a conclusion."

Since Baltimore came to national attention, Brookings scholars have probed the city’s challenges and opportunities, as well addressing broader questions of place, race and opportunity.

• In this podcast, Jennifer Vey describes how, for parts of Baltimore, economic growth has been largely a spectator sport: "1/5 people in Baltimore lives in a neighborhood of extreme poverty, and yet these communities are located in a relatively affluent metro area, in a city with many vibrant and growing neighborhoods."
• Vey and her colleague Alan Berube, in this piece on the "Two Baltimores," reinforce the point about the distribution of economic opportunity and resources in the city:
  

  In 2013, 40,000 Baltimore households earned at least $100,000. Compare that to Milwaukee, a similar-sized city where only half as many households have such high incomes. As our analysis uncovered, jobs in Baltimore pay about $7,000 more on average than those nationally. The increasing presence of high-earning households and good jobs in Baltimore City helps explain why, as the piece itself notes, the city’s bond rating has improved and property values are rising at a healthy clip."

• Groundbreaking work by Raj Chetty, which we summarized here, shows that Baltimore City is the worst place for a boy to grow up in the U.S. in terms of their likely adult earnings:

• Here Amy Liu offered some advice to the new mayor of the city: "I commend the much-needed focus on equity but…the mayoral candidates should not lose sight of another critical piece of the equity equation: economic growth."
• Following an event focused on race, place and opportunity, in this piece I drew out "Six policies to improve social mobility," including better targeting of housing vouchers, more incentives to build affordable homes in better-off neighborhoods, and looser zoning restrictions.
• Frederick C. Harris assessed President Obama’s initiative to help young men of color, "My Brother’s Keeper," praising many policy shifts and calling for a renewed focus on social capital and educational access. But Harris also warned that rhetoric counts and that a priority for policymakers is to "challenge some misconceptions about the shortcomings of black men, which have become a part of the negative public discourse."
• Malcolm Sparrow has a Brookings book on policing reform, "Handcuffed: What Holds Policing Back, and the Keys to Reform" (there is a selection here on Medium). Sparrow writes:
  

  Citizens of any mature democracy can expect and should demand police services that are responsive to their needs, tolerant of diversity, and skillful in unraveling and tackling crime and other community problems. They should expect and demand that police officers are decent, courteous, humane, sparing and skillful in the use of force, respectful of citizens’ rights, disciplined, and professional. These are ordinary, reasonable expectations."

Five more police officers await their verdicts. But the city of Baltimore should not have to wait much longer for stronger governance, and more inclusive growth.