reimagining the private retirement system 2016 iome challenge · to assist millennials and...
TRANSCRIPT
ReimaginingthePrivateRetirementSystem
2016iOmeChallenge
Contents
EXECUTIVESUMMARY.................................................................................................................................1
Introduction.................................................................................................................................................2
Background..................................................................................................................................................2
Education.....................................................................................................................................................4
GenderDifferencesinRetirementPlanning................................................................................................6
LackingTrustinWallStreet..........................................................................................................................7
GovernmentPolicy.......................................................................................................................................8
Implementation..........................................................................................................................................11
PrivateSolution..........................................................................................................................................13
Conclusion..................................................................................................................................................14
References..................................................................................................................................................15
FiguresandTables
Figure1PersonalFinanceEducationintheUnitedStates,2016.................................................................4Figure2DowJonesIndustrialAverage........................................................................................................7Figure3myRACapandContinuedSavingswithaRothIRA........................................................................8Figure4ProgramExpenditureasPercentofTotalGDP.............................................................................10Figure5ProgramExpenditureasPercentofFederalBudget....................................................................10Figure6PersonalSavingsRate...................................................................................................................12
Table1AverageNumberofJobs..................................................................................................................3
1
EXECUTIVESUMMARY
ToassistMillennialsandsubsequentgenerationssaveforretirement,itisessentialfor
theU.S.federalgovernmenttoadoptseveralpoliciesrelatedto:educationrequirements,the
myRAprogram,SocialSecuritytax,andtheSaver’sCredit.Personalfinanceeducationiscrucial
forstudents’understandingofhandlingtheirfinances;thus,itshouldbemandatoryforallhigh
schoolstudentstotakeacourserelatedtothistopic.Withoutthisbackgroundinmanaging
theirownmoney,furthergovernmentpolicieswouldstruggletoachieveeffectivenessamong
theMillennials.
Uponsuccessfulcompletionoftherelatedfinancialcoursework,individualswouldthen
befurthersupportedbygovernmentpoliciespromotingretirementsavingsandmakingthe
processeasier.TheproposedchangesinthemyRAprogram,SocialSecuritytax,andtheSaver’s
Creditwouldaccomplishjustthat.Ioutlinethespecificgoalsofeachproposedpolicyinthis
paper.Withcoordinationofneweducationrequirementsprovidingtheframework,andpolicies
providingthesupport,Millennialswillhavethenecessarytoolstosuccessfullysavefor
retirement.
Toimplementthesepolicies,theircontentandspecificitiesneedtobestrongly
disseminatedthroughmediachannelssuchaspublicserviceannouncements(PSAs).Thiseffort
shouldbecustomizedfordifferentdemographics,suchasgender,inordertoreachdifferent
audienceswithdissimilarhumancapitalandconcerns.
Alsooutlinedistheimportanceoftheprivatesectorandtheirroleinreimagining
personalretirementsavings.Whilethegovernmentplaysanimportantroleinmaking
retirementsavingeasier,itisfundamentallyuptotheprivatesectortoprovideinnovativeideas
andtoolstofurtherimprovetheefficiencyofgovernmentpolicies.Somethingassimpleasa
smartphoneapplicationcouldbeagamechangerforpersonalretirementsavingsasMillennials
turnawayfrombrickandmortarbanks.
2
Introduction
TheGreatRecessionwhichlastedfromDecember2007throughJune2009wasthe
worstfinancialcrisesintheUnitedStatessincetheGreatDepression.1;2Itseffectsarestill
presentnowadays.AccordingtoKatzandKrueger(2016),overthelastyearsallofthenet
growthinUSemploymenthasoccurredinalternativeworkarrangements(e.g.temporary
workersandfreelancers),notfulltimejobs.3Thereisnodoubtthatthisfinancialmeltdownhas
shapedtheMillennialGenerationintermsoftheirconfidenceinWallStreetandtheiroverall
handlingoftheirpersonalfinances.Addthistothefactthatyoungadultstendtoswitchfrom
jobtojobdirectlyafterhighschoolorcollegeandthat,historically,personalretirementsavings
hasoccurredthroughtheemployer,itisrealizedthereisapotentialproblem.TheU.S.federal
governmentmustworkbesidetheprivatesectortoreimaginetheprivateretirementsystem
andensureadequatepersonalretirementsavingsforMillennialsandsubsequentgenerations.
Background
Forseveraldecades,employersprovidedtheiremployeeswithretirementaccounts:
pensionsor401(K)s.Pensions,whicharedefinedbenefitaccounts,guaranteeamonthly
amounttobepaidtotheretireefortheremainderoftheirlife.Themonthlyamountisusuallya
calculationbasedontheiraveragesalaryandthetimespentwiththeemployer.Theseplans
tendtobeexpensiveandriskyfortheemployerandareunabletobetransferredifthe
employeechangesemployers.Inanattempttosolvethisproblem,themarketturnedto
401(K)s,knownasdefinedcontributionaccounts,whichallowstheemployeeandemployerto
contributetoaretirementportfolio.Typically,employerswillcontributeasetpercentin
additiontomatchinguptoacertainpercentofwhattheemployeecontributes.Whilethis
approachallowstheemployeetomovetheir401(K)withthem,theyfacethecyclicalnatureof
themarket.Youngadultstendtohavemanydifferentjobsovertheirearlyworkingage.A
reportbytheBureauofLaborStatistics(2015)whichtrackedmultipleagegroupsbetween
3
1978and2012,foundthatindividualsfromage18to48onaverageheld11.7jobs.Young
adults,thosebetween18to24yearsold,heldanaverage5.5jobs.3Thisholdstrueacross
severaldemographicsasseeninTable1.Additionally,itisimportanttonotethatasage
increases(untilage39),thenumberofjobsheldonaveragedecreases.While401(K)scanbe
rolledoverwithnewemployment,thisprocesscanbelongandcomplicated,notsomething
anyone,especiallyyoungadults,wouldwanttodealwithmultipletimesduringtheirlife.
Table1AverageNumberofJobs
Source:BureauofLaborStatistics(2015).3
4
TheU.S.governmentcreatedtheSocialSecuritySystemin1935toprovideasafetynet
forseniors.Thesystempreventscloseto14.5millionseniorsfromlivinginpoverty.4Social
Securityisfundedbycurrentworkerspayingin,allowingforretireestowithdraw.Thisworks
fineaslongaswhatis,onaverage,paidinisequivalentormorethanwhatisbeingwithdrawn.
Recently,thereisdoubttheSocialSecuritySystemwillbeinexistenceforgenerationspayingin
sincetheBabyBoomerGenerationrecentlystartedcollectingfromSocialSecurity.Withthe
populationsizeofBabyBoomers,combinedwiththeirincreasedlifespan,itisprojectedthat
theSocialSecuritytrustfundwillbecomeexhaustedaround2037.5WiththefirstMillennialsset
toretireatleasttenyearsaftertheexhaustionofthetrustfund,itisimportantforthiscohort
toincreasepersonalretirementsavingstoprotectthemselvesintheso-calledgoldenyears.
Education
Figure1PersonalFinanceEducationintheUnitedStates,2016.
Source:CouncilforEconomicEducation(2016)6
5
SeventeenStatesintheU.S.currentlyrequirehighschoolstudentstotakeapersonal
financecourseasshowninFigure1.6Personalfinancecoursesteachstudentshowtowrite
checks,makebudgets,savemoney,payforschool,planforretirement,andothermeasuresto
balancetheirfinances.Studentsshouldgraduatehighschoolwithabasicunderstandingof
personalfinance;therefore,thefederalgovernmentshouldrequiresuchcoursesbetaken.
In-schoolcreditunionsandbankswouldalsoincreasefinancialawarenessamonggrade-
schoolstudents.Thesecreditunionsandbankssetupanactualbranchinsideelementary
throughhighschoolstoencouragefinancialliteracyandgoodsavinghabitsfromayoungage.
Parent(s)wouldbelistedasthecustodian(s)fortheirstudent’saccount.Toexposestudentsto
thedifferentfinancialservicescreditunionsandbanksprovide,athree-stepexposureprocess
couldbefollowed:
ElementarySchool:Savingsaccountswithwithdrawalsavailable.MiddleSchool:Savingsandwithdrawswiththeadditiontosmall-shorttermloans.
(example:upto$100,byparentconsent)HighSchool:Savings,withdrawals,small-shorttermloans(example:upto$500,by
parentconsent),withtheadditiontoCD’sandbasicretirementsavingsaccounts.
Thesefinancialsystemsalreadyexistinsomeschoolstoday,thoughnotprovidingasin
depthservices.Whilecreditunionsandbankswouldnotdirectlyprofitoffofthesestudent
branches,thissystemprovidesawaytogrowpublicrelationsandmarketing.Someofthe
currentcreditunionsandbanksprovideastipendandcollegescholarshipsforstudent
employees.7Itwouldbeagreatopportunityforfinancialserviceprovidersandstudentsalikeif
in-schoolcreditunionsandbanksfoundtheirwayintoeveryschoolsystemnationwide.
Itiskeyforpersonalfinanceeducationtotakeplaceingradeschool,preparingstudents
beforetheyarefacedwithloansforcollegeexpensesandcreditcardoffers.Mandatingthis
educationtotakeplacebeforehighschoolgraduation,thegovernmentcanmakecertainthat
virtuallyallyoungindividualsarereceivingabackgroundinhandlingfinances.Thisrequirement
inadditiontoin-schoolcreditunionsandbackswillprovideentiregenerationsaframeworkin
personalfinance,includingretirementplanning.
6
GenderDifferencesinRetirementPlanning
AspreviouslyshowninTable1,onaveragetherearenomeaningfuldifferencesinthe
numberofjobsheldbymenandwomenwhenassessingitattheaggregatelevel.However,
QuickandMoen(1998)arguedthat,relativelyspeaking,fewerwomenspendasignificant
amountoftimeplanningforretirementthanmen(53%ofmenvs.37%ofwomen).8According
totheseauthors,whencomparedtomen,womenarelesslikelytohaveafuturetime
perspective(FTP)–thetendencytolooktowardthefutureratherthanfocusingonthepresent
orthepast.Ontheotherhand,thisbehaviorcouldinpartbedrivenbythehistoricalevidence
thatwomentendtohavelowerdisposableincomes,thusalowerabilitytosavemeaningful
amountsofmoney(USCensusBureau,2000).9Itisnoteworthythatthisbehaviorinwomenis
notonlyapplicabletoretirementbutalsotoothertypesoffinancialplanning(Glassand
Kilpatrick,1998;SimmonsandBetschild,2001).8;10
Notonlydowomentendtohavelowerdisposableincomewhencomparedtomen,they
oftentimesfacelowerpayforthesamejob.AccordingtotheWhiteHouse,in2014,women
earned79centscomparedtoadollarformen.ThispaygapisevenworseforAfrican-American
andLatinawomen,earning64percentand56percentofwhatamanmakes,respectively.11
Thispaygapwillleavewomenwithpotentiallyhundredsofthousandsofdollarsormorelost
overthecourseoftheirworkinglives,someofwhichcouldhavebeencontributedtowards
retirement.
Morerecently,Jacobs-Lawsonetal.(2004)corroboratethefindingsofpreviousstudies
ingenderdifferenceswithintherealmofplanningforretirementandrecommendthat
educationalandtrainingpoliciesaimedatboostingthisandothertypesoffinancialdecisions
needtobetailoreddifferentlyamonggendersbecauseaone-size-fits-allapproachhasproven
tobeineffective.12Besidestailoringeducationalandtrainingpolicies,moreworkmustbedone
toclosethepaygap.TheUnitedStatesshouldprovideitsdaughtersthesameopportunitiesas
itssons;thisstartswithequalpayforequalworkandskills.
7
LackingTrustinWallStreet
ManyMillennialslacktrustinWallStreet;asurveybyGoldmanSachs(2015)foundthat
only18percentofMillennialsfoundthestockmarkettobethebestwaytosaveforthe
future.13TheDowJonesIndustrialAveragelostoverhalfofitsvalueduetotheGreatRecessioncausedlargelybythehousingbubble.OnOctober9,2007,theindexread14,164.53atclose.
Thatnumberhaddecreasedby7,361.72toanewindexof6,547.05onMarch9,2009.14
Historically,thestockmarket,theDowJonesIndustrialAverageincluded,increasesovertimeat
ahigherratethaninflationortreasurybills.Unfortunately,thereareswingsinthemarket
whichbringsrisktothoseneedingtowithdrawduringtimesofeconomicturmoil,whenstock
pricesarelowasseeninFigure2.
Figure2DowJonesIndustrialAverage.
Source:DowJonesApril18,2006toApril19,2016.FRED(2016)15
IndividualslackingtrustinWallStreetmayprefertosetuparetirementaccountin
whichtheirsavingsareexposedtolessrisk,regardlessofthehealthoftheeconomy.Such
accountsalreadyexist,including:CD’s,moneymarketaccounts,savingsaccounts,andTreasury
notesandbonds.Whiletheseaccountsdonotcarrythesamepotentialearnings(andlosses)as
thoseinstocks,theyhavelowervolatility,somethingofvaluetorisk-averseindividuals.
8
GovernmentPolicy
TheFederalGovernmentshouldfocusonthreemajorpolicychangesinadditionto
mandatorypersonalfinancecoursestaughtingradeschool.Thesepolicieswillinclude:changes
tothemyRAretirementprogram,theSocialSecuritytax,andtheSaversTaxCredit.
MyRAisaU.S.Treasurybackedretirementprogram,whicheliminatestheburdenofa
largeopeningdepositandfeesofanormalIRA/RothIRA.SinceU.S.Treasurybondsbackthis
program,thereisvirtuallynoriskinvolved.Thismakesiteasyforanindividualtostartsmall
andtoseetheirmoneygrowwithoutthecyclicalnatureofthestockmarket.Anotherbenefitis
thattherearenofeeswithmyRA.Inadvertisingfortheprogram,myRAillustratesthe
guaranteedgrowthundertheprogramwithmorevolatilityunderaRothIRAaccount.
Currently,anindividualcanonlysaveupto$15,000intheirmyRAbeforemovingittoaprivate-
sectorRothIRA.16Thiscapshouldberemovedallowingpeopletocontinuetosavethrough
myRAwithouttheneedtotransferaftertheyreach$15,000insavings.Similarto401(K)s,
employerscanstillcontributetotheiremployees’myRAaccounts.
Figure3myRACapandContinuedSavingswithaRothIRA
Source:myRA(2016).16
9
For2016,theSocialSecuritytaxisassessedonanindividual’sfirst$118,500ofearned
income.17Anindividualwhomakesoverthisthreshold,paysthesameamountofSocial
Securitytaxasanindividualwhomakesexactly$118,500.Itistimetoremovethetaxcap,
taxingallearnedincomeatvaryingrates.Earningsuptoandincluding$250,000wouldbetaxed
atthecurrentrate:12.4percent(6.2percentemployee,6.2percentemployer).Earningsabove
$250,000toonemilliondollars,thetaxratewouldbe4.2percent,each.Earningsaboveone
milliondollarswouldbetaxedat2.2percent,each.
Example:
Gavinhastotalearningsof$12.5millionayear.$250,000wouldbetaxedat12.4percent(6.2percentemployee,6.2percentemployer).$749,999wouldbetaxedatatotalof8.4percent(4.2percentemployee,4.2percentemployer).Lastly,hisremainingearnings,$11.5million,wouldbetaxedatatotalof4.4percent(2.2percentemployee,2.2percentemployer).
TheadditionalrevenueraisedbythisnewsystemcouldhelpfundamyRAprogramfor
graduatinghighschoolstudents.Uponcompetitionofatleastonepersonalfinancecourse,a
myRAaccountwouldbesetupandseededforeachgraduatinghighschoolstudent.
AccordingtotheU.S.DepartmentofEducation,3.3millionhighschoolstudentsare
expectedtograduateinthe2015-16schoolyear.18IftheFederalGovernmentfundseach
student’smyRAaccount$500,thetotalexpenditurewouldequate$1.65billion–lessthan
1/100thofapercentofthetotal2014GDPoftheUnitedStatesandlessthan1/20thofa
percentofthetotal2015U.S.FederalBudget.19;20
1.65billion/17.419trillion≈0.009percentoftotalU.S.GDP
1.65billion/3.8trillion≈0.043percentoftotalU.S.FederalBudget
10
Figure4ProgramExpenditureasPercentofTotalGDP
Source:TheWorldBank.(2016)19
Figure5ProgramExpenditureasPercentofFederalBudget
Source:WhiteHouse(2015)20
Bycombiningpersonalfinanceeducationwithanactualseededretirementaccount,thefederal
governmentwouldbepavingthewayforretirementsuccessofyoungadults.
Underthetaxlaw,individualsareabletoapply$2,000ofretirementsavingstowardsa
RetirementSavingsContributionsCredit(Saver’sCredit)whenfilingtheirtaxes.Thisnumber
shouldincreaseto$5,500ayear,thetotalcontributionlimitforIRAsandRothIRAs.Thiswill
increasetheincentivetosavemore,astheclaimableamountontaxeswouldalsoincrease.
Millennialswouldadditionallybenefitfromthiscreditiftheywereeligibletoclaimitwhilestill
attendingschoolfull-time,somethingnotallowedtoday.21;22Thereneedstobeacareful
11
balancebetweenaugmentingthepersonalsavingsratewhilestillpromotinginvestmentand
economicgrowth.
Theabovepolicieswouldprovidesupporttotheeducationmandateframework.By
eliminatingthecaponmyRAandprovidingaseededmyRAaccounttograduatingseniorswith
completedcoursework,youngadultswillbeinspiredbywatchingtheirmoneygrow.This
inspirationmatchedwithexpandingtheSaver’sCreditwillresultinmoreindividualssavingand
morefrequentsavingtowardsretirement.
Implementation
Tobeabletoimplementthesepolicies,thegovernmentshouldrunanaggressivepublic
serviceannouncement(PSA)campaigntoinformthemassesaboutwhowillbenefitfromsuch
changes.PolicymakersshouldbepreparedforbacklashfromWallStreet,fromraisingtaxes,
andfrompromoting,toanextent,savinginsteadofdebt-drivenconsumption.
MyRAwasselectedduetotheminimalriskassociatedwithit.Backedbygovernment
treasuries,myRAaccountstheoreticallywillbedrawableaslongastheUnitedStates
governmentexists.Sincethegovernmentispromotingthisformofzero-riskretirement
planning,WallStreetwouldmostlikelylobbyagainstsuchpolicy.Retirementplannersmayalso
voiceconcernasmakingretirementplanningeasierwiththesepoliciescouldlowerthedemand
fortheprofessionalongwiththeloweringofitsearnings.Essentially,theU.S.government,by
makingtheprocesstosaveforretirementeasier,iscuttingoutthe‘middleman’whoprofits
fromfeesassociatedwithplanningandfrequentrecklessspeculationandexploitationof
people’signorance.
Thosemakingover$118,500ayear(currenttaxcapforSocialSecurity),mayalsoreject
policywhichwouldincreasetheirtaxburden.Increasingtaxesisusuallypoliticalsuicide;
however,withincreasedpublicawareness,especiallytothoseinthelowermiddleclass,
increasingtaxesonwealthierAmericanshouldbefoundjustified.Itisonlyequitablefor
12
wealthyindividualstopaySocialSecuritytaxesontheirtotalearningsifthosemakingunder
$118,500ayeardotoo.
Byincreasingtheincentivetosavewithtaxcreditpolicies,thecurrenteconomymaybe
worseoff.Thepersonalsavingsrateisadouble-edgedsword–itisgoodforindividuals’
retirement,butitalsomeanslessconsumptionistakingplacecurrently.Duringeconomic
downturns,suchastheGreatRecession,thepersonalsavingsrateincreasesduetomarket
uncertaintyandoverallfearofcurrentmarketconditions;thiscanbeseeninFigure4.By
promotingsavingwithalargerSaver’sCredit,thegovernmentwouldbepromotingsavingsand
mostlikelyreducingthedeficitinthebalanceofpayments,aswellassmoothingthenational
debt.Itiskeytorememberthatindividualssavingforretirementwilleventuallyspendit;
therefore,consumptionmaydecreaseinthepresentbutwillbemadeupinthefuture.
Figure6PersonalSavingsRate
Source:FRED(2016).23
13
PrivateSolution
Thefederalgovernmentcannotbeexpectedtoreimaginetheprivateretirementsystem
alone;thesolutionmustcomefromprivatesector.
Millennialsareconnectedtotheworldunlikeanygenerationbeforethemwiththeuse
ofmobiletechnology.Theyareabletocheckthenews,surftheweb,paybills,transfermoney,
andhavemuchmoreattheirfiguretipsthroughsmartphones,smartwatches,andtablets.
SystemssuchasApplePayandAndroidPay,allowuserstopayinstoreswiththeirmobile
deviseswithouteverreachingintotheirpursesorwallets.
Anapp,shortforapplication,shouldbecreatedforthesemobiledevicestohelp
millennialsvisualizeandtosaveforretirement.Usersofthisappwouldbeabletolinkbank
accounts,creditcards,andtheirmyRAaccounttotheapp.Then,workingmuchlikeApplePay
orAndroidPay,userswouldsimplyusetheirsmartphoneorsmartwatchtopayfor
transactions.Whenprocessingeachtransaction,userswouldbepromptedwithascreen
inquiringaboutapercent(i.e.thedesiredsavingrate)beingaddedtothetransactionwhich
wouldbedepositedintothemyRAaccount.
Example–
Taylorbuys$23.45worthofgoodsatagrocerystore.Shepaysforthetransactionusingthenewmobileappandselectsthat5percentbeaddedontohertotalforretirementfunding.Taylorwouldbecharged$24.62;$23.45forthegoodsand$1.17tobedepositedintohermyRAaccount.
Overtimethesesmallone-timedepositsinadditiontoroutinedepositswouldadduptoa
substantialamountinretirementsavings.
Inadditiontomakingcontributionseasier,theappcouldprovideinformationonthe
healthofanindividual’sretirementaccountbasedonretirementcalculations.Theuserwould
bepromptedtoentertheirretirementgoalssuchasageofretirement,averageexpenditures
duringretirement,andlifeexpectancy.Theappwouldthentakethisdataandprovideusers
withhowwelltheyaredoingtoachievetheirgoals.Itisexpectedthat,bylinkingretirement
14
savingstospendinghabitsratherthanincome,thismobileappmayprovidebetterestimates
forretirementgoalsandimproveanindividual’sfinancialdiscipline.
AsurveybyScratch(2013)foundthatMillennialsoverwhelminglyfeltnegativelyof
banks.Theresultsshowthat72percentofMillennialswouldrathergotothedentistthatlisten
tobanks,and73percentsaidtheywouldbemoreopentoreceivingfinancialservicesfrom
Google,Amazon,Apple,PayPal,orSquarethanfromanationwidebank.24Combiningthese
resultswiththenewappprovidesevidenceofitspotentialsuccessamongMillennials.
Conclusion
TheU.S.federalgovernmentshouldimplementaseriesofpoliciestohelpMillennials
andfuturegenerationbettersaveforretirement.ByeliminatingthecaponthemyRAprogram,
individualswillbeabletosave,withoutlimit,intoanessentiallyzeroriskaccountwithnofees.
IndividualsshouldpaySocialSecuritytaxesontheirfullearningswithnocapinplace,though
basedonaregressivetaxrate,inordertofundanewretirementinitiativeforgraduatinghigh
schoolseniorsandpromotethesustainabilityoftheUSretirementsystem.Changestothe
Saver’sCreditwouldallowworkingindividualstoreceivegreatertaxbreaksforsavingmoney
andwouldallowfull-timestudentstotakeadvantageofit.Toreinforcethesethreepolicies,the
federalgovernmentshouldmandatethatallpublicschoolstudentsberequiredtotakeatleast
onepersonalfinancecoursebeforegraduationofhighschool.Abasicunderstandingof
personalfinancewillallowthesestudentstotakefulladvantageoftheoutlinedpolicies.
Thegovernmentshouldnotbeexpectedtoreimagetheprivateretirementsystem
alone.Asitisaprivateissue,itisessentialforthemarkettoplayalargeroleindesigningnew
toolsforyoungergenerations.Entrepreneursshouldtakefulladvantageofmobiletechnology
toassistyoungadultsinsavingforretirement.Bylinkingretirementsavingstospendinghabits,
thesenewtoolsmayprovideabettermeasureofexactlyhowmuchsavingswillbeneededin
retirementyears;thus,makingMillennialsconfidentoftheirfinancialsecurity.
15
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