Working Longer Won’t Fix America’s Retirement Savings Crisis, Says This Expert
Many retirees end up leaving the workforce without enough savings to last them through retirement. While some experts think working longer may be a fix to people’s lack of retirement savings, labor economist and retirement security expert Teresa Ghilarducci believes that probably isn’t the solution.
Ghilarducci advocates for changes to the existing system for retirement savings to improve access. An example is the Retirement Savings For Americans Act (RSAA), a bill that’s been introduced in Congress. The RSAA would automatically enroll workers without access to workplace retirement plans into a retirement account. Low-income and middle-income workers would receive a matching contribution and a refundable tax credit as well.
Investopedia spoke with Ghilarducci, a Professor of Economics and Policy Analysis and Chair of Economics at The New School for Social Research, to understand what she thinks needs to change about the U.S. retirement system and how people should save for retirement in the meantime.
The Myth of Working Longer
When asked why people feel compelled to work longer or delay retirement beyond their expectations, Ghilarducci highlights two distinct realities. A minority, about 12% of people between 62 and 70, continue working because they genuinely enjoy their jobs. However, the majority of this age group keep working because they don’t have adequate financial resources to retire while maintaining their living standards. There’s also the pressing issue of those who can’t work longer and yet lack sufficient retirement funds.
Ghilarducci once believed that working longer was a reasonable solution. She recognized that it could reduce the need for taxpayer money or higher savings rates and appeared beneficial both for workers and the economy. However, her research disproved these assumptions.
The first misconception is that working longer is a plausible solution. Most people don’t have the option to work longer. A more effective approach is to assist people in saving for retirement and to expand and fully fund Social Security.
Another fallacy is that work inherently benefits individuals. Her research revealed that work serves those in high-status jobs with control over their tasks, such as policymakers and academics. Conversely, people without these advantages experience higher stress and cortisol levels, and their jobs often lack meaning, satisfaction, or opportunities for personal growth.
The third myth is that working longer bolsters the economy by adding more workers. However, when these workers’ productivity declines and younger individuals are underemployed, the economic gain diminishes. The GDP might grow if child labor were permitted, but societal values prioritize not just economic output, but also quality of life. By extending working years, the foundational elements of a healthy economy are compromised.
Alternative Solutions for the Retirement System
Ghilarducci points out that half of the workforce lacks a 401(k) or pension plan, leaving them without a mechanism to save for retirement. This group includes temporary workers and self-employed individuals like freelancers and gig workers, who represent a growing segment of the labor market. The solution lies in offering these workers the ability to automatically save in a retirement account. This is where the RSAA comes into play.
Savings Strategies While Awaiting Reform
While waiting for legislative reforms, there are recommended strategies for individuals to save for retirement. If you’re in your 20s or 30s, saving 3% to 4% of your income throughout your career, in addition to Social Security benefits, should help you preserve your living standards. The compounded growth on this savings rate can replace approximately 45% to 50% of your pre-retirement income.
If you begin saving at age 40, aim to set aside 10% of your pay. By the mid-50s, this rate increases to 50% of your pay.
Monitoring your progress involves ensuring that your savings equal about ten times your salary by retirement age. At age 30, aim for savings equal to your annual salary. By your 40s, strive to have saved approximately four times your salary.
Adhering to these guidelines facilitates effective saving. Younger investors should maintain a stock-heavy portfolio, gradually transitioning to bonds as they age. A 60/40 portfolio with low fees, consistently invested without withdrawals, may not optimize returns, but it generally yields favorable outcomes.
