For over half of American households, retiring to a life of leisure may not be an option. We're facing a massive retirement crisis -- more than $6.8 trillion short of the savings we need. Without dramatic change, millions of us will have to work for life.
Change is possible, and Congress should be leading it by promoting legislation that could help Americans get back on track for a secure retirement.
Golden years spent behind the counter at the golden arches?
To understand what awaits Americans as they retire, think of "Julie," a close family friend of mine.
Julie is in her 70s and has less than $5,000 left in savings, substantial mortgage debt, mounting medical obligations and a monthly social security check that covers a fraction of her needs.
She expected a comfortable pension from her former employer, Pan American Airways, but instead now draws under $250 a month following the company's bankruptcy. Even though later in her career she saved diligently in a 401k, without the powerful benefits of decades'-compounded growth, she is left with a thin financial cushion.
To make ends meet, she works part-time jobs in community organizations and draws on food donations from her church. She goes to work not because she wants to, but because she must.
Why we don't save enough.
Commenters on recent mainstream articles blame young people's supposed moral failings for our savings gap. But young American workers are not less disciplined or lazier than generations past.
They have higher student debt and health care expenses, but most of all, they just don't have the same kind of savings support their parents had.
In the past, much of the workforce had a portion of wages seamlessly and automatically reserved for the future in investments managed by employers. Now, most of us need to make an active choice to put money toward distant goals, select from confusing investment menus and maintain our savings rate in periods of job insecurity and income fluctuations.
Fewer than 20 percent of private American firms now offer defined benefit retirement plans, with private pensions becoming, as a recent Forbes article notes: "obsolete." Over the same period, median American wages have stagnated -- now roughly at where they were 25 years ago.
As a result, our national personal savings rates are now hovering at lower than five percent (even lower in younger demographics) -- down from above 10 percent, before declining through the 1980s and 1990s.
To reverse this trend and build long-term wealth, we need the kind of help that employers once offered -- help that makes it effortless to save.
Better investing is not enough -- we need to save more.
To see why retirement deferral rates matter so much, look to a recent Putnam Institute study. The report highlights how the impact of investment selection decisions has historically been dwarfed by the effects of consistently saving at higher rates.
Furthermore, recent behavioral economics research has allowed us to identify practices that actually drive higher savings rates. Related insights are transforming retirement plan design across the country.
In one well-publicized example, the economists Shlomo Benartzi and Richard Thaler used their Save More Tomorrow program to grow participants' savings rates from an average 3.5 percent (around which most of us under 45 currently save) to 13.6 percent (around where we should be saving for a secure retirement).
How we can build wealth.
Luckily, American politicians are starting to realize the magnitude of our retirement savings crisis. Last year, members of Congress from both sides of the aisle offered provisions widening retirement plan options for millions of Americans working in small businesses, or for themselves. The bills would have incorporated deferral automation and auto-escalation features to make saving much easier.
Now, Senators Collins (Republican) from Maine and Nelson from Florida (Democrat) have re-introduced a new version of the Retirement Security Act they proposed last year, and Illinois has passed its groundbreaking Secure Choice initiative, which requires employers to auto-enroll workers in a portable retirement savings account.
Americans from any partisan background can find much to appreciate in these measures' content. Their key provisions could help us start to bridge our multi-trillion-dollar retirement shortfall, and avoid onerous work obligations in our retirement years.
Similar ideas need to be promoted by our new Congress, and put into law.
For an example of how successful national savings policies can be, look to Australia, where personal savings rates were on par with those in the U.S. through the early 1990s. Following targeted policy changes over the last two decades, savings rates in the country now average over nine percent, and the country's pension assets have grown more rapidly than anywhere in the developed world.
Through the assets they help build, similar measures could also draw greater support from the financial advice industry for middle-class Americans. They also suggest ways to transform how financial advice is given -- not just through drawing up financial plans, but by helping coach clients into the key habits that will make a difference for their financial future.
With this kind of support, we might be able to avoid serving lattes into our 80s.
About the authors: Scott Burns is co-founder of Guide Financial -- a financial services software company. Esther Stearns is the former CEO of Nestwise LLC and former President of LPL Financial.