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By John Devine
“The main goals would be to give more incentives to those people who need them the most, especially lower-income workers, and to make existing savings incentives easier to use for people. Several thoughtful proposals from progressives and conservatives exist to achieve these goals. All that is really missing is the political will to enact sensible, bipartisan reforms.” – Christian E. Weller
Saving for retirement can be a risky business, especially if one doesn’t have the security of a traditional pension. Numerous factors from lack of financial knowledge to market upheavals can imperil retirement savings, a stark reality constantly confronting individual investors.
When volatility in markets spike, investors often feel the pain when their retirement savings take a hit. Some analysts have considered the impact of stock and housing bubbles, while others the results of a weak labour market. However, no one has really combined the two and linked them to important outcomes such as retirement savings, according to Christian E. Weller, author of the recent book, Retirement On The Rocks.
“I wanted to present new data on how increasing risk exposure at a time of more and more volatility in labour and financial markets hurt people’s retirement savings,” Weller, a professor of public policy at the McCormack Graduate School of Policy and Global Studies at the University of Massachusetts, and a Senior Fellow at the Center for American Progress, told ARIA recently.
Further, he wanted to show that the pain caused by unstable markets was made worse “because policymakers, especially Congress, failed to address the rising volatility.
“Policymakers instead increased people’s exposure to these risks. That is akin to asking people to learn to sink or swim rather than to give them better life-rafts as the storms are rolling in on a sinking ship.”
Amid the retirement-savings wreckage for individual savers caused by market upheavals, Weller identifies five factors that, over the past 30 years, have increased exposure to those risks, including the phasing out of “secure retirement sources” like defined benefit pensions, replaced with individual retirement accounts that “by design expose people to more risks.”
A second factor is a reliance on employers to offer retirement benefits, continues Weller. If you work for an employer who offers retirement benefits, chances are you stand to have a much more secure retirement than a worker in a job without that type of benefit. More and more workers are finding themselves in the latter group, says Weller, adding the reliance on employers offering retirement benefits is “working for fewer and fewer people.”
The American tax code, he says, is another concern, as it “showers the largest tax benefits on the richest people and offers little or no help to lower-income and middle-income people.”
The system is both inefficient and ineffective when it comes to helping people save for retirement, offering the least help to those who need it most, he says.
Fourth, savings incentives are complex and complicated when simplicity is required, and fifth, “offering sensible risk protections to people’s retirement savings is at best an afterthought and at worse not even a consideration.”
The main concerns identified in the book, explains Weller, are increasing uncertainty in the labour market, as well growing volatility in the stock and housing markets, “and an increasing integration of the two, so that stock markets, for instance, sharply fall as unemployment rates rapidly increase.”
That makes it harder for people to save if they are trying to do it on their own through individual accounts.
“There is a reason, for example, why people hold off on buying a new car when gasoline prices fluctuate. They don’t know where prices at the pump will go and find it safer to wait to invest a lot of money in a new car until they know whether prices will be high or low for the future.
“The same logic applies to retirement savings. People generally feel that it is not worth putting money away for the future if they cannot be sure that their savings will actually be there due to labour market uncertainty.”
Volatility in the jobs market often means people feel compelled to put money aside for emergency funds, impacting their ability to save for retirement, and the “integration” of the stock and labour markets frequently leads to missed investment opportunities – unemployed people usually don’t have the means to invest when conditions are ripe.
“By the time people feel better about the future and are ready to invest again, stock and house prices are high again, so that people pay more for their investments and thus lose out on potential earnings.”
Decisions contributing to today’s state of retirement affairs are many, but Weller identifies five basic policy changes, including a reduction of Social Security benefits, in 1983, combined with the push towards individual retirement accounts like 401 (k) plans. Tax incentives were increased for employers offering such plans, while at the same time benefits were being reduced.
“Policymakers also increased the tax incentives for high-income people to save by, for instance, raising the maximum amount that people can contribute to a retirement savings account, but offered few new benefits to low-income savers … and they created new savings options, making the system ever more complex.”
And while much has been said about helping people protect their retirement savings, it amounts to little more than lip service, maintains Weller.
While he identifies the problems that stand in the way of retirement security, Weller also offers solutions, including updating Social Security to provide a “meaningful minimum benefit.” Incentives could also be offered to propel the creation of “novel, low-cost, low-risk retirement savings options.”
Refundable tax credits not tied to income is another possible incentive, as is simplifying savings incentives, “combining numerous retirement savings incentives into one simple-to-use retirement savings plan.”
Doing a better job at disclosing risk and providing “safe, low-cost investment payout options” would help, he advises.
A number of initiatives are underway, with the most promising being proposals at the state level to provide coverage to employees who don’t have access to a workplace plan, says Weller, adding the federal government is helping these initiatives by clarifying regulations, “so that states will not run afoul of federal regulations.”
Proposals at the state level are promising, and if they become law could prod the federal government to act, he says, adding that tax reform at the federal level is key to addressing the retirement crisis.
“The main goals would be to give more incentives to those people who need them the most, especially lower-income workers, and to make existing savings incentives easier to use for people. Several thoughtful proposals from progressives and conservatives exist to achieve these goals. All that is really missing is the political will to enact sensible, bipartisan reforms.”
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