According to the Federal Reserve Bank of St. Louis 35% of U.S. households have no money saved in any type of retirement account. The same study also went on to say only half of the households had less than $1,100. Statistics from other studies tell the same story; Americans are not preparing for retirement. Americans who do not plan for retirement will continue working in their late years some working full or part-time jobs. Some will have to depend on their adult children or others. This could cause a financial burden or stress to the earlier generations making it difficult for them to save for retirement. Not saving for retirement could cause some to turn to credit putting themselves into debt. Downsizing and not being able to leave any assets to their children. Many people are counting on social security to be their retirement plan. “97 percent of the elderly (aged 60 to 89) either receive Social Security or will receive it”, according to Social Security Administration estimates. The problem with that is social security is supposed to provide a foundation, a supplement for retirement. Living on the fixed income of SSI alone still leaves Americans vulnerable to economic hardships. SSI is designed to replace less than half of a person average salary.
Why Are Americans Underprepared for Retirement?
The government has created a social net already in the form of SSI. One of the reasons the government is involved in SSI is that there are some people in the country who can no longer work or are disabled. These people find themselves in serve economic distress. “The cost is the instability in the capitalist system, the tendency for the economy to periodically plunge into recessions”1 (‘Commentary: How social welfare benefits help the economy’, 2018). SSI has a purpose, but the purpose has not been made clear by the government. People have been using SSI as a crutch instead of as a base. The government should be the one to adjust this mentality as they are the ones most Americans view as their retirement account.
Counting on SSI isn’t the only reason Americans are not planning for retirement. Thinking about retirement isn’t paramount when you are in your 20’s and 30’s. There is no urgency to plan and save. This could be because of optimism for the future, paying off other debts first (student loan, car loan, credit cards, etc.), or they are just not good savers to being with. Not having enough money to save towards a retirement plan another reason why people do not save. Millennials get caught up in college debt and entry-level salaries, or at jobs that do not offer 401(k)s that they can afford to put away an extra $200 in savings.
“The shift from defined benefit pension plans to employee-directed defined contribution 401(k)s is the major driver of the impending retirement crisis.”2(‘Americans Haven’t Saved Enough for Retirement. What Are We Going to Do About It?’, 2018). Employers wanted to avoid risk in guaranteeing pensions .401(k)s put the risk on the employee picking his/her own contribution plan. A pension provides more protection for a person from outliving their savings. A worker who has a 401(k) doesn’t have a clear idea of how much is the right amount to set aside. Financial literacy in dealing with a 401(k) is contributors to why middle-age Americans retirements plan are underfunded. Living above ones means as well as not saving sooner is also what leads to the problem of retiring poor.
Why Is Government Intervention Needed to Solve the Problem?
The government needs to intervene further to ensure that all Americans are prepared for retirement because “more than 30 million full-time, full-year workers between the ages of 18 and 64 without access to an employer-based retirement plan.”3 (‘Government’s Role in Helping Americans Save for Retirement’, 2018). If the government does not intervene there will be millions of elderly Americans in poverty. This will cause a cyclical recession in America. There is a market failure in government-run SSI and in the private sector as well for retirement thus government intervention is necessary.
There are three main ways of retirement’s plans in America Social Security, employer-sponsored pensions or retirement savings plans, and individual savings, but still, Americans are at risk of being under prepared. Individual failures because of behavioral basis; where Americans are not making rational choices about saving even though being aided by some government programs. Time discounting and present basis is the behavioral tendency where people prefer immediate rewards vs future payouts. Different types of retirement plans and incentives have been proposed and executed by both the private sector and the public sector, but still, most Americans cannot retire by the age of 65. Financial literacy is linked to temporal discounting. “According to the 2018 annual report of the Social Security Board of Trustees, the trust funds that disburse retirement, disability, and other Social Security benefits will be depleted by 2034.”4(Ssa.gov, 2018).
The demographics of the people who pay into SSI are shifting. Low birth rates meaning fewer people paying into SSI and baby boomers living longer collecting SSI longer, the younger generation cannot expect to receive SSI when it’s time for them to retire. The way SSI is collected, disbursed, and perceived will need to change with the times. The government needs to intervene in retirement plans because the outdated form of pay as you go SSI is no longer sustainable. “Social Security benefit payments support more than 9 million jobs and add almost $1.4 trillion in output to the overall American economy.”5 (Koenig and Myles, 2013) the government should intervene in retirement planning to relieve some of the burdens off SSI. SSI program supports/ provide millions of jobs, according to the AARP Public Policy Institute just by cutting SSI by 25% (as a project for 2033 ) could cost the U.S. economy about 2.3 million jobs and keeps 22 million people out of poverty. High unemployment will lead to higher reliance on government assistance and welfare programs, decrease economic growth, decrease in tax revenue due to less consumer consumption, to make up for less income tax governments will tax business more, the business then will be discouraged from hiring more workers perpetuating unemployment.
Americans not saving for retirement would cause massive poverty and underemployment. Americans cannot rely on SSI as it is projected to have massive funding cuts. The government needs to intervene to avoid millions of people who will not receive enough SSI and have insufficient savings from being in poverty.
Policy Option #1: Financial Literacy
Retirement is something everyone knows they should prepare for, but most do not save for until too late in life. To get Americans into the habit and mindset of saving and planning for retirement as soon as possible I suggest the government teach children in schools as soon as possible about their options and consequence and rewards of being responsible for their future years. The class can be offered either as an elective in high school or a requirement. The same way college is pushed and focused on as early as middle school so should financial literacy about saving, budgeting, debt, and investing. According to The National Institute on Retirement Security, a big reason why most Americans are not putting money aside for retirement is that they have debt they like to payoff.6 (Brown, 2018)
If young people are taught about debt in school before they take out loans then they can make better financial decisions. The hope is young people will have a deeper understanding that there is gives and takes with loans being yes they get cash quickly and easily but this will delay/stunt their retirement contributions. The government can offer incentives for keeping and contributing to a retirement plan throughout middle school and high school and even college. For instance, the government can offer higher interest rates for people under the age of 26. To get parents incentivized to also teach saving and planning for retirement at home for x amount of dollars your child has saved for retirement the parents can have that amount wrote off in taxes. Building the habit of saving while in school will make more dependent future retires. The class taught in school should also teach high schoolers about what is already being offered by the government currently like credit savers. By starting young and building habits this can help combat some of the present basis and procrastination.
Financial literacy shouldn’t stop at school. The government should offer free retirement workshops or guidance on updated retirement incentive offered by the government. The impact of doing these would be that schools would have to hire a qualified financial advisor to be teachers. The economy as a whole will benefit to have better-educated youth who will be financially literate and prepared for retirement. Young adults when applying for jobs will better understand their savings options with their employers and will feel an urgency to enroll and save.
Option #2: Protect Social Security Insurance
SSI is the biggest contributor to the elderly’s source of income. And 175 million Americans pay into SSI. Americans cannot be trusted to save and invest for their retirements voluntarily and/or alone as there are market failures that disrupt their savings. In 2008 many people lost their retirements/pensions because of the financial crisis. Causing people without jobs to pull from their savings and once again relying solely on SSI. Raising the age of retirement, raising taxes are some of the ideas being advocated for. “Economist Marc Goldwein, senior policy director at the Committee for a Responsible Federal Budget advocates for having more people paying into the program, not just people who are currently working”8(Cornfield, 2018). Propose Americans who have retirements incomes of over $200,000 should be excluded from taking in SSI this is the plan present by Gov. Chris Christie. And retirees whose income is $80,000 – $200,00 would see a reduction in their SSI payouts. SSI is for people who need it. This is “The ability-to-pay principle the trade-off here is the notion of fairness.
The impact of raising the age is there is an assumption that everyone is living longer which isn’t true for minorities or the poor so there is an unfair age requirement being put on the people who would need it most. Raising taxes to coverage SSI would be a hard sell for policymakers as it is very unpopular, and the generations of people who feel like they will not receive it anyways will not vote for such a tax raise. Excluding certain classes of people from receiving something, they are “entitled” too would make them find ways around paying into it, or hiring a lobbyist to fight on their behalf. By doing any of these options there will be many people upset.
Option #3: Incentivize/Penalize Employers
The government can incentivize employers to automatically enroll their employees into 401(k)s as opt-out. This is like what President Obama proposed separately from his “myRA accounts” . Opt-out plans will have more Americans automatically contributing to their retirement as the default. The higher rate the employee invests the more tax break the employer gets. This policy could either incentivize or punish employers. We know that people are loss averse so to get the best results a tax or fee should be placed on employees who have over 250 who do not offer a retirement plan. The current 2.7% match of an employee’s contribution is not enough of an incentive for employees to sign up or save. So, the burden should be on the employer to encourage workers to contribute more than just the minimum. If the average worker at a company does contribute at least 12% then the company will not be fined. “ Participants generally agreed that the retirement crisis can’t be fixed by tweaks and “nudges” designed to subtly spur workers to save more.”10(‘How to solve the retirement crisis’, 2018)
The impact on the employee is possible unwanted pressure from the employers to contribute more than they are comfortable it at the time. The impact on the employer is feeling an overreach from the government. The employers will have a higher overhead cost from running retirement programs. The employer will need extra education to learn the penalties. Phasing in this policy would require invest groups to also adapt their plans to accommodate companies.
Preferred and Recommended Policy
Of the three policies, I have proposed I would recommend option#1 teaching financial literacy earlier in life at school. The reason I would choose this policy because this is the only policy where there is currently a void. There are ready advocates trying to save SSI and business are currently getting incentives to offer retirement accounts. Personal responsibility for one’s future should be mostly on the individual. The retirement problem is rooted in procrastination and government reliance. Repetition of planning, saving, and budgeting will make kids, teens, and young adults think preparing for the future is automatic and expect.
According to a survey conducted by Ramsey Research in 2016, “nearly two out of three high school students who had taken a personal finance course reported they were already earning an average of $3,000 a year.”11(‘Students and Money – from Ramsey Solutions Research’, 2018). In the same study by Ramsey research where financial literacy was taught in school, “nearly 80% of the students said they understood how a 401(k) works and have their own bank accounts”. Currently, five states require students to take a personal finance course, I propose all 50 states require so. “It was found that mandated personal finance education in high school improved the credit scores and reduced the default rates of young adults.”12(Brown, Collins, Schmeiser, and Urban, 2014).Parents aren’t always the best teachers when it comes to finances so having a qualified teacher would not only benefit the child, but America as a whole because what that student learns will translate to real life behavior. Young adults are more likely to save and avoid debt when taught how in school. They will see SSI as what it is, a supplement to their retirement.
The government’s role in the economy is to promote economic stability and the role of an economist is to maximize welfare. Option #1 does both without harming others or having an over-reaching government. The expected outcome of teaching financial literacy in school is more educated Americans that thinking rationally about planning for retirement. I expect people who were taught at a young age about finances to overcome their behavior basis and save enough money to retire using SSI as a foundation vs. a life raft. In this paper the main takeaways are, an overwhelming majority of Americans are dependent on SSI. Most Americans under-save for retirement. SSI will be cut leaving many at risk of poverty, the economy at risk of a deep recession. The government needs to intervene to avoid a recession, high unemployment rates, and decrease economic growth. I proposed teaching financial literacy in school to fix the problem of retirement before it’s too late. I proposed protecting/saving SSI because too many people depend on it.
Lastly, I proposed penalizing employers for not offering retirement plans or adequate investments averages from employees. Each policy would have different expect reactions for taxpayers, employers, and SSI recipients. There are many types of retirement plans I have not discussed in this paper, many tax loopholes and suggestions on how to distribute SSI. The point of this paper is not to explain how to take advantage of these plans but to address the need for drastic change in the way Americans plan for retirements. A good starting point would be preparing the younger generations to have an always be prepared mindset in personal finance.