Economics of Retirement

Inadequate Retirement Savings for Workers Nearing Retirement

Due to lack of coverage and a systemic reliance on defined contribution plans, workers do not have enough saved for retirement.

ReLab’s policy note, Inadequate Retirement Savings for Workers Nearing Retirement, documents that the median retirement savings account balance for those nearing retirement is $15,000. 

Employer-sponsored retirement plans are intended to bridge the gap between Social Security and targeted retirement income. Unfortunately, in 2014, 35% of those nearing retirement did not have access to retirement plan, a share that has increased over the last 30 years.
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 In the 1980’s, 401(k) plans - or defined contribution (DC) plans - became widespread. For most workers in the private sector, they replaced rather than supplemented traditional pension plans, or defined benefit (DB) plans.  In theory, DC plans could enable participants to accumulate adequate wealth by the time they retire. But in practice, account balances fall short, reflecting spotty eligibility histories, non-participation, inadequate contributions and employer matches, pre-retirement withdrawals, high fees, and subpar investment returns. These faults are inherent to the DC system and cannot be fixed by regulation.

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 These low savings balances will not be enough to allow retirees to maintain their standard of living, a fact that is true at all income levels. 

August OWAAG Replacement Rates V2 framed 2 to upload

 The combined effects of cuts to Social Security benefits and the consequences of a broken DC-centric savings system has created a retirement crisis. Few workers without workplace retirement plans save for retirement. Without significant reform to the retirement system, many workers who reach retirement age will be forced to choose between working longer and suffering severe drops in their living standards in retirement. But many older workers cannot work longer due to physical or mental impairment, and those that are capable of working face a labor market unfriendly to older workers.

Rather than worsening the retirement crisis by cutting Social Security benefits, policymakers should both strengthen Social Security and expand retirement plan coverage. Guaranteed Retirement Accounts (GRAs) are individual accounts requiring employers and employees to contribute with a fair and effective refundable tax credit provided by the government. GRAs provide a safe, effective vehicle for workers to accumulate personal retirement savings over their working lives.

April Unemployment Report for Workers Over 55

Self-Employment Is No Solution for the Older Unemployed  Tweet: Self-Employment Is No Solution to the Shortage of Good Jobs for Older Workers #JobsReport @tghilarducci http://bit.ly/1WdPDaY

A smaller share of older workers are officially looking for work. The unemployment rate for workers aged 55 to 64 was 3.6% in April, down 0.3 percentage points from March. Older men’s unemployment decreased from 4.0% to 3.8%, and older women’s unemployment decreased from 3.8% to 3.6%.

Older workers have lower official unemployment rates than the national average, but face stagnating wages, growing long-term unemployment, physically demanding jobs, and age discrimination. One widely-advocated solution is for the unemployed to create their own jobs by becoming self-employed.

Near Retirees Average Household-Level Financial Assests

But this is wishful thinking. The existing self-employed are workers who have, to a greater or lesser extent, chosen self-employment rather than entered it as a last resort. It does not follow that if the older unemployed attempt to become self-employed, they will succeed. Analysis of Health and Retirement Study (HRS) data, a nationally representative survey of older Americans shows:

  1. Few unemployed workers over 55 enter self-employment – only 5.7% during the period 2010-2012.
  2. The low rate of entry to self-employment likely reflects a lack of resources, rather than insufficient entrepreneurial zeal among older unemployed workers.

Median household-level financial assets of unemployed workers over 55 are only $2,000. In contrast, newly self-employed older workers have average financial assets of $25,000, and older employees $10,000. Unemployed workers are also less likely to have housing wealth to draw on. Only 71% of older unemployed workers are homeowners, compared with 87% of the newly self-employed and 83% of employees, and unemployed homeowners have less housing equity than the newly self-employed and employees. With only $2,000 to start a business and little collateral, the older unemployed are unlikely to be able to finance viable businesses. Instead, self-employment likely means taking insecure, low-paid work in the gig economy.

America’s older workers should be able to choose to leave the labor force after a lifetime of work. Policy proposals that call for cutting Social Security benefits by raising the retirement age leave people at the mercy of a labor market unfriendly to older workers. Guaranteed Retirement Accounts (GRAs) open a path to retirement security by providing all workers retirement savings plans with guaranteed growth.

May Unemployment Report for Workers Over 55

Without the Choice to Retire, Unemployment Exacts High Psychological Costs on Older Workers  Tweet: #JobsReport Without the Choice to Retire, Unemployment Exacts High Psychological Costs on Older Workers http://bit.ly/1sr2I4c width=50

The Department of Labor’s monthly unemployment report released today shows an unemployment rate of 3.4% for workers over the age of 55. The unemployment rate has decreased from 3.6% last month to 3.4%, a decrease of 0.2 percentage points.

May 2016 Unemployment

In addition to imposing a financial cost on older workers, unemployment can also impose a psychological cost. The unemployed are not unemployed by choice. And being deprived of choice creates a feeling of helplessness.

According to the Health and Retirement Study (HRS), a nationally representative study of older Americans, unemployed respondents were more likely than both workers and retirees their same age to report a general feeling of helplessness. Among 55 to 64-year-olds, 40% of the unemployed agreed with the statement, “I often feel helpless in dealing with the problems of life,” compared to 8% of retirees and 16% of older workers.

Proposals to cut Social Security benefits by raising the retirement age will condemn some older Americans to unemployment, and will force others to continue to work out of economic necessity. Policymakers should prioritize preserving and strengthening the institutions that give people the choice to retire, rather than chipping away at their foundations. This means expanding Social Security and implementing Guaranteed Retirement Accounts (GRAs) to provide workers with effective savings vehicles over their working lives and lifelong income in retirement.