Keep Calm and Save On

In case you hadn’t heard, Americans aren’t saving enough money and haven’t done so far a fairly long time. Half of all Americans have less than $10,000 in savings. [1] The lack of money left over after income is spent means less available funds to more securely buy large-ticket items like real estate and automobiles, invest in new or expanded businesses, or provide a nest egg for retirement. There are a number of reasons for the lack of savings: widespread financial illiteracy, too-easy credit, stagnant real wages, and, when talk turns to retirement, the availability of Social Security.

Social Security’s popularity in the public imagination has undoubtedly led some citizens to skimp on the responsibility of saving money during their laboring years, because even if they haven’t saved they’ll still have Social Security to fall back on. The problem is that when Social Security was enacted during the 1930s as a centerpiece in President Franklin Roosevelt’s New Deal plan to fight the ravages of the Great Depression, the objective was to provide an old-age pension to prevent aged Americans from becoming destitute when their ability to hold a job waned. The criterion for eligibility of 65 years of age was longer than the life expectancy of many Americans at the time (58 for men and 62 for women, according to the Social Security Administration. [2] This meant that Social Security was intended as a safety net for the old—many of whom would not be collecting for very long based on the actuarial tables—not as a long-term retirement plan as it is often viewed today. Today according to the Centers for Disease Control and Prevention, American men have a life expectancy that now reaches to their mid-70s and women have exceeded 80. [3]

While the substantial growth in the length and quality of life are to be applauded, without some major changes Social Security may not be able to deliver in the same way for future generations as it has for the first few generations of recipients. How bad is the disparity between what working Americans should have saved as opposed to what they have saved? $6.6 trillion according to a report issued last year by the U.S. Senate’s Committee for Health, Education, Labor, & Pensions. [4]

Another important concern about the lack of saving in American society is that, formerly, many employers provided their workers with pensions that were fairly simple calculations based on salary and years of service. The problem with defined benefit plans from an employer’s point of view is that they have become more expensive, especially as, like illustrated above with Social Security, their retirees continue to live longer, requiring their pensions to be paid out over a lengthier period of time. Many companies have reacted by pushing more and more—or the entire—burden of retirement and other benefits on to employees. For many poorly paid workers this might even extend into entering the public social safety net.

For those workers who have continued to receive an employer-provided retirement plan there has been more emphasis on defined contribution as opposed to defined benefit. The defined contribution style of plan usually means that the employer will provide a certain percentage to the employee to invest, or will match (usually with a stated limit) the amount of one’s salary selected by the worker. This type of plan has been well received by Wall Street since it moves huge amounts of cash into the market, and, at least in theory, holds out the possibility that through diligent investing an employee can earn higher returns than with the old-fashioned conservative pensions. The problem, however, is that many citizens aren’t particularly well-educated about investing, or don’t monitor their defined contribution plan (i.e. 401(k), 403(b), etc.) or individual retirement account (IRA) closely enough to navigate the volatility of the market and economic swings. The bottom line appears to be that the defined benefit plan offers a smoother, more assured path than the boom-and-bust potential of defined contribution plans, but these plans are being phased out.  In fact only 1 in 5 Americans will now receive a pension income during their retirement. [5]

What to do? Well, Americans certainly need to become more responsible about saving and do better as a society to become more financially literate. American workers may need to labor past 65 since many in that age-bracket can still make effective daily contributions in workplaces. We also might need to continue to ratchet up the age of eligibility for Social Security. These are all choices, however, that would be complicated with significant societal and political anxieties and unclear results.

What if we required Americans to save through a mandatory plan? A number of other nations like Australia, Netherlands, and Singapore require their citizens to save a certain percentage of their salary for retirement through automatic payroll deductions. While the prospect of anything “mandatory” seems to be at odds with the American emphasis on personal autonomy and individual rights, there are increasing voices that some sort of requirement to save will be necessary to remedy the paucity of the average American’s nest egg.

Laurence Fisk, the Chief Executive Officer of BlackRock, the world’s largest investment fund, threw his company’s support behind some type of mandatory savings plan earlier this year. On the political front Senator Tom Harkin of Iowa has proposed something called “USA Retirement Funds” according to Dean Kadlec in Time. [6] How this system would work and whether it would be mandatory or a more inclusive version of an IRA as opposed to a defined benefit plan is unclear at this point.

Alicia Munnell, who directs the Center for Retirement Research at Boston College and also served on the President’s Council of Economic Advisers and at the U.S. Treasury supports a mandatory savings plan as the most promising way toward garnering the sort of guaranteed income pensions or fixed annuities that characterized most 20th century plans. Ms. Munnell’s preference is for a plan “initiated by the federal government but managed by the private sector that will replace about 20% of preretirement earnings”.  [7]

Singapore’s Central Provident Fund (CPF) as explained by Joseph Cherian, an American finance instructor at that country’s National University, requires a whopping 36% of young workers’ income to be saved. Twenty percent comes from earnings and the remaining 16% from employers. As Singaporeans age, and the initial investments take shape, the percentage of the deductions lowers over time to less than 12%. There are several investment options including safe government-backed securities. There is flexibility in the system to make withdrawals from one’s account for big sticker items like housing, investment, health care, additional financial products, or college, but otherwise the system ensures a comfortable retirement for its citizens. [8] Singapore’s system is well-received by the population and, as the New America Foundation points out in an in-depth study of the CPF, the system has helped the nation achieve economic growth and become one of the key “Asian Tigers.” [9] A problem with drawing too much from Singapore, however, is that it is very different culturally than the U.S., and has a population only a fraction of the size. Singaporeans are also generally more responsive to direction and authority by the central government.

Australia’s experience may prove a better example of what we could learn and possibly adapt to American conditions. For two decades, with bipartisan support of the nation’s conservative and liberals, Australia has addressed its own concerns about the poor level of retirement savings by introducing the Superannuation Guarantee program. It is a compulsory program which has been so successful that the amount accumulated by Australian workers for future retirement has risen to $1.52 trillion dollars. While Americans have amassed $2.8 trillion, our population is 14 times larger than Down Under. Known to Australians as “supers,” the plan supplements the Social Security-like national pension. The pension is means-tested so the super may be a key part of some citizens’ long-term plan. The Superannuation began as a required 3% diversion of employee salary. It is currently at 9% and will be raised to 12% by 2020. A further voluntary option allows employees to have additional contributions—known colloquially as “salary sacrifice”—deducted to further feather one’s nest. But as Nick Summers points out in his assessment of Australia’s system in Bloomsburg Businessweek [10], what makes the supers somewhat like the current American system is its downside. The majority of Australians are investing their plans in the stock market or with the assistance of money management firms. This means that Australians could experience more market volatility or suffer from the self-interest of investment houses over time. Such conditions could deflate earnings in a period of extended bear markets or economic uncertainty.

The more rigid Dutch system combines the features of Australia’s dual Social Security-style fund with a mandatory pension plan. However the Netherlands requires the pension accumulations to be converted into an annuity upon retirement. The system also prevents the “leakage” that causes havoc in the U.S. system when owners of 401(k)s often draw large sums prior to retirement which are rarely recouped according to the New York Times. [11] (Too many Americans draw their retirement savings earlier than many other systems around the world allow, in effect gambling that they have saved enough.)

One more concern about pensions and contributory plans in the U.S. is what happens when public or private employers find themselves unable to keep up stated commitments to their funds. A new plan being pioneered in the Canadian province of New Brunswick aims to find an equitable means of sharing risk between the government, employers, and citizens that will produce more comfortable and predictable outcomes. Success in this key area of achieving a secure retirement is to create a transparent regulatory rules structure outlining potential allocations, cost-of-living-adjustments, and investments, and guiding how they would be calibrated based on economic conditions. [12]
Vernon Loke points out  in the New America Foundation paper on the CPF [13] , that supporters of strengthening the common good and social compact in American society should embrace a push towards national defined benefits plans because asset-based social welfare programs grow over time through investment as they are generally untouchable, whereas income-based social-welfare promotes immediate consumption. Having recipients who understand they will receive a benefit in the future while working to enhance that nest egg promotes the sort of self-control, discipline, and “delayed gratification” that can have other aspirational benefits to the economy, culture, and society. Simply receiving an ongoing income without the building of a secure future behind it leads to the sort of disposable, wasteful, and “live for today” mentality that contributes to a host of social problems in our country.

Kirk G. Morrison

Kirk Morrison is chairman of the American Solidarity Party’s National Committee.