Saving for retirement is harder than it should be
(Bloomberg Opinion) — The U.S. government has long offered Americans myriad tips and temptations to save enough for a comfortable retirement — with far insufficient results. But why should it be involved at all? Why can’t people be sufficiently responsible for preparing for a completely foreseeable event?
There are two answers. First, people tend to be very bad at thinking about the distant future: it seems that our brains are not wired for it. Second, complicating that problem, the financial choices involved are complicated – and thanks to poor policy, unnecessarily so. Encouraging people to save more for retirement, and helping them do it wisely, would make many Americans a lot better.
In recent decades, the American system of retirement savings, such as it is, has shifted increasingly toward personal responsibility. Long gone are the days when employers typically offered guaranteed pension plans to supplement minimum Social Security benefits. Such corporate generosity has given way to defined contribution plans, which – for those lucky enough to have access – spend enough money on employees to set aside, choose the right investments, and ultimately figure out how to make savings last. be made.
Retirement is a uniquely difficult thing for people to think about. They stop saving when they are young and stand to benefit the most from the power of compound returns – not because they are irresponsible, but because the future seems too distant or too uncertain. , or because they have little income . And they find the task of managing retirement accounts daunting, with countless possible combinations of contributions and investments. Throughout their working lives, they often fail to take full advantage of employing matching funds – effectively passing on the free money.
Even worse, when people invest, they make mistakes. They fail to diversify or exit bad investments, and face penalties by making early withdrawals. On average, their retirement accounts yield significantly worse returns than old-fashioned company pension plans — one less frequently, given that the latter are often invested in fixed-income assets that pay meager returns.
The result: Americans are not ready for retirement. As of 2019, nearly half of people nearing the end of their working lives had no money left over in an employer-provided 401(k) plan or individual retirement account. Those with an average balance of $1,44,000 were not enough to ensure a comfortable old age. For the lowest-income fifth of the workers, the median balance was only $32,200.
This is not only a problem for millions of future retirees. With potentially hefty state budgets across the country, the elderly poor will weigh heavily on the social safety net. If they cannot afford professional care, younger members of the family will have to leave work to fill the breach, reducing the productive capacity of the economy.
Financial education can help, but only goes so far. When it comes to reaching consumers, motivated sellers of high cost mutual funds and deceptive annuities will always be better and faster than executives with prescriptions on prudent investments. Even worse, the retirement-account balance is peaking as many people are beginning to experience age-related cognitive decline, making them particularly vulnerable to financial predators.
It is in the public interest that the government put in place a simple retirement-savings system that leads people to better options. It has taken some small steps in the right direction – for example, by encouraging companies to automatically enroll workers in savings plans. For the most part, however, its haphazard collection of tax incentives and account options remains unacceptably confusing, incomplete, and inefficient. The next editorial in this series will explain how it made it this way, and how to fix it.
-Editors: Mark Whitehouse, Clive Crooks.
To contact the senior editor responsible for Bloomberg Opinion’s editorial: On David Shipley [email protected] ,