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Minnesota 2020 Journal: We’re Not Saving Enough

May 16, 2014 By John Van Hecke, Publisher

On Mother’s Day, Governor Mark Dayton signed the Minnesota Women’s Economic Security Act into law. It’s aimed at increasing family stability through expanded unpaid leave requirements and decreasing women’s pay inequity by requiring employer wage certification and disclosure. Less known is a provision authorizing a study of Minnesota’s retirement savings practices.

I can tell you right now that Minnesotans are not saving enough money to meet their retirement security needs. The State’s study will find the same but in greater detail, illuminating the problem’s depth and nuance. The research project will, I expect, underscore the need for an immediate shift in policy, enacted through legislation, creating a direct paycheck deduction plan for every worker to build long-term retirement savings.

At least, that’s what all of the research, including similar state legislature-directed studies in other states, finds. Nationally, the retirement savings data is unequivocal. People aren’t saving enough money to meet their reasonably projected retirement cost needs. If we don’t change directions, implementing a direct-deposit savings plan, Minnesota is at high risk of experiencing retiree poverty growth at exactly the moment that Minnesota’s elderly population is exploding. More people in retirement with fewer financial resources to meet needs will strain family and public resources.

This might come as a surprise but in 2020, more Minnesotans will be age 65 and older than will be school aged, 5-17. By decade’s end, there will be 285,000 more 65+ Minnesotans than at the decade’s start. The decade after that, the 20s, will see that figure grow by 335,000 more 65+’ers. Consequently, it’s accurate to observe that Minnesota is aging. But, here’s the great part. This is an asset, not a liability.

Think about what age yields. More experience, greater wisdom, and more time for non-work activities increases family and community social stability.

An increasingly large 65+ population will change Minnesota’s economic and social landscape but, again, this is a positive development, not a negative one. More people needing senior-focused healthcare service, transportation options, and changing lifestyles will drive innovation. The sheer market demand will transform the aging experience. It also highlights the need for increasing everyone’s retirement savings because almost no one has saved enough.

Markets respond to demand. Demand is desire backed by cash. I might want a new car but until I put money on the table, I simply have a new car dream. The market contemplates and assesses dreams but it’s moved by money. Minnesota’s aging population will express an interest in a great range of service desires but they won’t and can’t pay for everything. What’s important will quickly sort itself out. More retirement savings creates more demand and competition.

Increased retirement savings will only come from lowering the barriers to long-term savings. Everything that we’ve done to this point is inadequate. Therefore, we must do more to help people save more.

The most potent method for increasing retirement savings is direct paycheck contribution into a retirement savings account. This is exactly the same methodology we use to pay our income taxes. Through tax withholding, we pay our income taxes as we go so that we don’t get slammed with an income-appropriate tax bill but no savings to pay it. Saving two, three or four percent of every paycheck, directly deposited into a retirement savings account, invested for long-term gain, will, over a worker’s lifetime, dramatically improve retirement savings.

Compound interest is an extraordinarily important investment phenomenon. The investor reaps the reward of accumulating, reinvested interest earnings. It’s essential to old wealth’s perpetuity. That’s what makes retirement savings plan proposals so alluring and promising. They make rich people’s wealth building strategies available to low and modest income earners.

Getting there means requiring employers to facilitate direct payroll deposits into a retirement savings account. More than half of employers don’t offer an employer contribution to retirement savings benefit. Simply allowing workers to set up direct payroll deducted retirement savings plan contributions will begin reversing the retirement security need deficit. It’s a reasonable step forward that will increase retirement security, improve family stability and decrease expensive reliance on publicly funded care assistance.

Studying retirement insecurity will help make the case for change. But, it also delays realizing the earliest saving’s benefits. Family stability goals form the Women’s Economic Security Act’s core. Stronger families build a stronger future. We don’t need a study to know that.

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  • Dave S. says:

    May 17, 2014 at 7:10 pm

    A truly tax free retirement savings account would be helpful. Currently, all money that is in a 401k retirement savings account [a.k.a. “tax deferred”] is taxed:  pay roll tax going in, and then all money coming out at income tax rates with special rules in place to force people to withdraw at 70 1/2. Roth IRA is nice but all money going in is taxed at FICA + income tax and the max contribution is very small with a fairly small income limit. The author ironically speaks of tax withholdings from pay checks, I can assure you, at 15% income tax + FICA tax is a huge chunk of money going to the government every pay check. I could have a very nice retirement if even half of that was returned to me so I could put it into a retirement account. Alas, I am not hopeful.