For decades there’s been a festering retirement crisis in America.
Congress has repeatedly tried to resolve the retirement crisis via stop-gap, incremental efforts. It has created new retirement accounts, like Roth IRAs to benefit lower income workers, as well as tax-advantaged health savings accounts (HSAs) to help pay healthcare costs. It’s made it easier for small businesses to offer retirement plans, and it’s even allowed employers to auto-enroll employees.
Nevertheless, the retirement crisis has persisted. Roughly half of Americans say they don’t have enough saved to maintain their standard of living once they stop working, that they don’t have retirement accounts and that they rely on Social Security for half of their retirement income.
President-elect Joe Biden’s ambitious retirement promises—ramped up Social Security benefits and shunting some tax advantages from the upper-middle class to help lower wage workers—likely won’t go anywhere in a divided Congress. There is some hope that the Biden administration could pass an expanded version of 2019’s SECURE Act, although it would be yet another bandaid. The problem seems to require divine retirement intervention.
With that in mind, Forbes Advisor asked 10 leading retirement experts if they were God of Retirement for a day, how would they improve your retirement security.
Strengthen Social Security
Two experts we spoke to focused their hypothetical omnipotence on fixing the retirement crisis via the nation’s existing pension program, Social Security.
Sarah Newcomb, director of behavioral science at Morningstar, believes that the retirement system we have now asks too much of most people. While people are mostly focused on keeping a roof over their head, no effort is made to teach them how to organize their finances and save for retirement.
“The combination of short-term thinking and lack of financial knowledge creates a situation where people are set up to fail because young people can’t imagine being old, so they don’t save, and by the time they realize it’s an issue, it’s far too late to adequately prepare,” said Newcomb.
Social Security cuts through that disconnect because contributions are automatically taken from most workers’s paycheck, and you receive an annuity once you decide to claim benefits in retirement. The trouble is that Social Security doesn’t provide enough to live on for most people, providing only about 40% of their pre-retirement income when it’s estimated many will need about 70%. To address this discrepancy, Newcomb would beef up the program.
“I would expand Social security and make larger contributions to such funds as a standard deduction from every paycheck,” she said. “If workers knew they were assured a living wage in their later years, the reduction in overall stress and increase in life satisfaction may likely have a positive effect on worker productivity since financial stress results in billions of dollars per year in health care costs and lost productivity today.”
Catherine Collinson, chief executive of the Transamerica Center for Retirement Studies, would shore up the finances of the Social Security Trust Fund. This fund is slated to run dry in 2035, according to the latest Social Security Trustees report, at which point monthly benefits paid out to current retirees would immediately drop by about a quarter.
“There’s no silver bullet solution,” said Collinson. “But there needs to be a very thoughtful eye toward the vulnerable and those at risk of falling into poverty.”
Collinson’s latter concern would preclude ideas like raising Social Security’s full retirement age, which would not only reduce benefits but also shift a greater burden on those unable to keep working later, namely blue-collar workers.
“Policymakers have to come together. There needs to be a bipartisan approach,” she said
Improve Existing Retirement Accounts
Much like the Gods of Greek myth, Alicia Munnell, the director of the Center for Retirement Research at Boston College, was more conflicted.
On the one hand, Munnell agreed with Newcomb and Collision that Social Security needs help. But she also wanted to do something about how workers save on their own via employer-sponsored retirement plans.
While raising revenues to pay Social Security’s promised benefits, Munnell said she would ensure that every American had an individual retirement account (IRA) via their job. “That is, pass federal automatic IRA legislation,” she said. This is a strategy Mike Mansfield, program director at the Aegon Center for Longevity and Retirement, also supports.
Under this scenario, businesses would either enroll their employees in a plan they administered themselves, or workers would be enrolled in a government-administered IRA plan. Oregon operates an auto-IRA plan that works this way, for example.
Michael Guillemette, associate professor of personal financial planning at Texas Tech, agreed that auto-enrollment is a key step but needs to be more aggressive. Currently, the typical default contribution level for most plans is 3% of salary.
“I would make the default contribution rate for 401(k)s 10% and the default investment a target-date fund for all new hires,” said Guillemette. “This nudge would be helpful as employees could change their contribution rates and investment allocation, but most wouldn’t.”
Christine Benz, director of personal finance at Morningstar, would adjust the contribution limits for retirement plans. As it stands today, you’re allowed to save nearly four times as much every year in a 401(k) account than in an IRA. Benz thinks these annual contribution limits should be equal.
“There would be a single amount that you could contribute annually for retirement, regardless of whether you have a company retirement plan or not, regardless of where you made the contribution,” said Benz. “That way, people with gold-plated company retirement plans could keep on using them whereas those without a plan or those with poor plans would have a decent avenue for retirement savings.”
“I would get rid of lifetime required minimum distributions altogether,” Slott said. “It’s just an annoyance to older people to figure out how much they have to take out of one account or another.”
Strengthen Financial Education
Rather than focus on making existing programs work better, three of our experts would look to retirement savers themselves, imploring each of us to develop good financial habits as early as possible.
To their way of thinking, the ingredients for a secure retirement already exist—we just need to actually use them. The retirement crisis, then, is a problem of information and action, rather than design.
John Boroff, director of retirement and income solutions at Fidelity, would use his powers to create better, more comprehensive financial education.
“The first thing that pops into my mind would be teaching people the importance of starting to save early,” he said. “The power of compound interest over as long as possible a time period is really powerful. That, combined with highlighting how little a 1% change makes to your actual take home pay would be the things I wish I myself had recognized at 22.”
There’s a reason why this is a tantalizing solution. A 25-year-old that saves $500 a month with a 6% interest rate would have about $930,000 by the time they turn 65. If that same person started at 35, they would only end up with around $474,000.
Help People Get Started with Savings
Of course, that’s easier said than done. The average household helmed by someone under 35 has about $3,500 in checking and savings accounts, according to the Federal Reserve, meaning they’d have to part with a decent chunk of their cash each month. Still, saving something is better than nothing at all.
That’s a point that resonates with Shark Tank’s Kevin O’Leary. “The hardest part is actually to start saving,” he said. “It’s not about the amount to do it the first time.”
O’Leary’s plan would be to have parents incentivize their kids with matching funds. Once your kid turns 18, O’Leary said, parents should double whatever their children put away for a period of time. If your child saved $100, you would add $100 to their account. This would provide the positive feedback kids need to get going and keep saving after parental contributions ended. And if you can’t quite afford $100, start with what you can. The most important thing is to get started.
Laura Varas, chief executive officer of Hearts & Wallets, thinks non-retirement savings need to be prioritized, too. People have all kinds of near-term needs—home mortgages, auto loans, emergency savings, a fun vacation—that need attention, too. Minimizing other financial goals or focusing solely on 401(k) and IRA balances won’t necessarily result in healthier retirement savings.
“Savers need motivational goals that are reasonable,” said Varas. “That’s why Weight Watchers works: Wine or desserts aren’t forbidden totally; moderation is key. Save for emergency funds, for a child’s college, for a home, and heck, after Covid-19, everyone wants a vacation! Small joys are important. As long as we build them into our budget. Life is not all about retirement.”
Ending the Retirement Crisis
Each of the fixes for the American retirement crisis our panel of experts suggested above has its own limitations.
Bigger payroll deductions funding larger Social Security checks would take money out of people’s pockets today. Higher retirement plan contribution limits are no help for people who don’t have a retirement plan. And getting rid of RMDs isn’t terribly useful for people who actually need the retirement paycheck they provide.
There’s no silver bullet to end the retirement crisis in part because each of us has our own path to retirement. But we can all make moves today, some of which may even be inspired by the goals above, to increase our retirement security tomorrow.