Gig Econonmy and Retirement 

Table of Content

In recent years, the American career landscape has been drastically changing. One particular sector is the gig economy, which is set to employ forty percent of the US workforce by 2020. The gig economy has the allure of personal autonomy and avoiding the nine-to-five grind. This sector has shown us that people are now creating income in innovative ways – ways we would never have expected. This also means that people need to be saving money in different ways. However, due to its rapid rise, there is not yet an advantageous retirement solution for gig economy workers. People in this sector looking to establish retirement preparedness lack the benefits of their company-employed counterparts. Moreover, the instability of Social Security further aggravates the situation. This translates to people in this sector being financially forced to work longer and perhaps be unable to retire at all – these economic strains will emerge stronger due to spotty retirement income among a generation of elderly people. Workers in this sector are still young and tend to disregard or ignore the need to prepare for retirement. Considering the risks and costs associated, members of the gig economy ought to be aware of methods for retirement preparedness and the perils of failing to do so.

The gig economy is a much broader landscape than we think. It’s comprised of a diverse group of working individuals who gain some or part of their income from contract-based, freelance, or temporary work. Although many may associate this definition with Uber drivers, the sector includes social media marketers/influencers, photographers, independent tutors, specialized freelance consultants, small business owners, and property owners on Airbnb. It’s a large group – 57 Million American workers generating $1.4 trillion annually – in a rapidly growing sector (Betterment’s 2018 Report: Gig Economy and the Future of Retirement, 2018). Millennials are the largest population in this sector, and the majority of them are using the gig economy to replace their full-time job (Gaskell, 2018). The rapid growth of this sector, paired with its young demographic, presents an alarming situation in the case of retirement. As a generation, millennials are grossly underpreparing for retirement, and with the gig economy providing non-conventional retirement plans, there’s even more of a tendency to disregard retirement preparedness.

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The current outlook for retirement awareness among gig economy workers is grim. Forty percent of those in the gig economy save less than five percent of their income, and half of those save nothing at all, according to a 2018 Bankrate survey (Morgan, 2018). Further, a survey by an online investment company, Betterment, found that seven in ten full-time gig economy workers are unprepared to sustain their lifestyle in retirement, one in three of them set aside no money for retirement, and one-third associate retirement with anxiety (Betterment’s 2018 Report: Gig Economy and the Future of Retirement, 2018). Compared to their company-employed counterparts who enjoy the luxury of an employer-subsidized matching plan, gig economy workers have the potential to save significantly less. Gig economy workers need to make even stronger efforts to save than their company-employed counterparts, but evidence shows that they’re even farther behind. This situation is aggravated by the instability of Social Security in the future – people won’t have a “safety net” to fall back on as previous generations did. Social Security is only projected to pay full benefits until 2035, at which point benefits will be cut by 20% (Morgan, 2018). As it is today, the average benefit is $1,369 per month – just slightly above the poverty line (Morgan, 2018). What will the future reveal for gig economy workers, most of which are millennials nowhere near retirement, with this grim outlook? Without effective steps being taken, gig economy workers may be a slave to their freelance job well through retirement. This further emphasizes the importance of retirement preparation awareness to bolster the gig economy’s retirement outlook.

Moreover, the retirement industry hasn’t updated due to the novelty of this sector. Systems that are currently in place haven’t innovated to the gig economy yet, making it even more critical for gig economy workers to be aware of their retirement outlook. The pay structure is dissimilar to traditional jobs – workers are paid on a non-consistent, service/project-based basis – and they lack the typical benefits that most employees receive from their companies. These benefits include health and/or disability insurance, unemployment benefits, paid time off, and 401(k) matching plans (Morgan, 2018). Additionally, gig economy workers must compensate for the taxes that their counterparts’ employers support, such as Social Security and Medicare (Morgan, 2018). With the lack of these employer-provided luxuries and inconsistent pay, it’s much more difficult to handle retirement responsibilities. This disbalances their progress toward traditional retirement paths. Because of the lack of equilibrium between gig economy workers and the employed, gig workers need to be aware and hold themselves accountable for compensating the disbalance. Well-known, traditional paths for retirement don’t work, and they’re not adapting quickly enough for gig economy workers. It is critical for gig economy workers to to ensure their financial stability and retirement preparedness through additional responsibilities.

Increasing awareness of the gig economy will help alleviate some of the burden placed on gig economy workers. With this knowledge, gig economy workers can use unfamiliar systems to their advantage. Systems embedded within the tax code and IRA plans allow gig economy workers to improve their financial outlook, but they risk being overlooked because they are typically unexplored and have been historically unneeded when the gig economy was underdeveloped. In regards to specific advantages, the tax code favors self-employed individuals through allowing business-related expenses to be deducted from a freelancer’s gross income, reducing the amount of money that is taxed (Morgan, 2018). In addition, retirement accounts such as simplified employee pensions, SIMPLE IRAs, or solo 401(k) provide a tax advantage for gig economy workers (Nova, 2018). Although these options are available, the problem is that the retirement industry hasn’t fully adapted to the rapid growth of the gig economy, so knowledge and common use of these financial solutions is underused.

Lastly, although there are options in place to improve the situation of gig economy workers, policy makers are at work to further better the outlook and it’s important for gig economy workers to be aware of this. At the federal and state level, lawmakers are discussing plans to transfer the existing luxuries of employer-sponsored plans to gig economy workers. Portable benefits programs, Multiple Employer Plans (MEPs) or Pooled Employer Plans (PEPs) allow employers “combine resources on behalf of independent workers to purchase group health and disability insurance” (Milliken, 2018). Some of these plans even allow for automatic enrollment, which provides a retirement plan virtually as automatic as those of employed counterparts. In addition, it is especially critical for gig economy workers to be aware of the fate of social security. It cannot be assumed that for millennials, social security will remain as we know it at retirement age. With the future of social security being largely dependent on the next few election cycles, it is highly important for gig economy workers to follow and participate in current political events.

While retirement presents a challenge for the gig economy, there are steps that can be taken to understand the benefits and challenges that they face. For the large millennial population in the gig economy, there is a larger tendency to disregard or ignore the need to prepare for retirement. However, with the decline of Social Security and the differences that this sector presents, it is now more important than ever for gig economy workers to understand retirement solutions and the perils of failing to prepare. Moreover, policymakers are in the actions of establishing plans to help the gig economy – this undergoing is something that ought to be closely followed by the self-employed. Being a part of the gig economy provides many lifestyle luxuries, but it’s important to remember the different outlook on retirement planning for this sector for them to continue to enjoy their lifestyles when they are looking to retire.

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