Retiring Broke – Nearly Half of Americans Run the Risk – What Now? This may not be a popular argument, but I’m just going to come right out and say it: America’s retirement system is broken. We moved away from employer-funded defined benefit (DB) retirement plans and provided American workers the “opportunity” to save for retirement on their own in defined contribution (DC) plans (mostly 401(k)s and 403(b)s). In pulling away the pension safety net, however, we may have failed our workforce, or at the very least, failed to offer them an optimal solution for achieving retirement security.
The reality is, the 401(k) wasn’t meant to replace pensions — they were created as a tool to supplement DB plans. In fact, 401(k) advocates actually say they regret that it has become the primary vehicle for Americans to save for retirement. Just 13% of workers have DB plans, compared to 38% in 1979, according to The Wall Street Journal. The shift from DB offerings to a reliance on DC plans has benefitted employers, though, in the sense that it has passed much of the cost of offering a retirement benefit on to employees.
Therein lies the rub. Employers are no longer footing the bill for workers’ retirement, but workers have not assumed nearly as much of the responsibility for their future financial security as they should. No matter how much we impress upon them the importance of saving — the NEED to save early and often — most workers simply aren’t doing it. Begging and pleading isn’t prompting them to save more, and the idea of a retirement spent in poverty isn’t getting the job done, either.
And that’s mostly among larger employers that offer their workforce access to a 401(k) plan at all. Many smaller employers do not offer retirement plan benefits, citing cost as a chief obstacle to doing so. So here’s a burning question: Should we keep perpetuating a system that isn’t available for all employees, and doesn’t seem to be getting Americans any closer to the “dream” retirements we’re all working so hard for?
Many Americans May Retire Broke
To say the least, the outlook for retirement in America is rather bleak. Call it sensationalism — big, ugly statistics garner more readers — but one of this week’s headlines on CNBC read “42% of Americans are at risk of retiring broke.” For those doing the math, that’s nearly half. Really? Nearly half of Americans don’t have enough saved for retirement? Nope. In fact, they have less than $10,000 stashed away for their post-working years. What?? How can that be? Perhaps a more compelling question is, Why is that?
CNBC cited data from a survey conducted by personal finance website GoBankingRates, which polled more than 1,000 adults online in February. Now, that’s a rather small sample size, so the results might be skewed, but there’s no denying, they may be indicative of a larger issue. As the CNBC article notes, “At this rate, retirement is more of a fantasy than a reality for many people in this country.” That certainly doesn’t inspire a lot of confidence in our current retirement system now, does it?
Granted, some of it is just plain old fiscal irresponsibility. I’m not saying Americans aren’t partly to blame here. We all know we’re supposed to save for retirement, and that, if our workplace offers one, we should start contributing to the retirement plan from our very first paycheck (eligibility requirements notwithstanding). That’s doesn’t mean we do it — a large majority don’t. (We also know we shouldn’t eat fat and sugar-laden foods because they’re bad for us, but we do that anyway, too.) Put another way, just because we know better doesn’t mean we’re going to act on that knowledge. Often, it’s easier to make the decision not to do something, especially if we think it’s hard. Dieting and saving money? In most people’s opinions, yeah, those are hard things to do.
Respondents to the GoBankRates poll gave two primary reasons they have not stashed away money for retirement. More than 40% said they don’t make enough to save, and nearly 25% said they are already struggling to pay bills. Hmm, okay, maybe it’s a budgeting issue. Maybe we’re all over-indulging in flat-screen televisions, fast fashion, and drive-through coffee instead of saving our hard-earned dollars for more important things, like our lives after work.
There may be some element of truth to that. We’re an instant-gratification society. Why save for a tomorrow we can’t envision when we can have the latest and greatest gadgets in our hands (on credit) today? After all, we can save “later.” Except that implies being prepared — and it’s not surprising, few of us are prepared when “later” comes around a lot sooner than we planned (or didn’t).
Additionally, learning how to budget and manage money is key to achieving personal finance goals. But it’s something many of us simply haven’t been taught. To be sure, workplace financial wellness programs can help bridge the knowledge gap. It’s a positive step many employers are taking to reduce financial stress in the workplace and help their employees be more happy and productive. According to Aon Hewitt, 72% of employers have either created or are in the process of creating and rolling out financial wellness programs.
Okay, so workplace financial wellness is a great way to improve money literacy and help employees understand how to spend their money more wisely, as well as “find” wiggle room in their budgets to save for retirement. All fine and well. But here’s another thought: what if Americans simply aren’t earning enough to keep up with the cost of living, let alone sock money away for an unknown future? Here are some more startling statistics: 70% of Americans live paycheck to paycheck, and 64% couldn’t cover a $1,000 emergency without borrowing money. What’s more, the average employee spends 24% of their take-home pay on consumer debt payments. We’re drowning in student loan debt, too. According to the personal finance website, Make Lemonade, cited in Forbes, there are more than 44 million borrowers with $1.3 trillion in student loan debt in the US alone. Yes, that’s trillion, with a “t.”
But that isn’t even the whole dismal picture. While unemployment is at 10-year lows, wages have remained relatively stagnant since the 2008 financial crisis. There are a lot of factors at work: technological innovations, weaker labor unions, and the globalization of the workforce. All of these have also caused wage gains to be higher at the higher end of the pay scale, meaning the top brass is being rewarded, while rank-and-file workers’ paychecks aren’t getting any bigger. Anecdotally, I have also heard of companies that haven’t given many, if any, of their employees pay raises in years.
So if employees are feeling the pay squeeze, and the cost of living is rising while their take-home pay remains the same, it’s no wonder they’re struggling, and that they believe they can’t afford to save for retirement. How can they?
We Need To Do Better
All of this said, we’re doing the best we can with a flawed system, but that doesn’t mean there isn’t room for improvement. To be sure, we’ve implemented plan design features like automatic enrollment and automatic contribution escalation to help combat inertia and get employees saving for retirement, and increasing those savings over time. A majority of employers either offer or intend to offer financial wellness programs to help educate employees and improve financial literacy. Many sponsors partner with retirement plan advisors to help educate participants and help them be better savers and investors. A majority have thriving, interactive, technologically driven employee education and communication programs designed to foster awareness of the benefits of, and engagement with, the plan. All great, positive steps in the right direction.
But at the end of the day, the statistics show that even with all we’re doing right, our current retirement system still misses the mark. Personally, I believe we need to take better care of our workforce, and better care of each other in general. If that means raising wages to help improve workers’ feelings of financial security so they believe they can afford to save for their future, then we should do that. If it means implementing some sort of hybrid DB/DC plan structure where employers help foot some of the bill for retirees beyond a company match, then that’s something we should consider.
The data clearly shows we need to — and should — do better by America’s workforce when it comes to helping them prepare for retirement. Putting the onus 100% on employees isn’t the answer. There has to be a better way.
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