Why It's So Hard for Americans to Save for Retirement (SWWC vol 3, issue 60)
Hello!
I feel like we as a nation have not spent enough time appreciating Tim Meadows' guest stint on Brooklyn Nine Nine. Let's remedy that. Chat about it on Twitter with me.
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We've established that America has a looming retirement savings issue -- as in, people did not save and an alarmingly large number are likely to finish their lives in poverty -- and I've been wondering how we got to this point. Why don't people save more for retirement?
If you're a member of Generation X, the answer is simple: You were born at the wrong time. The Great Recession wiped out an estimated 45% of that generation's net wealth (by contrast, the Baby Boomers only lost 25% of their net wealth) and so the retirement portfolios that may have been started in the just-recovering-from-the-early-90s-recession period got whacked. It doesn't help that Gen X also has the weakest wage history: In 2015, Bloomberg reported that 49% of Gen Xers had not seen their wages rise more than 2% since the recession recovery. Consequently, 38% of all Gen Xers have more debt than savings. As a result, reports the Pew Charitable Trust:
"Gen-X is the first generation that's unlikely to exceed the wealth of the group that came before it and face downward mobility in retirement," said Erin Currier, director of Pew's Economic Mobility Project. "They have lower financial net worth than previous groups had at this same age and they lost nearly half of their wealth in the recession."
If you're a millennial, the working theory is that you're blowing it all on avocado to-- no! Wait! I'm kidding! The working theory is that you're actually incapable of imagining a future in which you're not young and immortal, and thus you're not prioritizing retirement savings. Now I am not kidding.
And if you were an adult from the early 1970s on? You may have been a victim of massive, ongoing economic slowdown. The U.S. annual per capita growth rate dropped from 3.2% in 1973 to 1.5% by 1993. As more people had to spend more of their income keeping up with rising housing expenses and rising healthcare expenses, they saved less.
So what? Saving for retirement might get even more challenging because one of the biggest incentives is on the federal chopping block. Republicans in Congress are looking to overhaul the tax code, lowering the top income tax rates, and one of the ways they want to make up for the loss in rich-people taxes is by removing the 401(k) tax deduction.
This deduction allows people who are contributing to a 401(k) to deduct the amount they've saved, up to $18,000 (if you're under 60), from their gross income. Since deductions lower taxable income, having a few healthy deductions can move a taxpayer down a tax bracket so they're not paying as much in federal tax.
If the 401(k) deduction goes away, the 401(k) is essentially the same as a Roth IRA, another retirement investment vehicle where you're taxed up front on the income you chuck into the account, but don't get taxed upon any withdrawals past retirement age. Some might argue taxing 401(k)s simply moves the tax pain from the withdrawal end to the savings end.
Putting aside the issue of why anyone's bothering to reform our tax system -- which is currently fairly adept at spreading the pain so the lowest-income Americans are not disproportionately taxed relative to their earnings (I know, I was shocked to learn this too) -- there is a question of how this sort of 401(k) tax move would affect people's participation in the savings program.
Even assuming you have access to a 401(k) program through your employer -- which 45% of Americans do, thanks to a whopping 14% of all U.S. employers -- if you don't have the two-fer of "I'm planning for a future I can't imagine!" and "I get a sweet tax deduction now!" are you really going to sock away money? Especially if you're already struggling with student loan payments and trying to figure out whether or not you can deduct the interest you paid on those?
As the Washington Post reported when examining why it's so tough for Americans to save for retirement:
Consumer advocates and retirement experts say the way to get more people to save is twofold. The first step is to give everyone access to a retirement account. The next is to make it seamless for people to sign up.
401(k) programs do make a difference in whether or not people save for retirement. A 2011 Congressional Budget Office Study examining savings patterns in the Aughties found stark differences between 401(k) participation versus IRAs: 29% of American workers contributed to 401(k) plans compared to 3% who contributed to IRAs and 4% who contributed to Roth IRAs. And when people contributed to 401(k) plans, they socked away an average of $4360 per year. By contrast, traditional IRAs contributions averaged $2840 per year, or 65% of what the 401(k) people put away. Roth IRA contributions averaged $2590, or 59% of the average 401(k) contribution.
Who cares? Working families should. Access to frictionless retirement programs through employers is one way to help working-class and middle-class Americans build retirement savings; being able to benefit from a tax deduction when you're in the thick of the student loan repayment/child-rearing/career-building years is another.
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Your pop culture recommendation for the day: When reading "Christ in the Garden of Endless Breadsticks," Helen Rosner's poignant meditation on Olive Garden and the way we carry our inner landscapes into the deliberate nowhereness of chain eateries, I was reminded of David Sax's bright and informative book on the genesis of food trends, The Tastemakers: Why We're Crazy for Cupcakes but Fed Up with Fondue.
The Rosner piece is part of Eater's excellent package on the decline of America's QSR segment -- quick service restaurants --and I spent several happy hours reading through Elizabeth Dunne's "As Goes the Middle Class, So Goes TGIFriday's," Meghan McCarron's "Why We Always Ended Up At Friendly's," Mattie John Bamman's "Breaking Cheddar Bay Biscuits at Red Lobster" and Bijan Stephen's "Applebee's Deserves to Die."
We're not all going to associate Hershey bars with the brothel in which we were raised, because we don't all have that specific experience. But we do all have an experience where we taste something and we're taken out of time for a moment. Sometimes, those moments happen over the toasted ravioli at Olive Garden.
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