America isn’t saving enough for retirement. Can that be fixed before it’s too late?
The race is on to save Americans’ golden years.
The aging of baby boomers, the looming funding crisis for Social Security and the meager size of many workers’ nest eggs — if they have one at all — have spurred candidates, lawmakers and experts to propose ways to boost retirement savings.
Politicians even are talking about making changes to Social Security, long known as the third rail of politics because touching it was thought to be a career-killer. The looming financial train wreck awaiting the popular entitlement program and the increasing number of older Americans who depend on it hasn’t left much of an alternative.
A consensus has developed that the nearly four-decade-old transition from employer-sponsored pensions to individual 401(k) plans has been a failure for all but the wealthiest Americans and that something needs be done — soon.
The point was driven home Friday when markets convulsed over the U.K.’s vote to exit the European Union. Like the financial crisis and Great Recession, which drained 401(k) accounts and pummeled Americans’ finances, the Brexit stock selloff left retirees shaken.
“The longer we wait, the more draconian the solutions will have to be,” said former Sen. Kent Conrad (D-N.D.), who co-chairs the Commission on Retirement Security and Personal Savings launched by the Bipartisan Policy Center think tank.
President Obama has pushed retirement savings initiatives, presidential candidates have talked about Social Security on the campaign trail and several states, including California, are taking their own steps to help workers put away more money.
“There’s more activity around retirement savings than there has been in 20 years,” said Teresa Ghilarducci, an economics professor at the New School in New York and expert on the issue.
Statistics illustrate the dire situation facing millions of Americans.
About 22% of people ages 45 to 59 said they have no retirement savings or pension, according to a recent Federal Reserve study. And only about half of private-sector workers participate in a retirement savings plan, Bureau of Labor Statistics data show.
Many workers are worried about just making it to the next paycheck, let alone saving for retirement, particularly after the financial hit from the Great Recession. About 46% of adults in the Fed survey said they did not have enough saved to cover a $400 emergency expense.
Social Security is supposed to be the backstop for such cash-strapped Americans. But that safety net is fraying.
The program’s trust fund for retiree benefits will run out in 2035, Social Security’s trustees reported Wednesday. The program would keep running, but only with incoming taxes from workers. That would mean it would have to cut benefits by 23% unless Congress and the president agree on a way to pump more money into the system.
The two presumptive presidential nominees are promising to deal with the problem but have not released detailed plans.
“I have said from the very beginning, we are going to protect Social Security,” Hillary Clinton said at a Democratic debate this spring.
She opposes increasing the retirement age, reducing cost of living adjustments, cutting benefits or privatizing the program.
To bolster the system and boost some benefits, Clinton said she is open to raising the $118,500 cap on income that is subject to Social Security taxes so the wealthy would contribute more. Her rival for the Democratic nomination, Bernie Sanders, wants to tax income up to $250,000.
Donald Trump, the presumptive Republican nominee, has been much less specific, saying he would preserve Social Security by increasing economic growth. He criticized his primary opponents for proposing cuts to the program, such as raising the retirement age and reducing benefits for higher-income recipients. Trump also indicated he opposed Democratic plans to increase benefits.
“We’re going to save your Social Security as is,” he said at an April town hall meeting in Wisconsin. But a campaign policy advisor recently said Trump was open to enacting bipartisan changes to the program.
Ghilarducci, who has spoken with the Clinton campaign on retirement issues, said, “There’s been a sea change in the way politicians view Social Security.
“The reason why we’re talking about expanding Social Security is precisely because the retirement crisis is bigger than people thought and more immediate than people thought,” she said.
Social Security’s precarious finances are only part of the problem, experts said. Americans need to save more on their own to supplement Social Security benefits — now an average of about $1,200 a month — as life expectancy is increasing.
Congress created the 401(k) provision of the tax code in 1978 to give workers a tax break on deferred income. In 1979, the year before that took effect, about 38% of private-sector workers participated in a traditional, defined-benefit pension plan, according to the Employee Benefit Research Institute.
As 401(k) plans became more popular, the number of people with traditional pensions began falling. It was down to 15% last year, the Bureau of Labor Statistics said.
About 61% of private-sector workers had access to a 401(k) plan last year, but only 43% participated.
That highlights a big problem with 401(k)s: People have to elect to contribute.
Ghilarducci wants guaranteed retirement accounts funded by mandatory paycheck deductions that would earn “a secure, modest, guaranteed rate of return” paid out in an annuity for as long as a person lives.
The Bipartisan Policy Center commission, on which she served, issued a lengthy report this month proposing a comprehensive plan. It included raising the cap on income subject to the Social Security tax to $195,000 by 2020, gradually increasing the retirement age for full benefits to 69 by 2070 and creating retirement security plans for private-sector workers.
Those plans would be run by third-parties, relieving businesses of the administrative burdens and financial liabilitywhile providing new incentives for automatic enrollment, Conrad, the former senator, said.
“The only thing the employer would need to do is do a payroll deduction,” he said. “It’s critically important you have not only Social Security’s future assured, but you have additional savings vehicles that you take advantage of, especially at work.”
The Obama administration has tried to boost retirement savings outside of Social Security. Last year, the Treasury Department began offering starter retirement accounts called myRAs. But the administration has been unable to push through a proposal to require businesses who do not offer retirement plans to automatically enroll employees in individual retirement accounts.
With federal action stalled, some states are acting on their own.
In California, lawmakers are close to creating the first state-run retirement plan for private-sector workers whose employers don’t offer one. The proposal, awaiting legislative approval, would enroll workers automatically and let them save 2% to 5% of their wages unless they opt out.
Several other states have passed or are considering similar plans requiring employers to automatically enroll workers in some form of retirement savings account.
AARP has been pushing for state action on automatic enrollment until it can be done nationwide.
Conrad said the state plans are “attempts to deal with a very real need,” but he believes a national solution is needed.
“It emphasized to people how critically important Social Security really is because that’s the one thing they can really depend on,” he said.
“And I think it told a lot of people you’ve got to pay more attention to your own situation. You just can’t hope that something good’s going to happen. You’ve got to plan for it, and you’ve got to work toward it,” Conrad said.
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