Financial preparedness for retirement is a major challenge for many, if not most, US households. While economists disagree about the magnitude and depth of the issue, in general, consensus exists around the notion that improving retirement security should be a public policy goal.
For starters, retirement savings rates are abysmally low. The National Institute on Security Research reports that an estimated half of working age households do not own a retirement savings account. That is about 40 million households, both those in and out of the workforce, that have not put any assets toward retirement.
Income is a key factor in retirement account asset ownership rates. However, even among moderate-income tax payers, retirement preparedness is a cause for concern. Fifty percent of households in the second income quartile and twenty-five percent in the third highest income quartile do not own retirement accounts.
Data also suggests that among those with retirement accounts, accumulated wealth is far less than the projected amounts needed for retirement security. For example, only 1 in 5 households have more than their annual income saved in retirement accounts. Likewise, half of working household’s net worth amounts to less than their annual income.
Statistics aside, many tax payers are ill prepared for retirement and our system is ill equipped to change the trajectory for those nearing retirement. We can and should, however, renew retirement security efforts to help younger generations get ahead of this risk.
Retirement security is one of the many social policy goals embedded into our system of tax administration. However, the complexity of the tax code undermines the effectiveness of the savings incentives. One example is the Retirement Savings Contribution Credit, or “Saver’s Credit.” The credit provides a tax incentive to low and moderate-income taxpayers for contributions made to retirement accounts. It is intended to encourage saving, but only a small percentage of the eligible tax filers take advantage of it.
The nuts and bolts of how and for whom the tax code incentivizes retirement savings should be considered as Congress and the Administration debate tax reform. As a principle, the tax incentives should be simplified in order that the average tax payer understands the benefits offered and is rewarded for retirement saving.
Beyond tax simplification reform, more could be done to strengthen the household retirement security. Several recent reports outline challenges and proposals for responding to the current situation:
- The Bipartisan Policy Center Commission on Retirement Security and Personal Savings recommends, for example, specific actions to improve access to and benefits of workplace retirement savings plans.
- The Aspen Institute’s Financial Security Program’s report “Building a More Robust and Inclusive US Retirement System Amid a Changing Economy” recommends, among other ideas, making workplace plans more portable to reduce savings “leakage” – or taking money out of retirement savings – when a worker switches employers.
- The American Enterprise Institute’s Andrew Briggs suggests that government policies could make employer sponsored retirement plans more available and automatic to facilitate household retirement saving.
The policy ideas put forth in these reports each requires careful consideration but are, never-the-less, an important step toward rethinking retirement security policy. As we pause to recognize National Retirement Security Week I hope you will join in the conversation.