Although President Joe Biden's administration is raising hopes for a substantial stimulus package, economic forecasts are still sour.
Major banks and the International Monetary Fund are predicting slower economic growth in 2021 so that the recession that started in February 2020 is looking more likely to linger.
And even though the average American household is accumulating cash — average savings rates are sky high, 12.9% in November — it is more than likely this is savings from the first round of stimulus checks and not long-term savings dedicated to retirement.
There are two signs the typical American will be even more worse off in retirement than they were before. First, rates of return on safe assets are going to remain low for longer as central banks do everything they can to prop up the economy. Second, neither workers nor employers will likely increase contributions to make up for lower future rates of return. Workers are tapped out and employers will not increase the already low retirement plan coverage at work. They don't have to. Employers — many of the most profitable are bigger and stronger — won't be pressured to increase wages or benefits in the face of lingering unemployment and low worker bargaining power.
Although these lower rates of return on financial assets are completely justified from a macroeconomic perspective, they mean any American saving for retirement will have to save more and that seems really unlikely. As University of Pennsylvania professor and veteran retirement researcher Olivia Mitchell puts it in an excellent 2020 paper, "Building Better Retirement Systems in the Wake of the Global Pandemic," the nation will have to "rethink" plan contribution rates.
But rethinking may be optimistic. The cold, hard math of saving for retirement in a low-return environment seems to make the whole enterprise a bit hopeless.
If real returns remain low for years, saving rates for retirement would have to skyrocket to make up for the low rates. James Poterba, Mitsui Professor of Economics at the Massachusetts Institute of Technology, predicts that contribution rates should be 33% to 48% of earnings to pay for a lifetime income stream, covering half of workers' pre-retirement income (assuming a 4% investment return, a 2% inflation rate and saving for 20 years). If workers save for retirement for 40 years, they need to save 15% to 22% of pay. I say that is rare — most people would tell me they don't know anyone who does.
If investment returns are even lower than 4%, saving rates have to be 50% of pay to generate a payout stream that keeps pace with inflation. Since recommending people save half of their pay for 20 years is ridiculous — do we now cancel retirement?
I think Boston College economists Joseph Quinn and Kevin E. Cahill in their rethinking about saving for retirement speak for many hopeful lawmakers that if people just worked longer and maybe didn't retire the low rates wouldn't be a problem. They propose a golden solution: If people give up retirement years, inadequate retirement balances don't have to be stretched as much and employers will have the comfort of an expanded labor supply.
Canceling retirement seems pretty mean for so many workers who don't have jobs that are desirable or healthy to be in if you are old. Also, the COVID-19 recession makes working longer disjointed from reality.
Older workers face even more difficulties keeping and finding a job — unemployment rates for the first time are higher for older workers than prime age workers. The second reason it is harsh to cancel retirement is that Americans already have fewer expected retirement years than almost all workers in rich countries. More importantly, people who retire voluntarily really like it. They overwhelming enjoy not working and having time for themselves before they die.
In our 2018 study with co-authors Siavash Radpour and Tony Webb, we turned over every stone to get an accurate measure of how much people had to retire on. Only 5% of people at the very top of the income distribution had five or more times their average pay in their mid-50s. Most of those even at the top won't come close to having 10 times their salary as recommended by Fidelity Investments and Aon PLC. Changing the target income from maintaining living standards to something smaller and more modest, say 200% of the poverty line, then a person could afford, perhaps, a small apartment, enough food and the ability to celebrate a friend's birthday at an Applebee's a few times a year.
But many can't even reach that modest goal in retirement. My colleagues and I found in our 2019 study that 61% of working married men and 86% of working single women aged 62-70 will not have enough income to meet the modest standards of having $32,920 for a couple or $24,280 for someone living alone.
Another option to huckstering people into saving more and more out of their pay is to rethink how we deliver old age security, including an expanded Social Security system or mandatory employer contributions, without forcing Americans to give up dignified retirement years, or the freedom to structure their physical, productive and social activities before infirmity and death.