Changes for an equal opportunity retirement


Over the past few decades, how Americans prepare for retirement has changed, shifting the responsibility for things like portfolio choices and risk management to workers.  In response to these changes, the American retirement system should be modernized with means testing for social security benefits and mandatory saving for workers above a threshold.  While ultimately the responsibility will always rest the individual, these changes would ensure availability and access to a minimum of retirement planning for all.

A logical way to begin this modernization of the American system is to implement some sort of means testing in for social security benefits.  The top 10 countries already do some sort of income/wealth based benchmarks for benefits.  By phasing out the benefits with income, the top earners would be forced to save more.  This is especially attractive option given the expected short falls of social security, though there are political considerations due to what would essentially be a transfer of wealth.

Adjusting people’s social security payments won’t be enough by itself to make up for the deficit.  The most direct way to increase saving for retirement is to make people save more.  The United States should update the current system with the addition of mandatory saving for all workers above some poverty threshold. The groundwork for such a program has already been laid.  In January, shortly after the state of the Union address, President Obama announced the MyRA.  The account can be opened with a minimum of $25, and is effectively an IRA that is invested only in treasuries. The account allows for the accumulation of $15,000 over 30 years until it is rolled into a Roth IRA.  The Marketwatch article mentions that a key difference between workers with savings and those without is access to such an account.  This account is a sort of IRA on training wheels, allowing savers time to learn and gain experience building wealth for the future.

There are some drawbacks to a mandatory savings program however.  As seen in Australia, who use a similar program has resulted in lower wages.  The United States certainly doesn’t need lower wages, but this can be avoided by not implementing Australia’s mandate that employers contribute at least 3% of pay to the plan.  Instead the a portion of the amount of social security that is phased out due to means testing can just be discounted back to its present value and then saved.  In this way, the United States can ensure American’s that make enough money to be saving are saving something for their futures, with out effecting wages.

Americans are not prepared for retirement.  Roughly a third don’t even have $1000 saved, and the majority have less then $25,000.  It should come as no surprise that when world rankings of retirement preparedness were released in February 2014, the United States ranked 19th.  Part of the problem is that people don’t understand the complex plans and decisions that need to be made.  However the United States can reverse this trend by implementing policies that have already been proven to work in other countries.


3 thoughts on “Changes for an equal opportunity retirement

  1. Max Huppertz

    Interesting idea! In the long run (I’m thinking a Solow-type growth model) foregoing some wages in favor of more savings might even pay off, although if you can have higher savings without reducing wages that would obviously be even better. I wonder whether employers would cut wages (or postpone raises, since cutting wages tends to be kinda hard) one-to-one for retirement contributions they might be mandated to make. Maybe you would have a higher effective wage if your employer put off increasing your wage but matched your retirement savings a little more, instead of you having to save a lot more because your employer doesn’t match at all. Not sure though.

  2. awerther

    Great post. It is crazy to think that over a third of Americans don’t even have $1,000 saved for retirement. Clearly something needs to be done about this and I think some sort of mandatory saving could work. It would obviously be great if this can happen without lowering wages.

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