Ronnie Chen, Ph.D., assistant professor of finance at Carson-Newman University in Jefferson City, Tenn., shared his thoughts on the state of retirement today in this recent email interview.
MoneyRates.com: What should the government do to encourage Americans to save more for retirement – or should it even bother?
Chen: According to the 2013 Retirement Confidence Survey conducted by the Employee Benefit Research Institute, 49 percent of surveyed workers said that they were not confident about having enough money for a comfortable retirement. This is not surprising given the low savings rate and high debt level among Americans. For instance, the survey shows that 55 percent of workers are having a problem with their level of debt, and 47 percent of workers age 45 and older have total savings and investments of less than $25,000. Therefore the government should further encourage Americans to save more for retirement.
There are a few things the government can do to promote retirement savings. One of the most important things the government needs to do is to stimulate the economy and create more jobs. Especially in recent years, retirement savings might have relatively decreased because making ends meet has become the No. 1 challenge for many Americans. Another thing the government can do is to promote financial literacy. According to the same survey, a striking percentage of workers do not know how much money they need to save for their retirement and only 46 percent of surveyed workers report they and/or their spouse have tried to do the calculation. This need is more imminent if we consider the number of significant tax and legal changes made to the retirement planning system in recent years (e.g., the 2006 Roth 401(k)).
How might the retirement of the baby boomers impact the economy?
The retirement of the baby boomers will potentially impact the economy from many perspectives. To name a few, unemployment, cost of labor and tax. Over the next 20 years, the number of baby boomers that are retiring each day could reach 10,000, and the Labor Department predicted last year that the growth of the labor forced would slow down by 7 percent each year relative to the previous decade until 2020. Even if some of the baby boomers are postponing their retirement for various reasons, this may alleviate the unemployment problem we have been having since the recent financial crisis. With fewer workers available, the employers will possibly be forced to increase the salary level and labor will become more costly, especially for those physically demanding industries. Another reason for the available labor force to demand a higher salary is the potential increase in tax. When about 80 million baby boomers shift from taxpayers to benefits collectors, it is going to be a financial disaster for the government. And one way to finance Social Security, Medicare and Medicaid is to raise tax rates on the labor force. However, new immigrants might mitigate those issues.
MoneyRates estimates that Fed policy has cost U.S. savers more than half a trillion dollars. Have the Fed’s low-rate policies been worth the lost income to retirees and other savers?
Indeed, the Fed’s low-rate policies might have cost American savers a lot of money in the short run due to decreased returns on savings and other financial assets such as bonds. But in the longer term, these policies should be beneficial to retirees and other savers. The goal of the Fed’s low-rate policies is to stimulate the recovery and growth of the economy, because theoretically, it will boost consumption and investment and therefore improve the fundamentals of the economy. As the fundamentals of the economy improve, the returns on the stock market, the barometer of the economy, are going to increase, leading to an increase in the value of retirees and savers’ investment portfolios. Besides, the improvements in economy fundamentals are also going to boost investors’ confidence and their demand for both risky and safer (such as CDs and bonds) financial assets, leading to increased returns on these financial assets. For example, the yield on 10-year Treasury bonds increased by roughly 1 percent from May to October this year.