Really Rethinking Retirement

            There’s no question that Americans need to save more.  As former Senator Kent Conrad noted at last week’s Bipartisan Policy Center presentation on “Rethinking Retirement,” almost 45% of the population would have difficulty coming up with $2,000 on 30 days notice.

            More serious though, according to Conrad, about 50% of Americans do not have access to a retirement plan at work.  Without employer sponsored retirement plans, workers have to rely on self-discipline to save.  Following an introduction by Conrad, BPC presented several experts who focused on ways to make saving, planning for financial emergencies and retirement easier and more automatic for most people.

            The U.K. has apparently had good success with these kinds of programs.  There, a law currently being phased in requires all employers to automatically deduct as little as 2% of an employee’s salary and invest it for them.  Most employers have directed these deducted amounts to a low fee investment fund established by the government.  Employees can opt out of the program, but 90% of the people have chosen not to exercise that option.           

            Something is almost always better than nothing.  But, I remain skeptical. 

            Suppose you are 30 years old today and you want to retire at age 65.  Earning an average return of 6%, you would have to save $5,241.72 every year--$436.81 per month--to have a nest egg of $600,000.00.  Table 1 shows the amount of annual income a person would need for different percentages of annual deductions to arrive at an annual contribution of $5,241.72.

Table 1

Percent of Income Deducted	Income Required
2%	$262,086
3%	$174,724
4%	$131,043

            If you stop making investments at retirement, annual inflation is 3% and you continue to earn an average of 6%, your savings would kick $32,616 to you every year for 20 years before becoming exhausted.  Though that may seem like a reasonable amount of money, in today’s dollars, you’d only have $11,592, before taxes, in purchasing power at age 65, and just $6,418 at age 85 when the fund runs out of money.

            Of course, all of these numbers are unrealistic for most people.  The median household income in the United States—income from all earners in a household—was $53,657 in 2015.  Here is how the numbers work for current median income, again assuming an annual deduction, average inflation at 3% and average investment return at 6%.

Table 2

Median Income	Percent of Income Deducted	Total Annual Deduction	Total Nest Egg	Monthly/Annual Payout*	Purchasing Power at 65*	Purchasing Power at 85*
$53,657	2%	$1,072.14	$119,473.68	$845/$10,140	$300/$3,600	$166/$1,992
$53,657	3%	$1,639.71	$182,720.72	$1,292/$15,505	$459/$5,508	$254/$3,048
$53,657	4%	$2,146.28	$239,170.24	$1,692/$20,304	$601/$7,212	$333/$3,996

*Before taxes.

            These numbers would be higher if employers were to match employee contributions. Since there are no free lunches in life, employers would certainly modify compensation packages in ways that cut into consumption, such as charging employees more for health insurance or reducing paychecks to account for those matching contributions. 

            The point is that the kinds of savings schemes advocated by the BPC’s expert panel wouldn’t give most people a significant level of purchasing power after they stop receiving paychecks at age 65.  And they leave people who have the good fortune to survive more than 20 years after retirement exposed.

            This is why all of the attempts by Republicans in Congress to cut back on Social Security are misguided.  Most people simply can’t save enough to replace whatever eventually gets whacked out of Social Security.

            What these kinds of numbers should tell policy makers is that retirement security needs a really serious rethink.  The paradigm we currently  use to think about it has to change.

            First, the idea that most people can or even should be able to leave gainful employment at the tender age of 65 isn’t reasonable or sustainable.  For most people, foregoing a paycheck for 20 years or more is a non-starter, particularly when they can work.  Public policy has to find ways to encourage people to stay in the work-force longer by making it easier to upgrade skills and retrain while making it harder for employers to avoid hiring or retaining older workers.

            Second, policy makers should think about recasting Social Security as a disability oriented program that can protect people who are not formally disabled, but who are otherwise physically unable to continue to do the work they had previously done.  This would avoid our current practice of penalizing people who spent their careers working on their feet or with their hands and are forced to retire before they can receive full Social Security benefits.  We could create a presumption of disability for other kinds of workers when they reach specific ages.

            Third, we must reorient our medical system toward wellness so that people stay healthy longer and so that illness costs less.  We must do what we can to stop people from smoking and becoming obese.

            And last, we need to reduce economic inequality by raising wages so that people can afford to make more meaningful contributions to their own economic security.