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US baby boomers find it difficult to save for rainy days
By Laura Tyson |
June 26, 2013, Wednesday
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AS the first wave of America's baby boomers begins to retire, the retirement system is revealing its flaws.
More than half of all workers (and more than 60 percent of low-income workers) are at risk of lacking sufficient savings to maintain their living standards after they stop working. In a recent international comparison, America's retirement system received a passing grade of C; but, for a large and growing number of Americans, the system is failing.
The slow recovery from the Great Recession has exacerbated the challenge. Homes are most Americans' major retirement asset, and, despite a recent pickup, housing prices are still 28 percent below their 2006 peak, while 28 percent of all homeowners owe more on their mortgages than their property is worth.
Discretionary employer retirement plans are a major pillar of America's retirement system. But nearly 16 million Americans are either unemployed or have dropped out of the labor force, while more than half of the jobs created during the recovery are low-wage positions that usually do not offer such plans. By contrast, most of the 625,000 public-sector jobs lost during the recovery offered generous pensions.
Nearly 60 percent of all employed private-sector workers aged 25-64 are not covered by employer retirement plans, and coverage rates vary by income: 73 percent of all workers in the top earnings quartile are covered by such plans, compared to only 38 percent in the bottom quartile. Plan participation also varies by income, with low-income workers much less likely to participate than high-income workers.
Lack of universal coverage
The lack of universal coverage also means that workers move in and out of plans as they change jobs; more than one-third of all households end up with no employer-based pension coverage. By contrast, in several other countries, mandatory employer and employee participation in national employer-based plans means nearly universal coverage.
Personal retirement savings, another pillar of the US retirement system, are inadequate for most households, partly because the decades-long stagnation in median wages has made it difficult to save. One-third of Americans aged 45-54 have nothing saved specifically for retirement. Meanwhile, three-quarters of near-retirees have annual incomes below US$52,201 and average total retirement savings of less than US$27,000.
The United States relies on generous tax incentives to encourage personal retirement savings, but these incentives are poorly targeted and yield limited returns. More than 80 percent of the value of these incentives goes to the top 20 percent of taxpayers, who earn more than US$100,000 a year.
Moreover, while the incentives cost the US Treasury nearly US$100 billion annually, they induce little new saving; instead, they cause high-income taxpayers to shift their savings to tax-advantaged assets - a major reason why President Barack Obama proposes capping the tax deduction for retirement saving.
A more radical proposal would convert the tax deduction into a means-tested and refundable matching government contribution - deposited directly into a taxpayer's individual retirement account (IRA). Taxpayers are more responsive to matching incentives than they are to tax incentives, because the former are easier to understand and more transparent.
Lack of coverage in employer-based plans and insufficient personal savings leave more than one-third of all households (and more than 75 percent of low-income households) entirely dependent on Social Security for their retirement income.
Addressing the looming retirement crisis requires increasing worker coverage in employer-based plans. Here, automatic enrollment, unless workers opt out, has proved effective, boosting employee participation to more than 90 percent. Indeed, recent research indicates that automatic enrollment is much more effective than tax incentives for increasing retirement saving.
Laura Tyson, a former chair of the US President's Council of Economic Advisers, is a professor at the Haas School of Business at the University of California, Berkeley. Copyright: Project Syndicate, 2013.www.project-syndicate.org. Shanghai Daily condensed the article.
More than half of all workers (and more than 60 percent of low-income workers) are at risk of lacking sufficient savings to maintain their living standards after they stop working. In a recent international comparison, America's retirement system received a passing grade of C; but, for a large and growing number of Americans, the system is failing.
The slow recovery from the Great Recession has exacerbated the challenge. Homes are most Americans' major retirement asset, and, despite a recent pickup, housing prices are still 28 percent below their 2006 peak, while 28 percent of all homeowners owe more on their mortgages than their property is worth.
Discretionary employer retirement plans are a major pillar of America's retirement system. But nearly 16 million Americans are either unemployed or have dropped out of the labor force, while more than half of the jobs created during the recovery are low-wage positions that usually do not offer such plans. By contrast, most of the 625,000 public-sector jobs lost during the recovery offered generous pensions.
Nearly 60 percent of all employed private-sector workers aged 25-64 are not covered by employer retirement plans, and coverage rates vary by income: 73 percent of all workers in the top earnings quartile are covered by such plans, compared to only 38 percent in the bottom quartile. Plan participation also varies by income, with low-income workers much less likely to participate than high-income workers.
Lack of universal coverage
The lack of universal coverage also means that workers move in and out of plans as they change jobs; more than one-third of all households end up with no employer-based pension coverage. By contrast, in several other countries, mandatory employer and employee participation in national employer-based plans means nearly universal coverage.
Personal retirement savings, another pillar of the US retirement system, are inadequate for most households, partly because the decades-long stagnation in median wages has made it difficult to save. One-third of Americans aged 45-54 have nothing saved specifically for retirement. Meanwhile, three-quarters of near-retirees have annual incomes below US$52,201 and average total retirement savings of less than US$27,000.
The United States relies on generous tax incentives to encourage personal retirement savings, but these incentives are poorly targeted and yield limited returns. More than 80 percent of the value of these incentives goes to the top 20 percent of taxpayers, who earn more than US$100,000 a year.
Moreover, while the incentives cost the US Treasury nearly US$100 billion annually, they induce little new saving; instead, they cause high-income taxpayers to shift their savings to tax-advantaged assets - a major reason why President Barack Obama proposes capping the tax deduction for retirement saving.
A more radical proposal would convert the tax deduction into a means-tested and refundable matching government contribution - deposited directly into a taxpayer's individual retirement account (IRA). Taxpayers are more responsive to matching incentives than they are to tax incentives, because the former are easier to understand and more transparent.
Lack of coverage in employer-based plans and insufficient personal savings leave more than one-third of all households (and more than 75 percent of low-income households) entirely dependent on Social Security for their retirement income.
Addressing the looming retirement crisis requires increasing worker coverage in employer-based plans. Here, automatic enrollment, unless workers opt out, has proved effective, boosting employee participation to more than 90 percent. Indeed, recent research indicates that automatic enrollment is much more effective than tax incentives for increasing retirement saving.
Laura Tyson, a former chair of the US President's Council of Economic Advisers, is a professor at the Haas School of Business at the University of California, Berkeley. Copyright: Project Syndicate, 2013.www.project-syndicate.org. Shanghai Daily condensed the article.
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