Today ends the week known as National Retirement Security Week. Although the week started in 2006 as a week to raise awareness about the importance of saving for retirement, progress since then suggests the more apt title for the week should be National Retirement (In)Security Week. Many Americans have no savings at all for retirement, and those who do are likely to find themselves woefully unprepared financially for their golden years.
At one time, 84% of private sector workers who were offered a retirement plan through work had access to a defined benefit pension. A pension is deferred compensation and is structured to pay a defined, monthly benefit upon retirement. It’s an amount you can depend on and something you can’t outlive. Today, while 84% of the public sector still does have access to a defined benefit pension, most workers in the private sector are offered risky, inadequate 401(k) plans, or worse, nothing at all.
You may already be familiar with the sobering statistics on the reality of retirement under a 401(k). The median 401(k) balance is $18,000 total. The problem cuts across demographics, but women, people of color, and millennials face the biggest uphill battle in saving enough for a secure retirement. NIRS estimates that women are 80% more likely than men to be living in poverty at age 65 and above. Three out of four African American households have less than $10,000 saved for retirement, and only 38% of Latinos work for an employer that offers a retirement plan.
How do we right the ship?
First, we must acknowledge human nature and provide better tools and access to savings. Richard Thaler, the recent winner of the Nobel Prize in Economics, taught us a lot about the value of auto-enrollment and auto-escalation in retirement plans--two features that were already present in pension design. Pensions automatically take a portion of an employee’s salary into a pooled account that is professionally managed. Over a 30-year working career, money comes out week by week, paycheck by paycheck, grows, and upon retirement is paid out in a reliable, monthly sum.
States have begun to explore policy to help the 45 percent of Americans without access to a retirement savings plan. They should remember the design elements of pensions that make them so secure for retirees. Vermont, the ninth state to pass legislation creating a state retirement program, offers a 401(k) plan that is voluntary for employers to join, but automatically enrolls employees once the employer signs on. The next step for states is to research designs that would offer pooled, professional management of accounts and to develop systems that are geared toward providing a monthly annuity upon retirement.
Second, states must fully fund and protect their pensions for teachers, firefighters, nurses, and other public employees. A recent report by Good Jobs First found that in 9 of 12 states studied, states’ annual giveaways in subsidies and tax breaks to profitable corporations was more than the annual required cost for pensions. These costly giveaways could be used to fund education, infrastructure, pensions, or other retirement savings programs. Lawmakers need to have an honest discussion about whether corporate welfare is providing an adequate return on the state’s investment.
Big solutions are needed to help the near half of Americans who do not have access to a retirement plan through work. The longer we kick this can down the road, the more difficult it will be to address the retirement savings crisis we are facing.