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To Fix Retirement Crisis, Give Every Baby $10,000

(Bloomberg Opinion) — A growing number of US workers say it’s becoming more difficult to save for retirement, according to Charles Schwab’s latest retirement survey. Just 37% of respondents believe they are “very likely” to reach their retirement goals, down from 47% a year ago. The average savings target also rose to $1.8 million from $1.7 million last year.

Workers face two big hurdles when it comes to saving for retirement. One is money. The median full-time wage in the US is roughly $57,000 a year, which doesn’t leave much room to save, particularly for the half of full-time workers — more than 60 million of them — who make less than the median wage. A second one is time. Even those who can afford to save for retirement typically don’t earn enough to do so until well into their 20s or 30s. Most people are lucky to have a 30-year runway to save and invest regularly for their future.

With limited time and money, amassing $1.8 million is a nearly impossible feat. But with a little imagination, it’s possible to give workers more of both and with it a dignified retirement.    

As things stand, retirement math doesn’t add up. Assuming workers can grow their savings by 7.5% a year after inflation, which is roughly what US stocks have delivered historically, they would have to save $16,000 a year for 30 years to accumulate $1.8 million in today’s dollars. Most people don’t earn enough to save that much.   

And that’s the best case. Most people also don’t have the stomach to invest entirely in stocks. They’re more likely to own a diversified portfolio of stocks and bonds, which dampens the volatility of an all-stock portfolio but also the growth. Diversified funds have returned about 60% as much as US stock funds over the past 10 years through 2021, according to Morningstar, implying a return closer to 4.5% a year after inflation. At that rate, workers would have to save closer to $29,000 a year for 30 years to reach the same retirement target, a savings rate even fewer workers can afford.

A more efficient way to save for retirement is to combine the growth of stocks with the power of time. If individuals were able to invest $10,000 in stocks at birth, that money would grow to roughly $10 million in 70 years assuming a growth rate of 10% a year before inflation that compounds quarterly, the equivalent of $1.8 million in today’s dollars based on a growth rate of 7.5% after inflation. It’s a fraction of the savings that would be required to reach the same target over a working lifetime and would eliminate the need for additional retirement savings for the majority of people.     

Individuals can’t do that on their own, and most families can’t afford to set aside $10,000 for newborns. But the federal government can, and it wouldn’t cost as much as you might think. Roughly 3.7 million babies are born in the US every year. Putting away $10,000 for each of them would cost the federal government $37 billion, adjusted periodically for inflation, a small fraction of the more than $1 trillion the government spends on Social Security every year. Funding everyone’s retirement at birth would lower the burden on Social Security and possibly replace it entirely.

It might cost even less. The program could be based on need, so that individuals would receive the difference between $1.8 million in today’s dollars and their retirement savings at age 70. Those who manage to save more than $1.8 million on their own would be ineligible, and any unused amounts would fund future contributions.

One obvious drawback of a need-based system is that it could be a disincentive to save, but it’s hard to imagine that willingness to save would be as big an obstacle as ability is today. Even if it were, the federal government is better suited to handle retirement savings given that it can achieve with just $10,000 what would otherwise take a lifetime of investing.   

Some might hesitate to entrust retirement savings to the stock market, but that’s precisely where they belong. Yes, the stock market is volatile and uncertain in the near term, but it has been quite reliable over long periods, and a government-based retirement program would effectively have unlimited time. The investment could resemble a broad market tracker like the S&P 500 Index, which would be cheap and easy to manage.   

Barring a substantial rise in wages, the retirement shortfall won’t correct itself. The US stock market is the envy of the world, and the federal government has the time and resources to leverage it for the benefit of everyone’s retirement. It’s time to put those untapped assets to better use.

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To contact the author of this story:

Nir Kaissar at [email protected]

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