Art by JCiardielloSome talk about there being a retirement savings “crisis.” I think that may be a little hyperbolic. But saving for retirement has gotten a lot tougher over the last15 years. And, with a huge hole where the federal budget used to be, our policy options have gotten a lot more limited.
Here’s my take—beginning with the three basic facts I think are critical to our understanding of the current situation.
Fact #1 – long-run decreases in returns have significantly driven up the cost of saving for retirement
The returns to savings are going down. And because of that, it costs more to save for retirement. A lot more—like 25% to 50% more than it used to. The effect is easiest to see in defined benefit plans, where decreases in interest rates have, since 2000, doubled/tripled the cost of providing $1 of benefits.
The long-term decline in interest rates—largely driven (I believe) by the aging of first world populations—has been followed by a (more or less permanent) decline in returns generally. This long-term decline in returns means that $1 saved today produces a significantly smaller account balance at 65, and buys a smaller annuity, than it did, say, 15 years ago.
Bottom line: It used to be that saving 6% to 8% a year over a career would produce an adequate retirement income. Now you need save at least 10% to 12%.
Fact #2 – employees will have to pay for any additional retirement saving
Pretending that “the employer will pay for increased retirement saving” is naïve. In any reasonably efficient market—that is, as long as you’re not dealing with a public utility or the government—increased retirement benefits can’t be paid for by the employer, because the employer’s cost of capital and the price of its goods are both determined by the market.
You could “make the rich pay,” but there’s kind of a long line of “virtuous policies” we’re already going to make the rich pay for—like education and infrastructure and medical care. Sooner or later you are going to run out of other people’s money. And Republicans are going to fight you every step of the way on this.
Fact #3 – workers don’t have any “additional” money to save
According to Pew, the real wages of American workers haven’t increased in 40 years. So any increased retirement savings is coming out of a fixed pie: inducing workers to save more for retirement is going to result in them spending less money on other things. We don’t know what those other things are. How can we possibly know that it is better for them to save more for retirement than to spend money on those other things?
We have to face the fact that retirement savings and policies to encourage it exist in a world of tradeoffs—if you have more retirement savings you are going to have less of something else. Crudely: for most workers, increased retirement savings equals a cut in their current standard of living. NEXT: In this context, what are our options?