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Minnesota 2020 Journal: Retirement Ranking Highlights Need for Improvement

March 14, 2014 By John Van Hecke, Publisher

Minnesota is a good place for retirement but that will change unless policymakers help Minnesotans boost retirement savings. New state-by-state comparative data finds good but also real future retirement life challenges. Minnesotans are ahead of the national pack when it comes to socking money away for retirement but we’re still coming up short; our savings rate will be insufficient for our need. There’s time to do something about this problem. With modest public policy shifts, the retirement savings crisis can evaporate. Doing nothing, on the other hand, reinforces shortcomings.

The National Institute on Retirement Security released a report this week, offering comparisons and rankings. “The Financial Security Scorecard: A State-by-State Analysis of Economic Pressures Facing Future Retirees,” finds that, using 2012 data, Minnesota ranks near the top when it comes to the overall retirement environment compared with other states. That’s the good news.

The bad news is, despite this ranking, Minnesotans like all Americans need to do much, much more to secure their post-work retirement. The risk of inadequate personal savings is lifestyle compromise leading to choosing between shelter, nutrition and healthcare. All three are necessary for a secure life under any circumstance but they’re especially important in retirement when earned income is replaced with fixed income from insurance and savings.

Let’s get back to the good news. According to NIRS analysis presented as the “State Financial Security Scorecard,” Minnesota, overall, scores below top-ranked Wyoming and equal to Alaska and North Dakota. All other states score lower with California generally coming in last. I say “generally” because the NIRS’ calculations are complicated, addressing three specific areas impacting retirement. No state ranks the best in all; no state ranks worst. Closer reading is required to appreciate the challenge of planning for a distant need. The same close reading strongly suggests clear policy changes to decrease the risk of a retirement savings crisis.

The scorecard integrates three evaluation points: potential future retirement income; retiree costs; and labor market opportunities for older adults. Basically, that means accumulated savings across all retirement savings platforms, the anticipated costs of living as a retiree in a particular place, and retirement age-appropriate work that can generate income and off-set relying solely on savings.

Minnesotans can expect more secure retirement conditions than most Americans. That’s terrific. We need to reinforce the factors contributing to this finding and, in fact, dramatically expand them. But, realizing secure retirement is more than just financial savings. Workplace-generated savings are an essential but changing and ultimately diminishing part of retirement security. Employer contributions to employee retirement savings are a non-wage benefit. They are a form of deferred compensation that achieve both an immediate and long-term good for worker and employer. There are basically two forms, defined-benefit plans and defined-contribution plans.

Defined-benefit plans, better known as pensions although that term properly refers to any retirement savings vehicle, were once the retirement savings standard. Plan participants were guaranteed, in return for meeting work obligations, a minimal level of income and other services such as healthcare for life after workforce retirement. They’ve generally been replaced by defined-contributions plans that shift the savings investment performance to third-party vendors. Employers typically contribute to the plan but their responsibility to retirement savings ends there. Employees usually contribute portions of their paycheck under this scheme. Both options have advantages and drawbacks but defined contribution plans are viewed as less advantageous to employees.

The NISR’s report finds that, compared to other states, Minnesota earns a 7-out-of-10 score when it comes to retirement financial savings. For retirement costs, including housing, out-of-pocket Medicare spending, and Medicaid benefits generosity, Minnesota’s score is 8-of-10. Lastly, Minnesota’s retiree labor market receives an 8-of-10 score. In other words, Minnesotans have a bit more money set aside, can expect reasonably controlled costs and have retirement work opportunities if they choose.

Again, the bad news: none of this is enough.

So, what does this new report tell us about what we need to change? First, all retirement savings must improve. People need to have more money, securely invested in savings vehicles that preserve and optimally increase purchasing power. Minnesota should follow California’s and Illinois’ example and create a paycheck deduction retirement savings account that lets workers directly deposit money. This strategy works slowly but relentlessly because compounding interest is, as physicist Albert Einstein declared, the eighth wonder of the word.

Minnesota’s legislature is considering just such a proposal. Authored by State Representative Patti Fritz (D-Faribault), the Minnesota Secure Choice Retirement Savings Plan would create a savings trust for Minnesotans not currently offered a workplace retirement plan. Employers would be required to allow employees to divert money directly from their paychecks. Employers would not be required to match worker contributions. The trust would be managed by a state appointed board and would create a low cost or no cost investment fee structure.

With enough time, retirement savings, built on people’s individual contributions, will expand and reduce the likelihood of a retirement security crisis. That’s smart public policy. But, don’t just take my word for it. Read the NIRS’s report. Read the Fritz bill. Decide for yourself. I can guarantee you, however, that doing nothing won’t improve the mounting inadequate savings crisis. Let’s nip this one in the bud, now.

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