Hasta La Gadget!

Our policymakers are looking for ways to encourage older Americans to save more for retirement. How about leading by example?

The retirement outlook for most older Americans today is tenuous (Quinn & Cahill, 2016). Over the past 30 years we have witnessed an unprecedented change in retirement income sources, perhaps most notably a switch in the private sector from defined-benefit (DB) pension plans to defined-contribution (DC) plans, like 401(k)s. While DC plans do have some benefits — they are portable when one changes jobs and the amount of assets accumulated is transparent — DC plans expose workers to both market risk and longevity risk, both of which were traditionally assumed by employers in DB plans. The default position is that, going forward, older Americans will be more exposed to risk later in life and will need to take action to insure against it.

Older Americans today also face a Social Security program that has undergone substantial changes over the past 30 years. For one, the Full Retirement Age (FRA) was increased from 65 to 67 for individuals born after 1959, and the increase has been occurring gradually over time starting with those reaching age 62 in 2000 (U.S. Social Security Administration, 2016). Other pro-work changes have occurred as well. The Earnings Test — a calculation that reduces current benefits if earnings exceed a threshold — has been eliminated above the FRA, and the Delayed Retirement Credit — the amount that monthly benefits increase for each month benefit receipt is delayed — is now actuarially fair for a representative worker. By incentivizing continued work, policymakers are sending a signal that it may be wise to postpone retirement.

The traditional third pillar of retirement income is individual savings, and the news on this front is sobering. Excluding home equity and the value of defined-benefit pensions, most workers report having less than $25,000 in financial assets, as do approximately 40 percent of workers aged 45 and older (Helman, Copeland, & VanDerhei, 2016). When considering 401(k) balances, among the approximately half of workers with a plan the median account balance for those aged 55 to 64 is roughly $110,000, enough to purchase a joint and survivor annuity of approximately $500 per month (Munnell, 2014). Combined with the medium-range Social Security benefit amount of approximately $1,500 per month (Board of Trustees of OASDI, 2015), most older Americans will be living benefit check to benefit check in retirement, so to speak.

One might reasonably ask how we got ourselves into a position where most of us will have to choose between a lower standard of living in retirement or continued work later in life. Policymakers, in particular, have been concerned about low savings rates for some time, and are currently seeking creative ways to promote savings, such as through automatic enrollment in employer 401(k) plans and even state-level plans. These all sound like good ideas and recent evidence points to some degree of effectiveness (Munnell, 2016).

A more basic starting point might make sense, though. Consider one measure of our federal government’s own savings rate — the budget deficit/surplus as a percentage of Gross Domestic Product (GDP; a measure of the total goods and services our country produces each year) . Over my lifetime, since 1971, this rate has been on average negative 3 percent (Office of Management and Budget, 2016). It doesn’t take an economist to figure out what your financial outlook will look like if on average you spend more than you earn every year. What is worse, most recently our federal government’s savings rate exceeded negative 5 percent in each year from 2009 to 2012, with an eye-popping negative 9.8 percent in 2009, followed by negative 8.7 percent in 2008, and negative 8.5 percent in 2011. Our savings rate was negative 2.8 percent in 2014 and negative 2.5 percent in 2015 — six years after the official end of the Great Recession in June 2009 (Rich, 2013). These percentages are depressing, and not just in the sense that they bring down assets.

The dollar amounts sound even worse. Last year our federal government spent $438 billion more than it collected, an amount that we have surpassed every year since 2007 (Office of Management and Budget, 2016). In 2009, our federal government spent an astonishingly $1.4 trillion more than it collected — in just one year — followed by $1.3 trillion in both 2010 and 2011, and yet another trillion in 2012.

Some will argue that a comparison between the way our federal government operates and the way a household operates is different. For one, the federal government has the power to tax and, somewhat justifiably, we have all been the beneficiaries of such deficits, so it makes sense for us to be stuck with the tab. Our federal government also has the ability to print money and monetize our debt. Both options, while feasible, risk serious adverse consequences.

I see things differently. If our policymakers really want to encourage fiscal responsibility and promote savings, perhaps it’s time they lead by example and stop spending beyond their means, too.

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