There were headlines last fall when the American population reached 300 million, with 400 million predicted by 2043. Of less immediate concern were some of the implications. For instance, the number of American workers will grow, but will they be any better prepared for a financially secure retirement? Unfortunately, no—if existing trends continue.
Retirement saving has declined dramatically over the past ten years. In fact, according to the most recent Commerce Department report, the savings rate for fiscal year 2006 was a staggering negative 1 percent. These downward statistics are true across the spectrum of workers:
- Nearly one out of two American workers—totaling some 75 million— currently has no employer-sponsored savings plan.
- Only 1 in 2 employees who do have access to a saving vehicle is taking advantage of this resource.
- About 1 in 4 eligible employees “leaves money on the table” and fails to participate even when offered employer matching contributions and tax advantages for contributing.
- Even those who do save are often not saving enough. More than six in ten workers who reported saving in the 2006 Retirement Confidence Survey (Employee Benefit Research Institute, 2006) have saved less than $50,000.
A new book addresses this situation and proposes legislative and administrative changes that would make saving for retirement easier for middle- and lower-income households, while at the same time offering practical savings ideas for workers. Aging Gracefully: Ideas to Improve Retirement Security in America was published by the Century Foundation Press and written by William G. Gale, J. Mark Iwry and Peter R. Orszag, Brookings Institution scholars who are principals of the Pew-supported Retirement Security Project, a partnership of Brookings and Georgetown University’s Public Policy Institute.
The authors point out that the current retirement savings system does not work for lower-income households, who need it the most. The system offers few incentives to participate and little guidance to navigate through confusing issues such as level of contribution, retention and investment allocation. As Gale often puts it “You don’t have to be a mechanic to drive a car, and you shouldn’t need a Ph.D. in financial economics to navigate the pension system.”
Yet surveys and a Retirement Security Project research experiment have shown that people will save for retirement if it is made easy, and that fact is the basis of the authors’ common- sense recommendations for policy changes.
They argue for: automatic 401(k) features for workers in companies with employer-sponsored plans and automatic IRA enrollment for workers in companies without 401(k) plans, with workers always having the ability to opt out; improved “Saver’s Credit” tax savings for middle- and low-income workers who participate in these savings plans; and reduced implicit taxes on retirement savings imposed through means-tested benefit programs such as food stamps, Medicaid and cash welfare assistance.
For more on retirement security, go to the project’s Web site at www.retirementsecurityproject.org.
Pew is no longer active in this line of work, but for more information visit the Retirement Security Project on PewHealth.org.