It Is A Good Time To Address America’s Retirement Challenge

Recent articles have noted the excellent economic statistics we are seeing today, many of which are the best in a generation.

The labor market is flourishing, and not just for rich folks for once. The unemployment rate is at its lowest level in 60 years—jobs are more plentiful than they have been in a generation. Competition for workers has not only pushed earnings up—median household income is sitting near its brand-new high, one that is $6,000 higher than it was in the late 1990s. It has also pushed earnings up more for the lowest-paid workers than the highest-paid workers. The past three years have erased a quarter of the run-up in wage inequality created in the past four decades. Real wages for the lowest-paid workers are growing faster than they have since the 1960s. The country’s wage structure is getting more equal, not less.

While many are asking how long these strong numbers will last, there is another question that should be asked: How to leverage economic conditions to set middle class Americans on a better course for the future?

In tough economic times, the game plan has become crystal clear. During the Great Recession that followed the bursting of the housing bubble and the COVID-19 pandemic, federal policymakers, both monetary and fiscal, took significant steps to mitigate the economic damage caused by these crises. Relating to retirement, policymakers allowed those facing financial emergencies to tap their retirement savings with fewer penalties and restrictions. During the pandemic, there were relatively few Americans who took advantage of this change because those with retirement savings were less likely to be experiencing financial hardship.

Today, fortunately, the opposite situation exists. Many economists and experts agree that economy is strong, which is the perfect time for Americans and policymakers to make investments in the nation’s financial future.

Getting on track to pay for our federal spending is certainly a reasonable place to start. But I want to propose another option: Strengthening the nation’s fiscal position when it comes to retirement and better supporting America’s aging population.

Strengthening America’s Weak Retirement Infrastructure

A serious policy conversation about improving retirement first must start with addressing the Social Security shortfall. We’ve been hearing about a future funding shortfall for decades but fail to act. Today’s economy presents a unique opportunity to use rising wages and wealth to address this national challenge.

Current Social Security contribution rates were last set in the early 1980s. Few government programs are run on economic projections that are so outdated. It’s time for a refresh, which means making the difficult choices now to assure younger workers that their futures are also valued by all of us.

Social Security’s trust fund is about a decade away from having inadequate funding to support current benefit levels, which will force difficult decisions. The options for shoring up the trust fund become more expensive the longer Congress waits to act, regardless of the state of the overall economy. It is fiscally responsible to make hard choices on how to reform Social Security while the economy is strong and there is still time before the fund is depleted.

Second, it’s always hard to adjust to saving more, but there’s no better time than when wages are rising. Nineteen states have stepped in to address the fact that roughly half of workers lack an employer-sponsored retirement savings plan. These state-facilitated programs are creating the opportunity to save for the lower- and middle-income workers who are finally seeing their earnings increase. Now would be one of the best times for many of these workers to begin participating in these savings programs, which is convenient as more of these programs are getting up and running.

The states that have established these programs also expect to save on Medicaid costs in the future, which is another form of investing now to save money down the road.

While some states are leading the way to get more Americans access to retirement savings accounts, it is disappointing that federal leaders are not pursuing more big picture retirement policy solutions. The U.S. government runs an effective savings program for federal workers (the Thrift Savings Plan or TSP), with low costs and massive economies of scale. But there is no such program available to Americans working for smaller business that cannot or will not start their retirement plans for their own employees.

The behavioral aspects of retirement saving are well understood. Workers with a user-friendly plan, with good default options, are more likely to accrue resources for retirement. Workers without access to a plan at work, without automatic paycheck deductions that make saving an activity that requires no action from individuals, are very unlikely to succeed.

The Federal government could open the TSP to more workers or build a similar program for those underserved by our financial system. This would be an innovative win-win opportunity in retirement policy. Such a program available to private sector workers lacking retirement accounts at their job would help workers maintain their standard of living in retirement, avoid poverty, reduce strains on families, and lower future elder public assistance costs for taxpayers.

It’s not just state and federal policymakers who have the opportunity to act. Private companies are taking advantage of the positive economic environment to improve retirement outcomes for their employees. IBM
IBM
recently made headlines with its decision to return to re-open its’ pension plan for its workers. Time will tell if this is the start of a trend, but a growing chorus of experts are suggesting that this is a prime time for companies to ignite a pension renaissance.

With a strong labor market, plentiful jobs, rising wages and wealth, and an urgent need for people to be more optimistic about our national future, there may never have been a better time to act on these challenges than today. Shoring up Social Security, expanding access to retirement plans, and bringing back pensions would all be worthwhile investments to make while the opportunity is here.