Help People Save For Retirement

We are headed for a major retirement crisis. If we do not act soon, the number of poor or near-poor people over age 62 will soar to 21.8 million people by 2045—up 25% from 17.5 million in 2018. In the next 12 years, 40% of middle-class older workers will become poor and near-poor elders.

What can we do to prevent this onrushing tragedy? What policies will be bold and far-reaching enough to meet this critical moment? The answer might surprise you. But before I reveal a promising proposal circulating in Washington to address the situation, allow me to dispense with some of the go-to policy responses, which are regrettably insufficient to meet the crisis.

Why Not Just Expand Social Security To Solve The Retirement Crisis?

The most obvious response, expanding Social Security, is a critical step but won’t be nearly enough. Raising revenues to make Social Security solvent is imperative—we should have done it yesterday. Everyone needs a Social Security supplement. The average monthly Social Security benefit is about $1,500–less than what most Americans need to maintain their standard of living. Any possible combination of raising the payroll tax, raising the cap on taxable earnings, and taxing capital will do the job. Representative John Larson (D-Conn) has for years taken on the big, costly, and vital task of making Social Security solvent because it takes an act of U.S. Congress.

Unfortunately, today’s looming retirement crisis is so huge that making Social Security solvent and even expanding it won’t be enough to prevent this tidal wave of elder poverty.

Save Early And Often

It turns out, our parents’ advice to “save your money” is key to elder survival and prosperity. Simple math illustrates the amazing power of starting early and saving consistently. It marshals the most powerful force in finance, compound interest.

To get to $1 million by age 65, you can start saving $380 per month at age 20 consistently for 45 years with a 6% return. The magic is that a whopping 80% of that $1.0 million will come from investment earnings, not your own wallet or reduced consumption. Of course, this presumes you get paid enough to save that much—a pivotal requirement that can’t be taken for granted.

However, if you start saving $380 a month at age 50, you’ll only have $110,000 when you’re 65—not nearly enough to keep you comfortable in old age. Worse, only 38 percent of that money would come from return on investments, while the majority—$68,400—would come through daily scrimping and sacrifices to your quality of life. Starting at an older age may also require less risky investments and therefore lower returns. The earlier you save, the more the market does the heavy lifting.

To be on track for retirement, a 25-year-old employee earning average wages needs to save 16% of their pay each pay period in order to achieve a retirement-ready account balance of 11.1 times their final pay at age 67 (assuming a 6% return). Start at age 35 and you will have to save at least 25% of your pay. Start at 50 and you will need to save over half of your take-home pay. You see where this is going. It’s abundantly clear that while saving is critical, going it alone without a pension or policy support won’t be enough.

It’s Time For Universal Pensions

To truly meet this looming crisis head-on, we need a system where everyone, especially young workers, gets enrolled in a pension plan. Nearly half of Americans are not covered by a workplace pension plan.

A plan from the Economic Innovation Group is the only serious proposal in Washington that will cover most workers currently laboring without a pension. Every dollar a worker contributes will be managed in an efficient manner and the default fund will be diversified to get the largest risk-adjusted return possible. For eligible workers the government will add to the savings with a 3% matching contribution. Nobel prize winner Peter Diamond and Nicholas Barr support this approach. A large government plan can manage economic and demographic shocks better than a pure PAYGO system or a totally capitalized system.

This innovative blending of pensions and investment-driven savings offers our best current hope of stemming this impending crisis of elder poverty and economic precarity. You can learn more about the concept in this report. And if Washington is listening and learning, you’ll hear more about it soon.

Footnote: 

The tax rate for Social Security (old age survivors and disability insurance) is 6.2% for both the employer and employee and is paid on earnings up to a cap, which is $147,000 in 2022. Based on Social Security’s fascinating data in “Wage Statistics,” only 8 million workers out of 167 million wage earners made over $147,000 in 2021, but this handful is taxed as if they only earn $147,000. For instance, the 358 individuals who earn over $50 million a year (average earnings of $94,997,948.16) pay only 6.2% of $147,000 in Social Security tax. 

All workers need a restoration of Social Security’s promised benefits. Rep. John Larson (D-Conn.) and others are sponsoring legislation to get more revenue into the system to maintain current Social Security benefits. 

Social Security is the insurance base of our retirement plan, but it does not replace enough income in retirement to be relied on alone. Social Security replaces about 80% of pre-retirement income for lifelong low-wage earners and their families; 38% of pre-retirement income for middle-class workers; and less than 20% of pre-retirement income for the top 10%.

In the U.S. only the destitute retiree gets all their income from Social Security. The highest income retirees get one-third of their retirement income from Social Security, a third from pensions, and a third from assets. The bottom 40% of Americans over age 65 receive more than 90% of their retirement income from the PAYGO Social Security system.