Americans aren’t saving enough for retirement.
This phrase has become a mantra in the current economic and political conversation in the United States, and the longer it remains an issue the more worrisome it becomes. The Federal Reserve’s 2010 Survey of Consumer Finances shows that the fraction of families with retirement accounts fell 2.6 percent to 50.4 percent, while median holdings in those accounts fell 6.6 percent.
While the personal savings rate has increased in the wake of the 2008 crisis, it remains low relative to historic rates. Broadly speaking, wages have remained flat or have declined since the recession. Unemployment remains high and consumers seem unwilling to sacrifice a high standard of living in order to save appropriately.
The debate over how to incentivize proper retirement planning has come front and center as a result of the broad decline in savings. In particular, a provision in President Barack Obama’s 2014 budget proposal has attracted a lot of attention:
Commenting on the issue, the Employee Benefit Research Institute suggests that the plan to cap benefits for retirement savings is an awkward, ineffective solution to the savings problem. To get it out of the way, the provision would complicate the existing tax code in order to produce just $9 billion in revenue. Many observers do not see the implementation of this provision being worth the cost.
The ERBI points out that the at the end of 2011, 0.03 percent of accounts in the IRA database had more than $3 million in assets.
The deeper issue is the approach the President is taking to the savings issue. Critics would have the government do away with tax breaks associated with 401ks, IRAs, and other tax-sheltered plans, and substitute in automatic-enrollment policies. Research shows that the estimated loss of government revenue caused by these tax-sheltered programs is greater than $100 billion per year.
The same research, conducted by the Center for Retirement Research at Boston College, finds that automatic contribution plans increase total savings much more than tax subsidies.