This article in MarketWatch gave us a sober look into America’s retirement problems:
There’s a big difference between not saving enough and not saving at all.
You will only find out how big that difference is if you live it out, and a new study suggests that more people than ever are doing just that.
The latest COUNTRY Financial Security Index released Thursday showed that one in four Americans, across all age groups, is not saving at all for retirement. A majority of respondents (55%) said they either are not participating in a workplace sponsored retirement plan like a 401(k) or they don’t know if they are in a plan.
When more than half of Americans are not saving for retirement (or are simply not engaged in the process), that is a major problem. This also raises the question:
I can think of two major reasons:
1. Financial Illiteracy; and
2. Today’s Cost of Living Prevents Savings.
Financial illiteracy is a big term to lump in numerous reasons why people aren’t saving. This includes people not understanding concepts like compounding interest (interest adding to interest which, given enough time, leads to great returns). The great Richard Russell discusses compounding interest here in one of his greatest writings. Unfortunately, things like savings and compounding interest are typically not taught in public schools in the way that they should. Also, since Americans typically lack “financial education” (for lack of a better term), these concepts are not passed on to the youth–particularly poorer and middle class folks.
In other words, financial illiteracy compounds over time, too.
Another example of what I refer to as “financial illiteracy” is the mistaken belief or reliance that someone–whether it is the government, or a corporation–will “take care of me” in retirement. Some folks think that a very small amount of savings, when added to social security benefits, will be enough to retire. The problem with this is that social security is flirting with insolvency.
Neither Medicare nor Social Security can sustain projected long-run programs in full under currently scheduled financing, and legislative changes are necessary to avoid disruptive consequences for beneficiaries and taxpayers. If lawmakers take action sooner rather than later, more options and more time will be available to phase in changes so that the public has adequate time to prepare.
Yes, the right-wing, Koch Brother-funded think tank known as the Social Security Trustees have concluded that the current path of Social Security is unsustainable and Congress needs to make changes (such as cut benefits, raise taxes, or hike the retirement age) in order to push of insolvency for a few years. In other words, Congress needs to break its promises with respect to Social Security to keep the Ponzi Scheme going for a few more election cycles.
Social Security, in its current form, won’t be there for most people working today who are not close to retirement age. This is an unfortunate truth.
Other types of pensions, which are a rare breed these days outside of the public sector, have similar woes. Many public sector pensions–from San Jose to Chicago to New Jersey, Detroit, and more–have also promised too much to too many, with too few funds. Many private sector companies have phased out the pension in favor of a 401(k) with contributions, shifting savings responsibility from the corporation to the individual.
In some ways, the responsibility shift is better. By this, I mean that ownership of one’s own retirement is a better means of having a secure retirement than relying on someone else’s promise. What happens if the promise is broken and one simply relied on the pension as the sole means of retirement funds?
The other general problem that I see with retirement savings is the high cost of living eats into people’s disposable income to the point where retirement savings is difficult, if not impossible. I’ve discussed issues with the cost of living numerous times here. The basic premise is that the cost of the most important things needed for life (food, fuel, education, and health care) have steadily risen over the years. Wages have not kept up with the growth.
The canard pushed by the left is that a simple minimum wage hike will solve all of these problems. Not so fast, my friend. A hike in the minimum wage–like government policies which regulate and increase the cost of doing business–raises prices for goods, which will eat into any “raise” granted by government fiat. This will hurt all wage earners, particularly those at or just above the minimum wage.
What really needs to be done is to have government get out of the way of business and cut regulations which raise the cost of doing business, freeing up capital to stay within the business itself and permit jobs which pay higher than minimum wage to be created. Of course, this takes time and wage increases (in theory) come with productivity increases, which are a function of a given business meeting demand for a good or service. A freer market in terms of business regulations should also permit more entrants into the given business, which would be a net gain for workers.
Even so, workers should begin to save for retirement today. As demonstrated by Richard Russell, time is nearly as important of an asset for savings as principal, when compound interest is factored in. Young workers (even those making minimum wage) socking away $50 a week can, over time, compound that money into a million dollars. That assumes no raises, no financial windfalls, and a return of 10% (dividends and growth), which is not particularly aggressive.
In other words–no matter what your income is or where you are working–start saving today.
As always, free markets are better markets.