This may come as a surprise to most people but I only get once finance magazine at home: MONEY. In the past I have bought or subscribed to a number of magazines for the articles and advice, but I keep coming back to MONEY magazine. By this time in my personal finance life I can’t say that I get a whole lot of it except for some inspirational articles and/or interviews. This last issue they did an interview with Dr. Teresa Ghilarducci, an economist who teaches at the New School in New York City. Dr. Ghilarducci, after researching the topic for most of her career, has come up with a few conclusions.
First, the inadequacy to plan for retirement in the U.S. is the number ONE problem that families face. We are all going to get older, but not a lot of us plan for retirement. I think I have heard that only 31% of Americans are actually participating in a work retirement plan. Um, hello that is a HUGE problem. Considering the median 401k balance is only $120,000, which won’t get your far nowadays.
Second, social security as it is currently funded is woefully inadequate to support our retirement. Hell, the minimum benefit for someone single on social security is below the poverty level at $830 (the poverty level baseline is just over $900). According to reports, the trust fund will technically only start paying out about 80% of benefits starting in the year 2033. That isn’t that far away in political time.
Third, Medicare won’t cover all of your medical expenses. Most people on Medicare have a lot of their expenses covered. However, there is a part of Medicare that is like an insurance policy where you pay premiums and the like. In the future, premiums will go up and how many people on medicare will be able to afford the premiums.
Fourth, long-term care is a ticking time bomb we don’t acknowledge. I don’t agree with former Governor Mike Huckabee on a lot of things, but Huckabee has been on a crusade for us to declare war on ailments like Alzheimers, Diabetes, etc. If we solve those health issues we won’t have a lot of seniors going into assisted living or long-term care which can cost thousands, if not tens of thousands of dollars. And many people can’t afford it because they never bought a long-term care insurance policy (luckily my parents had some foresight and did and I know I will when the time comes).
The ultimate conclusion of Ghilarducci is that we are woefully unprepared for retirement, particularly savings.
The good Dr. did have some solutions that I am totally on-board with. First, take off the income caps on social security so that all income is taxed. Increase the tax on medicare by 1% to pay for long-term care insurance for people. Third and the most intriguing to me is that we mandate that all employees contribute (on top of) to a retirement plan. Dr. Ghilarducci solution is for the employer and employee to contribute at least 5%. Then that money is put into an index fund and managed for that person until they retire, similarly to how pensions are managed (public and private).
Say what you will about pensions and their management, but I am all for MANDATING retirement savings. Yes, I know this is America and people should have the right to choose and all that jazz. However, if people don’t retire then the taxpayer will be paying more for them in benefits that they will be using (e.g. food stamps) etc. I want people to have some skin in the game and I don’t think that it is high time people take this issue way more seriously. If that means I have to MANDATE that you contribute to a retirement plan that is fine with me. I mean we mandate that you pay social security taxes and medicare. This only adds one more layer of security for people. It doesn’t preclude people from saving more, but it is high time we start talking about ways of solving this issue. Research tells us that people won’t save until they are pushed. Very few people are conscientious enough to think 40 years into the future. If that means we have to mandate they save so be it.