On March 10, the Joint Economic Committee heard testimony on proposals to encourage Americans to save more for their retirement.
In his opening remarks, Chair Robert Bennett (R-UT) stated, “Two years ago American households saved only 1.5 percent of their income, an all-time low. Just over a decade ago, households saved eight percent of their income, and in the 1970s and early 1980s the saving rate was regularly over ten percent. Personal saving is low not only by historical standards but by international standards; nearly every other westernized economy saves more than the U.S., as do many developing countries.”
Ranking Member Pete Stark (D-CA) stressed the difficulty of saving faced by many Americans. “While we all recognize the importance of saving for retirement, we all don’t have the means to do so. It’s all many low- and moderate-income families can do just to get by each day, let alone put away a little money each month for retirement. One economic disruption to a family, such as unemployment, a medical emergency, or a divorce, can wipe out their savings.”
Richard Thaler, a professor of behavioral science and economics at the University of Chicago, encouraged the panel to understand human behavior, arguing that traditional economic models are not very helpful because they “assume that households are capable of making the complex calculations necessary to determine how much to consume and how much to save, and, as important, that the households have the requisite willpower to delay consumption in the way the conventional model predicts they should in order to provide for the future. Since the time of Adam and Eve, real humans (as opposed to the imaginary creatures populating economics text books) have had difficulty resisting temptation.” He pointed out that many firms have increased participation in retirement plans by adopting automatic enrollment, in which an employee would have to opt out of the plan if he or she did not want to participate.
Mr. Thaler explained the Save More Tomorrow (SMarT) plan that can be used in conjunction with, or separately from, automatic enrollment. “Under SMarT, participants are contacted a few months before their next pay increase with the following offer. They can commit themselves now to increasing their savings rates later, when they get their next raise…Their contribution rates will continue to go up whenever they get a pay increase until they either reach some specified maximum, or opt out of future increases.” Mr. Thaler said that the savings rate was dramatic for the 80 percent of employees who chose the plan. “In just 14 months from the time the consultant spoke to the employees, the participants who enrolled in the SMarT plan increased their savings rate from 3.5 percent to 9.4 percent, and after two more years they were saving 13.6 percent of their salary. Their saving rates have nearly quadrupled!”
Ric Edelman of Edelman Financial Services in Fairfax, Virginia, said that the reason why so many Americans have difficulty making financial decisions is because “they lack the education and information they need to make good decisions for themselves and their families.” He argued that the government must focus on improving financial literacy. “America’s youth are given the training, tools and skills to make money in the workplace, but we do not give them the knowledge they need to manage that money effectively. As a result, debt levels and bankruptcies have never been higher. And, not surprisingly, so are divorce rates, depression and suicide. Indeed the rich — the few who do know how to handle money properly — are getting richer, and the poor — the masses who do not understand the simple basics of money management — are getting poorer.”
Mr. Edelman offered the committee a number of recommendations:
His final suggestion was to permit people to save for retirement regardless of their age. He explained, “By allowing parents and grandparents to set money aside for a newborn, small investments can lead to future portfolios. For example, a one-time contribution of $5,000 at birth that earns 10% per year would be worth more than $2.4 million when the child reaches age 65.”
Testifying on behalf of the Brookings Institution, Peter Orszag argued that the retirement savings system is flawed because higher-income households have the strongest incentive to save and tax subsidies are worth the least to households who need to save more for retirement. Citing the Congressional Budget Office (CBO), he stated, “Only about one-fifth of workers in households with income of below $20,000 participated in some form of tax-preferred savings plan (including an employer-provided plan or an Individual Retirement Account) in 1997. As a result, such lower-income workers represented 34 percent of all workers, but just 15 percent of workers who participated in tax-preferred savings plans — and 55 percent of total non-participants in such savings plans.”
Mr. Orszag also addressed the “education gap,” citing an Employee Benefits Research Institute study that found only 45 percent of workers have attempted to figure out how much they will need to save for their retirement. “The evidence suggests that the impact of employer-provided financial education on lower-income workers is greater than on higher-income workers. Higher-income workers tend to be more financially sophisticated to begin with, and employer-provided education consequently does not benefit them as much as lower-income workers. Expanded financial education campaigns and more encouragement to firms to provide financial education in the workplace may prove to be beneficial in raising retirement security for lower- and moderate-income workers,” he said.
