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Minnesota 2020 Journal: Building Real Retirement Savings

February 07, 2014 By John Van Hecke, Publisher

No one is saving enough money to meet anticipated retirement needs. Not Minnesotans, not Iowans, not Mississippians, no one. This is a national problem with immediate local, community ramifications. Minnesota’s policymakers need to take the lead, creating a public retirement savings plan and mechanism that secures aging Minnesotans’ post-work lives.

Last week, President Obama, in his State of the Union speech to Congress, addressed this widely-acknowledged but little-acted upon issue. “Today, most workers don’t have a pension. A Social Security check often isn’t enough on its own. And while the stock market has doubled over the last five years, that doesn’t help folks who don’t have 401ks.” Obama announced that he would create MyRA, a savings bond facilitating retirement savings.

It’s a nice idea but’s not remotely enough, not when Americans face a projected $6.8-14.5 trillion retirement savings shortfall. Yes, you read that correctly. Fourteen point five trillion dollars. What else costs around $15 trillion? Almost nothing. A new aircraft carrier is only $13 billion. Modernizing American nuclear weapons systems over 30 years will cost about one trillion dollars. While estimates vary, the total cost of the Iraq and Afghanistan Wars is $4-$6 trillion. And, according to one study, 40 years of Alzheimer patient care costs will exceed $20 trillion.

Before everyone starts hyperventilating, the projected retirement costs shortfall is not a bill due today. Increased savings, including creating effective, efficient retirement savings for low and modest income earners will trim that big number. But, closely examining retirement savings demographically gives the greatest pause.

Retirement savings correlates with income. Increasing household income translates into higher and better retirement savings. The reverse is equally true. As income levels fall, retirement savings disappear or don’t exist at all. Forty-five percent of working age households have no formal retirement savings assets. Think about that. Nearly half of Minnesotans don’t have a pension, a 401(k) or an Individual Retirement Account to facilitate savings for post-work life.

It gets worse. Nationally, a typical working-age household has $3,000  in retirement savings. Working-age households nearing retirement possess an average of only $12,000 in retirement savings. These are not comforting figures. Retirement savings do not, however include Social Security benefits.

Social Security is a social insurance program, not a defined retirement benefits scheme. Its principal function provides low to modest income workers with minimal financial benefits necessary to avoid living below the poverty line. Nearly every worker contributes to the Social Security Trust Fund during their working life thus meeting minimum benefits eligibility. In short, social security provides some but not all retirement financing.

Given the well-defined projected retirement planning shortfall, what do we do?

First, broad and bland platitudes are useless. The soft, individual-centric retirement savings approach has crested with $14.5 trillion in unfunded need. Retirement savings has to be systematized and given real teeth. Adequate retirement savings are in everyone’s best interest. Without improving savings rates, creeping retiree impoverishment will create a greater demand for publicly-funded social services. It’s fair to assume that conservative policymakers, in twenty years’ time, won’t demonstrate greater enthusiasm for public funded social safety nets than they demonstrated in the past 20-30 years.

Second, wage stagnation, declining average household income and unrewarded worker contribution to productivity gains mean that we’re asking people with the least capacity to increase retirement savings, changing their lifestyle to address retirement needs. For workers living from paycheck to paycheck, we might as well ask them to travel to the moon. Saving more money for retirement means having more money to save.

Given these two concerns, retirement savings begins with increasing wages. Boosting Minnesota’s minimum wage to $9.50/hour or even, as President Obama suggests, $10.10/hour is an important and tangible first step. Second, savings increase with payroll source-point deductions. In the past, retirement savings reform have approached this issue mechanically. Worksource payroll deducted contributions are essential but success will only be achieved if we improve the situation. That means requiring employers to facilitate retirement savings deductions even if employers don’t offer a retirement benefit.

Lastly, retirement savings need an investment risk guarantor. That’s where government comes in. Functioning much like home mortgage securitizing giant Fannie Mae, the Federal National Mortgage Association, state and federal money and, optimally, an agency presence, realizes greater returns while mitigating some financial risk. Retirement savings shortfalls aren’t a progressive or a conservative problem. They’re not a Democratic or a Republican problem. Retirement needs are a Minnesota problem but it’s one that we’re entirely capable of addressing.

Everyone wins when everyone’s retirement savings expand to meet projected need. Everyone wins when we use collective economic weight to benefit many people, not just the privileged few. Everyone wins when everyone wins.

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3 Comments:

  • David Schmidt says:

    February 8, 2014 at 7:56 pm

    Retirement savings is an 80/10/10 problem. 80% personal decision and consequences, 10% social psychology, and 10% government. By personal decision I mean living below your means, not getting into debt, and saving for 40 years for retirement. This will mean-for 99% of Americans, a reduction in your lifestyle and staying out of debt. This means People will live in less house, have fewer “toys” and not have things like car loans and credit card debt. Experts generally recommend at least 15% of gross going into retirement savings. For those making minimum wage and living close to poverty-you must find a better job. Even a minimum wage of $10.10 per hour is insufficient to live [that’s only about $22k annually gross]. 10% social psychology-if people need to “opt out” of 401k paycheck withholding then more people will contribute to their 40k than if there is “opt in”. If a 40k is offered, more people will use than if no 40k is offered. The last 10% being government, I posit that money is fungible. If I am forced to pay a “modest” 20% to the government in income and FICA taxes [not including real estate taxes, sales taxes, gas taxes, vehicle taxes, etc.], that is easily 10% of my income I can’t put into retirement. Every dollar from my wages is taxed. Even what I put into my 401k has FICA removed. If I put money into my Roth IRA-that has full FICA and income taxes removed on the front end. There are two advantages to the Roth IRA and 401k—earnings are growing tax free and money coming out is tax free on the IRA, and mostly tax free going in for the 401k. But, Congress, in it’s collective “wisdom”, has to 1) limit how much I can put in to those accounts, 2) limit my income at which I am allowed to use those accounts, 3) tax every dollar either going in or coming out or both [arguably, with the 401k, tax 6.2% going in, + full income tax on what comes out], 4) control how the money comes out [Minimum Required Distribution]. 5) due to Federal Reserve policy [the Fed is not part of the actual government], people in 401K’s are forced into mutual funds due to bond interest rates being so low that there is almost no return after accounting for inflation.

    • Don Knudson says:

      February 10, 2014 at 11:58 am

      “Those making minimum wage….. must get a better job.”  When they do, those who have money “and who are living below their means” won’t be able to have the cheap products and services provided by minimum wage jobs.  It appears to me that we are all in this together.  Those of us with money take advantage of situations where others are providing their services and skills at or near minimum wages.  Thus the poor remain poor and those with money and options get to take their surplus of income and put it in savings for retirement, etc. 

      I was fortunate to be employed at a time, starting my career in the 1970’s when retirement savings was provided as a benefit.  Thus 10% of my salary was sent to investments for retirement.  I didn’t miss it.  I lived within my means, as stated above.  In my case, I’m still working and will do so until I’m 70, for certain.  I expect to continue to work, even after that, if I am able.  By this I am hoping to be able to afford a few years of retirement with financial security.  I expect even then the stock market may crash again.  Possibly the government will try restrict social security funding in order to shrink government.  So even with a pension, I see many enemies willing to defund my security.  I’ve seen elderly who worked for corporations providing them pensions only to have those pensions disappear because of bankruptcy of the company and along with it the pensions that had been promised. 

      Today, with fewer jobs supporting adequate savings for retirement, it’s guaranteed that future retirees with be in poverty and still working until they are 80 years old.  Maybe that’s what capitalists want, esp. if cheap labor by elderly poor will benefit the more wealthy who need their cheap services so they can live below their means.

      As I say, we are all in this together.  Required savings for retirement beyond social security is the only answer that would be effective in ensuring elderly of the future a dignified end of life.  Relying on people’s individual decisions to save for retirement out of meager incomes when they can’t afford enough food or have emergencies that require spending money they don’t have is doomed to failure.  That’s what this article confirms. 

      Will conservatives, who loathe people depending on government such as social security, etc., be willing to require employers to provide pensions for all employees in order to create forced savings to fund the future retirement of all citizens?  And those pensions must be protected as the individual’s private property not to be robbed and defunded when a corporation or other organization needs cash to bail out bad business deals.  Today I’ve noticed conservatives label people with pensions as “greedy” when they want to take that money and use it for other purposes than what was intended. 

      One thing I don’t see fixable.  It is that savings and pensions remain a crap shoot because of the instability of the economic system that is now more erratic in it’s behavior as we are wrapped into a global economy with the risk of many unsavory practices and behaviors by capitalist and corporate players.  We appear to be now back into boom and bust deregulation.  Hold on to your knapsack!   

      • David Schmidt says:

        February 10, 2014 at 5:56 pm

        Mr. Knudson poses an unsolvable math problem: Either someone has the money to save for retirement, or they don’t. A) If your income doesn’t pay your bills then a forced savings plan is pointless-lowing your current ability to pay your bills. B) If you’re wealthy-the forced savings plan is pointless since you have the money and C) For the middle class, unless taxes go down-they struggle as it is to save. Ergo, the “forced savings” plan would only be effective for the middle class, who, I argue, are already greatly overtaxed. Additionally, since the current “tax privileged” retirement savings accounts have so many catches, hooks, and caveats, we can only guess what kind of monstrosity of a forced savings plan Congress would implement.