Over the past few decades, the American retirement savings system, such as it is, has evolved strongly towards personal responsibility. Long gone are the days when employers routinely offered guaranteed retirement plans to supplement minimum social security benefits. These corporate largesse have given way to defined contribution plans, which, for those lucky enough to have access to them, require employees to set aside enough money, choose the right investments and ultimately find how to make the savings last.
Retirement is a particularly difficult thing that people think about. When they are young and stand to benefit the most from the power of compounding returns, they tend to put off saving, not because they are irresponsible, but because the future seems so far away. or too uncertain, or because they have too little income. . And they find the task of managing retirement accounts daunting, with countless potential combinations of contributions and investments. Throughout their working lives, they often fail to take full advantage of employer matching funds, causing them to lose free money.
Worse still, when people invest, they make mistakes. They fail to diversify or exit bad investments, and incur penalties by making early withdrawals. On average, their retirement accounts earn significantly lower returns than old-fashioned corporate pension plans — a low bar, given that the latter are often invested in fixed-income assets offering meager returns.
Result: Americans are not ready for retirement. In 2019, nearly half of people nearing the end of their working lives had no money saved in an employer-provided 401(k) plan or individual retirement account. Those who did had a median balance of $144,000, far from enough to ensure a comfortable old age. For the fifth of workers with the lowest incomes, the median balance was only $32,200.
It’s not just a problem for millions of future retirees. Poor older people will weigh heavily on the social safety net, potentially crushing state budgets across the country. If they cannot afford professional care, young family members will have to take time off work to fill the gap, reducing the productive capacity of the economy.
Financial education can help, but only goes so far. When it comes to reaching consumers, motivated salespeople of high-cost mutual funds and deceptive annuities will always be better and faster than public servants with brochures about prudent investing. Worse still, retirement account balances are peaking just as many people are beginning to experience age-related cognitive decline, making them especially vulnerable to financial predators.
It is in the public interest for the government to put in place a simpler retirement savings system that guides people towards better choices. It has taken some small steps in the right direction, such as 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 ineffective. Future editorials in this series will explain how it got there and how to fix it.
The editors are members of the Bloomberg Opinion Editorial Board.
