Do you think you’ll have enough money to live the life you want until you die? Or will you work forever so you don’t run out of money?
According to the Federal Reserve, 60% of Americans are not sure if they’re on track for retirement. The average American has $65,000 set away for their retirement years and it’s not enough. The old pension system is essentially done away with. People are living longer, and middle-class wages not keeping pace with inflation. It’s nearly impossible for most people to save enough money to get them through retirement. Is the retirement system broken?
Economist Ben Harris has some ideas on how to improve it. Harris recently served as the Assistant Secretary for Economic Policy and the Chief Economist with the U.S. Treasury Department. He also co-authored a book with economist Martin Bailey, “The Retirement Challenge: What’s Wrong with America’s System and a Sensible Way to Fix It.”
LISTEN: Ben Harris weighs in on the state of our retirement system on the HerMoney podcast. Listen wherever you stream your favorite podcast!
The Good News: What’s Right with Our Retirement System
It’s not all gloom and doom, Harris says. There are positives.
“The first thing that’s right with this system is that it allows us to accumulate enormous sums of money,” he says. “At the end of 2022, if you look across different retirement accounts, Americans had roughly $33 trillion in these various accounts — a doubling from 2010. We have a lot of money socked away for retirement.”
The second thing that’s good about the system is that it’s flexible.
“A lot of people want to work until they’re older — they see value in it,” Harris says. “Some people want to retire as quickly as they can. Marital situations are different, people have different preferences. People have different expectations for how long they’ll live. Some want to leave money to kids, some don’t.”
The third positive is that we put a lot of support through public programs like Social Security, Medicare, and Medicaid.
“As a country, we’ve decided that retirement is really important,” Harris says. “And we’re going to put incredible resources towards it. That’s what’s right with the system.”
The Bad News: What’s Wrong with Our Retirement System
“One thing that’s wrong with the system is it simply fails certain people,” he says. “I think that someone who has worked their whole life and made the right decisions should not be living in poverty when they’re older.”
Part of the problem, he says, is that the 401(k) system is out-of-date. It’s a system that came about by accident, not choice.
“It was not like policymakers ever sat down and said, ‘Yeah, we want a system of 401(k)s,'” he says. “It was a small part of the tax code [and] they became really popular over time. Companies shifted away from traditional pensions and towards 401(k)s, in part, because they didn’t want to take on the risk of having to fund pensions.”
So now we have a system where a lot of people have money in 401(k)s but that doesn’t necessarily equate to security. Since 401(k)s invest in the stock market, they may go down — and at the wrong time. While your investment in real estate is a wonderful thing, your home can’t be considered a liquid asset, because you need a place to live.
“Maybe you’re a person who’s been a middle-income worker for your whole life and you’ve got half a million dollars socked away,” Harris says. “Maybe you don’t have a mortgage. On paper, you’ve got a lot of wealth, right? You’ve got half a million dollars in your 401(k), maybe you live in a half-a-million-dollar house. But we don’t have great mechanisms for turning all that wealth into security. And that’s a real fundamental problem with our system.”
What Can We Do to Improve the System?
Harris believes there are a lot of things that policymakers can do. The first step comes from those who have the power to make legal changes.
“Policy is really not set up well to help all people accumulate savings,” he says. “One thing that policymakers can do is make the retirement saving incentives more equitable.”
Another step towards improvement comes from employers.
“Whether they like it or not, employers have become one of the vehicles through which we save,” Harris says. “The first thing that employers can do is automatically put people on a path towards sound saving.”
One big change needs to come from the people. If you haven’t been saving for retirement, you’re not likely to start without some sort of motivation or catalyst.
“But if people are on the path to good saving, they tend to do it by leaps and bounds more than if you ask them to actively save,” he says. “If you’re getting any sort of 401(k) match, and you’re leaving it on the table, that’s a big mistake.”
You can take an active approach to your retirement accounts and look at where your money goes.
“People need to be vigilant against bad decisions when it comes to investing,” he says. “Economists have this mantra: diversification, low rates. We don’t do a good job of dealing with the risk of unknown lifespans. If everyone knew how long you would live, you could take whatever resources you had and budget accordingly.”
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