tag:theconversation.com,2011:/africa/topics/401-k-19938/articles401(k) – The Conversation2020-03-10T16:43:57Ztag:theconversation.com,2011:article/1333992020-03-10T16:43:57Z2020-03-10T16:43:57ZA coronavirus recession may be coming: Here’s what to do with your money<figure><img src="https://images.theconversation.com/files/319667/original/file-20200310-61094-ktecos.jpg?ixlib=rb-1.1.0&rect=71%2C238%2C7868%2C5059&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">In Rome, a normally packed Colosseum is virtually empty. </span> <span class="attribution"><span class="source">AP Photo/Andrew Medichini</span></span></figcaption></figure><p><a href="https://www.nytimes.com/2020/03/09/business/stock-market-oil-coronavirus.html">Global markets are crashing</a>, the <a href="https://economictimes.indiatimes.com/markets/commodities/news/crude-crashes-by-most-since-1991-as-saudi-arabia-launches-price-war/videoshow/74544385.cms">price of oil is plummeting</a> and even <a href="https://www.bbc.com/news/world-europe-51810673">entire countries are in lockdown</a>. The odds of a recession due to the new coronavirus outbreak <a href="https://www.cnn.com/2020/03/09/economy/global-recession-coronavirus/index.html">are rising every day</a>. </p>
<p>A question I’m often asked as a <a href="https://scholar.google.com/citations?user=JfUEmSUAAAAJ&hl=en&oi=ao">finance professor</a> and a <a href="https://www.cfainstitute.org/en/programs/cfa/charter">CFA charterholder</a> is what should people do with their money when the economy is slowing or in a recession, which typically causes riskier assets like stocks to decline. Fear causes many people to run for the hills. </p>
<p>But the short answer, for most investors, is the exact opposite: Stick to your long-term plan and ignore day-to-day market fluctuations, however frightening they may be. Don’t take my word for it. The tried and true approach of passive investing is backed up by a lot of evidence.</p>
<figure>
<iframe width="440" height="260" src="https://www.youtube.com/embed/pja6bOqFKmo?wmode=transparent&start=0" frameborder="0" allowfullscreen=""></iframe>
<figcaption><span class="caption">A look at how the coronavirus could affect the U.S. economy.</span></figcaption>
</figure>
<h2>Most of us have money at risk</h2>
<p>While we usually associate investing with hotshot Wall Street investors and hedge funds, the truth is most of us have a stake in financial markets and their ups and downs. <a href="https://www.federalreserve.gov/publications/files/scf17.pdf">About half of American families own stocks</a> either directly or through institutional investment vehicles like mutual funds. </p>
<p>Most of the invested wealth average Americans hold is managed by professional investors who look after it for us. But the <a href="https://www.cnbc.com/2017/01/04/a-brief-history-of-the-401k-which-changed-how-americans-retire.html">continued growth</a> of defined contribution plans like 401(k)s – which require people to make choices about where to put their money – means their financial security increasingly depends on their own investment decisions.</p>
<p>Unfortunately, most people are not good investors. Individual investors who trade stocks <a href="http://dx.doi.org/10.2139/ssrn.219228">underperform the market</a> – and passive investors – by a wide margin. The more they trade, the worse they do. </p>
<p>One reason is that the pain of losses is about <a href="https://www.behavioraleconomics.com/resources/mini-encyclopedia-of-be/loss-aversion/">twice as strong</a> as the pleasure of gains, which leads people to act in counterproductive ways. When faced with a threatening situation, our instinctive response is often to run or fight. But, like trying to outrun a bear, exiting the market after suffering losses is not a good idea. It often results in selling at low prices and buying higher later, once the market stress eases.</p>
<p>The good news is you don’t need a Ph.D. in finance to achieve your investment goals. All you need to do is follow some simple guidelines, backed by evidence and hard-earned market wisdom. </p>
<h2>Investing checklist</h2>
<p>First of all, don’t make any rash moves because of the growing chatter about recession or any wild gyrations on Wall Street. </p>
<p>If you have a solid investment plan in place, stick to it and ignore the noise. For everyone else, it’s worth going through the following checklist to help ensure you’re ready for any storm on the horizon.</p>
<ol>
<li><p>Define clear, measurable and achievable investment goals. For example, your goal might be to retire in 20 years at your current standard of living for the rest of your life. Without clear goals, people often approach the path to getting there piecemeal and end up with a motley collection of investments that don’t serve their actual needs. As baseball legend Yogi Berra <a href="https://www.goodreads.com/quotes/499411-if-you-don-t-know-where-you-re-going-you-ll-end-up">once said</a>, “If you don’t know where you are going, you’ll end up someplace else.” </p></li>
<li><p>Assess <a href="https://www.investopedia.com/articles/pf/07/risk_tolerance.asp">how much risk</a> you can take on. This will depend on your investment horizon, job security and attitude toward risk. A good rule of thumb is if you’re nearing retirement, you should have a smaller share of risky assets in your portfolio. If you just entered the job market as a 20-something, you can take on more risk because you have time to recover from market downturns. </p></li>
<li><p><a href="https://money.usnews.com/investing/investing-101/articles/why-diversification-is-important-in-investing">Diversify your portfolio</a>. In general, riskier assets like stocks compensate for that risk by offering <a href="https://www.investopedia.com/ask/answers/042415/what-average-annual-return-sp-500.asp">higher expected returns</a>. At the same time, safer assets such as bonds tend to go up when things are bad, but offer much lower gains. If you invest a big part of your savings in a single stock, however, you are not being compensated for the risk that the company will go bust. To eliminate these uncompensated risks, diversify your portfolio to include a wide range of asset classes, such as foreign stocks and bonds, and you’ll be in a better position to endure a downturn. </p></li>
<li><p>Don’t try to pick individual stocks, identify the <a href="https://www.vanguard.com/pdf/icrwmf.pdf">best-performing actively managed funds</a> or time the market. Instead, stick to a diversified portfolio of passively managed stock and bond funds. Funds that have done well in the recent past <a href="https://www.thebalance.com/past-performance-is-no-guarantee-of-future-results-357862">may not continue to do so</a> in the future. </p></li>
<li><p>Look for low fees. Future returns are uncertain, but investment costs will certainly take a bite out of your portfolio. To keep costs down, invest in index funds whenever possible. These funds track broad market indices like the Standard & Poor’s 500 and tend to <a href="https://www.thebalance.com/investing-in-low-cost-index-funds-357951">have very low fees</a> yet <a href="https://www.cnbc.com/2019/03/15/active-fund-managers-trail-the-sp-500-for-the-ninth-year-in-a-row-in-triumph-for-indexing.html">produce higher returns</a> than the <a href="https://ssrn.com/abstract=1356021">majority of actively managed funds</a>. </p></li>
<li><p>Continue to make regular contributions to your investments, even during a recession. Try to set aside as much as you can afford. Many employers <a href="http://longevity.stanford.edu/sightlines-financial-security-special-report-mobile/">even match</a> all or some of your personal retirement contributions. Unfortunately, most Americans are <a href="http://longevity.stanford.edu/sightlines-financial-security-special-report-mobile/#retirement">not saving enough</a> for retirement. <a href="https://financialengines.com/docs/financial-engines-401k-match-report-050615.pdf">One in four Americans</a> enrolled in employer-sponsored defined contribution plans does not save enough to get the employer’s full match. That’s like letting your employer keep part of your salary. </p></li>
<li><p>There’s one exception to my advice about standing pat. Let’s suppose your long-term plan calls for a portfolio with 50% in U.S. stocks, 25% in international stocks and 25% in bonds. After U.S. stocks have a good run, their weight in the portfolio may increase a lot. This changes the risk of your portfolio. So <a href="https://www.vanguard.com/pdf/ISGPORE.pdf">about once a year</a>, rebalance your portfolio to match your long-term allocation targets. Doing so can make a <a href="https://www.forbes.com/sites/investor/2011/11/16/does-portfolio-rebalancing-work/#1fc4f9548393">big difference in performance</a>.</p></li>
</ol>
<p>Always keep in mind your overall investment plan and focus on the long-term goals of your portfolio. Many market declines that were scary in real time look like small blips on a long-term chart. </p>
<h2>Turbulence ahead</h2>
<p>In the long run, this approach is likely to produce better results than trying to beat the market – which <a href="https://www.investopedia.com/ask/answers/12/beating-the-market.asp">even pros</a> tend to have a hard time doing.</p>
<p><a href="https://www.cnbc.com/2017/10/03/after-winning-bet-against-hedge-funds-warren-buffett-says-hed-wager-again-on-index-funds.html">Billionaire investor Warren Buffett</a> demonstrated this by easily winning a bet that a simple S&P 500 index fund could beat a portfolio of hedge funds – <a href="https://www.investopedia.com/articles/investing/042015/10-most-famous-hedge-fund-managers.asp">supposedly the savviest investors</a> out there, at least judging by the high fees they charge.</p>
<p><a href="http://jasonzweig.com/a-note-on-benjamin-graham/">In the words</a> of legendary investor Benjamin Graham: “The investor’s chief problem and even his worst enemy is likely to be himself.” Graham, who mentored Buffett, meant that instead of making rational decisions, many investors let their emotions run wild. They buy and sell when their gut – rather than their head – tells them to. </p>
<p>Trying to outsmart the market is <a href="https://ssrn.com/abstract=1622184">akin to gambling</a> and it doesn’t work any better than playing a lottery. Passive investing is admittedly boring but is a much better bet long-term. </p>
<p>But if you follow these guidelines and fasten your seat belt, you’ll be able to ride out the current turbulence. </p>
<p><em>This is an update of an article originally published on Aug. 21, 2019.</em></p>
<p>[<em><a href="https://theconversation.com/us/newsletters?utm_source=TCUS&utm_medium=inline-link&utm_campaign=newsletter-text&utm_content=expertise">Expertise in your inbox. Sign up for The Conversation’s newsletter and get a digest of academic takes on today’s news, every day.</a></em>]</p><img src="https://counter.theconversation.com/content/133399/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Alexander Kurov does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>With a global recession looking increasingly likely, a finance scholar offers guidance on how to ride it out.Alexander Kurov, Professor of Finance and Fred T. Tattersall Research Chair in Finance, West Virginia UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1220032019-08-21T12:32:30Z2019-08-21T12:32:30ZHow to invest if you’re worried a recession is coming<figure><img src="https://images.theconversation.com/files/288605/original/file-20190819-123727-5d7g7l.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Even the pros don't know what's up. </span> <span class="attribution"><span class="source">AP Photo/Richard Drew</span></span></figcaption></figure><p>Although the U.S. economy <a href="https://www.cnbc.com/2019/07/26/us-gdp-second-quarter-2019.html">continues to grow</a> and <a href="https://finance.yahoo.com/news/july-2019-jobs-report-bls-215030223.html">add jobs</a>, <a href="https://www.cnbc.com/2019/08/15/trump-wants-fed-rate-cuts-unclear-if-they-would-help.html">talk</a> of a <a href="https://finance.yahoo.com/news/recession-will-be-a-slow-motion-accident-strategist-131602319.html">recession</a> is <a href="https://trends.google.com/trends/explore?date=all&geo=US&q=Recession">increasingly in the air</a> due to a number of worrying signs.</p>
<p><a href="https://www.bloomberg.com/opinion/articles/2019-08-14/u-s-businesses-are-stuck-in-trade-war-uncertainty">Business investment</a> and <a href="https://www.bloomberg.com/news/articles/2019-08-16/trump-economy-loses-luster-for-independents-in-2020-warning-sign?srnd=premium">consumer confidence</a> are taking a hit due to the growing economic jitters and uncertainty over the ongoing trade war with China. An important bond market recession warning – known as an <a href="https://fred.stlouisfed.org/graph/fredgraph.png?g=mtiz">inverted yield curve</a> – <a href="https://www.washingtonpost.com/business/2019/08/14/stocks-tank-another-recession-warning-surfaces">is spooking investors</a>. And policymakers are actively taking steps to bolster the economy, such as the Federal Reserve’s recent decision to lower short-term borrowing costs. The Trump administration <a href="https://www.washingtonpost.com/politics/trump-confirms-hes-considering-a-payroll-tax-cut-amid-mounting-economic-concerns/2019/08/20/2c97e500-c37a-11e9-9986-1fb3e4397be4_story.html">is even mulling a payroll tax cut</a> to avert a downturn. </p>
<p>A question I’m often asked as a <a href="https://scholar.google.com/citations?user=JfUEmSUAAAAJ&hl=en&oi=ao">finance professor</a> and a <a href="https://www.cfainstitute.org/en/programs/cfa/charter">CFA charterholder</a> is what should people do with their money when the economy is slowing or in a recession, which typically causes riskier assets like stocks to decline. Fear causes many people to run for the hills. </p>
<p>But the short answer, for most investors, is the exact opposite: Stick to your long-term plan and ignore day-to-day market fluctuations, however frightening they may be. Don’t take my word for it. The tried and true approach of passive investing is backed up by a lot of evidence.</p>
<h2>Most of us have money at risk</h2>
<p>While we usually associate investing with hotshot Wall Street investors and hedge funds, the truth is most of us have a stake in financial markets and their ups and downs. <a href="https://www.federalreserve.gov/publications/files/scf17.pdf">About half of American families own stocks</a> either directly or through institutional investment vehicles like mutual funds. </p>
<p>Most of the invested wealth average Americans hold is managed by professional investors who look after it for us. But the <a href="https://www.cnbc.com/2017/01/04/a-brief-history-of-the-401k-which-changed-how-americans-retire.html">continued growth</a> of defined contribution plans like 401(k)s – which require people to make choices about where to put their money – means their financial security increasingly depends on their own investment decisions.</p>
<p>Unfortunately, most people are not good investors. Individual investors who trade stocks <a href="http://dx.doi.org/10.2139/ssrn.219228">underperform the market</a> – and passive investors – by a wide margin. The more they trade, the worse they do. </p>
<p>One reason is because the pain of losses is about <a href="https://www.behavioraleconomics.com/resources/mini-encyclopedia-of-be/loss-aversion/">twice as strong</a> as the pleasure of gains, which leads people to act in counterproductive ways. When faced with a threatening situation, our instinctive response is often to run or fight. But, like trying to outrun a bear, exiting the market after suffering losses is not a good idea. It often results in selling at low prices and buying higher later, once the market stress eases.</p>
<p>The good news is you don’t need a Ph.D. in finance to achieve your investment goals. All you need to do is follow some simple guidelines, backed by evidence and hard-earned market wisdom. </p>
<h2>Investing checklist</h2>
<p>First of all, don’t make any rash moves because of the growing chatter about recession or any wild gyrations on Wall Street. </p>
<p>If you have a solid investment plan in place, stick to it and ignore the noise. For everyone else, it’s worth going through the following checklist to help ensure you’re ready for any storm on the horizon.</p>
<ol>
<li><p>Define clear, measurable and achievable investment goals. For example, your goal might be to retire in 20 years at your current standard of living for the rest of your life. Without clear goals, people often approach the path to getting there piecemeal and end up with a motley collection of investments that don’t serve their actual needs. As baseball legend Yogi Berra <a href="https://www.goodreads.com/quotes/499411-if-you-don-t-know-where-you-re-going-you-ll-end-up">once said</a>, “If you don’t know where you are going, you’ll end up someplace else.” </p></li>
<li><p>Assess <a href="https://www.investopedia.com/articles/pf/07/risk_tolerance.asp">how much risk</a> you can take on. This will depend on your investment horizon, job security and attitude toward risk. A good rule of thumb is if you’re nearing retirement, you should have a smaller share of risky assets in your portfolio. If you just entered the job market as a 20-something, you can take on more risk because you have time to recover from market downturns. </p></li>
<li><p><a href="https://money.usnews.com/investing/investing-101/articles/why-diversification-is-important-in-investing">Diversify your portfolio</a>. In general, riskier assets like stocks compensate for that risk by offering <a href="https://www.investopedia.com/ask/answers/042415/what-average-annual-return-sp-500.asp">higher expected returns</a>. At the same time, safer assets such as bonds tend to go up when things are bad, but offer much lower gains. If you invest a big part of your savings in a single stock, however, you are not being compensated for the risk that the company will go bust. To eliminate these uncompensated risks, diversify your portfolio to include a wide range of asset classes, such as foreign stocks and bonds, and you’ll be in a better position to endure a downturn. </p></li>
<li><p>Don’t try to pick individual stocks, identify the <a href="https://www.vanguard.com/pdf/icrwmf.pdf">best-performing actively managed funds</a> or time the market. Instead, stick to a diversified portfolio of passively managed stock and bond funds. Funds that have done well in the recent past <a href="https://www.thebalance.com/past-performance-is-no-guarantee-of-future-results-357862">may not continue to do so</a> in the future. </p></li>
<li><p>Look for low fees. Future returns are uncertain, but investment costs will certainly take a bite out of your portfolio. To keep costs down, invest in index funds whenever possible. These funds track broad market indices like the Standard & Poor’s 500 and tend to <a href="https://www.thebalance.com/investing-in-low-cost-index-funds-357951">have very low fees</a> yet <a href="https://www.cnbc.com/2019/03/15/active-fund-managers-trail-the-sp-500-for-the-ninth-year-in-a-row-in-triumph-for-indexing.html">produce higher returns</a> than the <a href="https://ssrn.com/abstract=1356021">majority of actively managed funds</a>. </p></li>
<li><p>Continue to make regular contributions to your investments, even during a recession. Try to set aside as much as you can afford. Many employers <a href="http://longevity.stanford.edu/sightlines-financial-security-special-report-mobile/">even match</a> all or some of your personal retirement contributions. Unfortunately, most Americans are <a href="http://longevity.stanford.edu/sightlines-financial-security-special-report-mobile/#retirement">not saving enough</a> for retirement. <a href="https://financialengines.com/docs/financial-engines-401k-match-report-050615.pdf">One in 4 Americans</a> enrolled in employer-sponsored defined contribution plans does not save enough to get the employer’s full match. That’s like letting your employer keep part of your salary. </p></li>
<li><p>There’s one exception to my advice about standing pat. Let’s suppose your long-term plan calls for a portfolio with 50% in U.S. stocks, 25% in international stocks and 25% in bonds. After U.S. stocks have a good run, their weight in the portfolio may increase a lot. This changes the risk of your portfolio. So <a href="https://www.vanguard.com/pdf/ISGPORE.pdf">about once a year</a>, rebalance your portfolio to match your long-term allocation targets. Doing so can make a <a href="https://www.forbes.com/sites/investor/2011/11/16/does-portfolio-rebalancing-work/#1fc4f9548393">big difference in performance</a>.</p></li>
</ol>
<p>Always keep in mind your overall investment plan and focus on the long-term goals of your portfolio. Many market declines that were scary in real time look like small blips on a long-term chart. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/288824/original/file-20190820-170922-1a1wkr5.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/288824/original/file-20190820-170922-1a1wkr5.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=402&fit=crop&dpr=1 600w, https://images.theconversation.com/files/288824/original/file-20190820-170922-1a1wkr5.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=402&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/288824/original/file-20190820-170922-1a1wkr5.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=402&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/288824/original/file-20190820-170922-1a1wkr5.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=505&fit=crop&dpr=1 754w, https://images.theconversation.com/files/288824/original/file-20190820-170922-1a1wkr5.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=505&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/288824/original/file-20190820-170922-1a1wkr5.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=505&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Warren Buffett knows a thing or two about investing.</span>
<span class="attribution"><a class="source" href="http://www.apimages.com/metadata/Index/Earns-Berkshire-Hathaway/d7c1206a7ac2405ca58abc0667ae43e1/57/0">AP Photo/Nati Harnik</a></span>
</figcaption>
</figure>
<h2>Turbulence ahead</h2>
<p>In the long run, this approach is likely to produce better results than trying to beat the market – which <a href="https://www.investopedia.com/ask/answers/12/beating-the-market.asp">even pros</a> tend to have a hard time doing.</p>
<p><a href="https://www.cnbc.com/2017/10/03/after-winning-bet-against-hedge-funds-warren-buffett-says-hed-wager-again-on-index-funds.html">Billionaire investor Warren Buffett</a> demonstrated this by easily winning a bet that a simple S&P 500 index fund could beat a portfolio of hedge funds – <a href="https://www.investopedia.com/articles/investing/042015/10-most-famous-hedge-fund-managers.asp">supposedly the savviest investors</a> out there, at least judging by the high fees they charge.</p>
<p><a href="http://jasonzweig.com/a-note-on-benjamin-graham/">In the words</a> of legendary investor Benjamin Graham: “The investor’s chief problem and even his worst enemy is likely to be himself.” Graham, who mentored Buffett, meant that instead of making rational decisions, many investors let their emotions run wild. They buy and sell when their gut – rather than their head – tells them to. </p>
<p>Trying to outsmart the market is <a href="https://ssrn.com/abstract=1622184">akin to gambling</a> and it doesn’t work any better than playing a lottery. Passive investing is admittedly boring but is a much better bet long-term. </p>
<p>But if you follow these guidelines and fasten your seatbelt, you’ll be able to ride out the current turbulence. </p>
<p>[ <em><a href="https://theconversation.com/us/newsletters?utm_source=TCUS&utm_medium=inline-link&utm_campaign=newsletter-text&utm_content=expertise">Expertise in your inbox. Sign up for The Conversation’s newsletter and get a digest of academic takes on today’s news, every day.</a></em> ]</p><img src="https://counter.theconversation.com/content/122003/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Alexander Kurov does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>A growing number of investors, policymakers and others say the US economy may be at risk of spiraling downward. A finance professor explains how to ride it out.Alexander Kurov, Professor of Finance and Fred T. Tattersall Research Chair in Finance, West Virginia UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/993592018-11-26T11:36:19Z2018-11-26T11:36:19ZSocial Security helped slash elderly poverty to 9.2 percent in the 20th century – that triumph is now in jeopardy<figure><img src="https://images.theconversation.com/files/247141/original/file-20181125-149326-8rpn68.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">More elderly people may soon be pinching pennies.</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/old-couple-small-coin-poverty-senior-623466419?src=aI8oTOP6bdRMtaa0CeyMnw-1-7">docent/Shutterstock.com</a></span></figcaption></figure><p>In 1959, <a href="http://www.nber.org/aginghealth/summer04/w10466.html">more than a third of all elderly Americans</a> lived in poverty. Slashing that number to under 10 percent by the late 1990s was among the great U.S. triumphs of the 20th century. Social Security deserves a large share of the credit.</p>
<p>I believe eliminating old-age poverty entirely could one day be deemed a triumph of the 21st century. Even sustaining it at 10 percent would be a significant achievement. </p>
<p>But that meager goal is in serious jeopardy. <a href="http://dx.doi.org/10.2139/ssrn.3172935">My research shows</a> more Americans are increasingly struggling to save enough for their later years. And one of the main ways they have left, Social Security, is just 15 years away from going broke. </p>
<p>This leads me to ask one question: Do Americans want to return to a time when so many of their elders died in poverty?</p>
<h2>A wobbly retirement</h2>
<p>Since its <a href="https://www.ssa.gov/history/hfaq.html">advent</a> in 1935, Social Security has been one leg of Americans’ <a href="https://www.ssa.gov/history/stool.html">three-legged retirement stool</a>. The other two have been the wide availability of defined benefit retirement plans and personal savings supported by broadly shared economic prosperity. </p>
<p>This stool turned out to be remarkably successful by reducing the poverty rate among Americans aged 65 and older from as high as 78 percent in 1939 to 35 percent in 1959 – as Social Security benefits began kicking in – to 10 percent by 1995. </p>
<p><iframe id="mtbt4" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/mtbt4/1/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<p>But in recent decades, the defined benefit plans and worker savings legs have become increasingly wobbly. If they break entirely, saving Social Security becomes even more vital. </p>
<h2>Businesses shed pension risks</h2>
<p>For much of the 20th century, <a href="https://www.gao.gov/products/GAO-15-419">defined benefit plans</a> promised an annual lifetime payment determined by salary and played an important role in the financial security of many households with residents over 65. </p>
<p>Rising life expectancies required companies to pay out benefits for much longer, making them more expensive and risky. Coupled with uncertain investment returns, <a href="https://www.bls.gov/opub/mlr/2012/12/art1full.pdf">companies have been getting rid of them</a> in a hunt for savings and more profits for shareholders. Only 16 percent of Fortune 500 companies <a href="https://www.marketwatch.com/story/another-company-just-cut-its-pension-plan-what-to-do-if-it-happens-to-you-2018-07-11">offered</a> such plans in 2017, compared with 59 percent just two decades ago. </p>
<p>The Department of Labor <a href="https://www.dol.gov/sites/default/files/ebsa/researchers/statistics/retirement-bulletins/private-pension-plan-bulletin-historical-tables-and-graphs.pdf">reports</a> that the number of active participants in these pension programs as a percent of the labor force peaked in 1981 at 28 percent. Only about 9 percent participated in 2015. </p>
<p>Instead, they’ve shifted to defined contribution plans like the 401(k), placing the financial risk of retirement on workers. </p>
<p>That might have been OK, had working and middle-class Americans continued to share in the nation’s prosperity. </p>
<h2>The American dream fades for many</h2>
<p>But increasingly, that is not happening. </p>
<p>That’s in part because employment growth in the U.S. is now concentrated among highly skilled workers and low-paying service sector jobs, leaving fewer and fewer positions that provide enough income to set aside money for savings. </p>
<p>My research shows job opportunities <a href="http://dx.doi.org/10.2139/ssrn.3172935">are increasing most rapidly</a> in positions that pay less than US$30,000 thanks to automation as well as the growing demand for personal services – and the accompanying low wages. <a href="http://dx.doi.org/10.1257/aer.103.5.1553">These types of jobs</a> do not share as much in the fruits of economic growth. </p>
<p>In short, the <a href="http://science.sciencemag.org/content/early/2017/04/21/science.aal4617">American dream</a>, characterized by the hope that children will have a higher standard of living than their parents, is fading. <a href="http://doi.org/10.1126/science.aal4617">Ninety percent</a> of children born in 1940 made more than their parents at age 30, but only 50 percent of those born in 1984 had higher income at that age.</p>
<p>This means many more Americans will not be able to set aside much money for retirement, whether in terms of personal savings or a plan like a 401(k) or an IRA. And it’s why <a href="https://www.gao.gov/products/GAO-15-419">personal savings</a> is the shortest leg on the retirement financial stool and it will become shorter as a result of widening income inequality. </p>
<p>Without more revenue, Social Security will have to cut benefits by 2034. Even if current benefits are sustained, increasing low wage employment will result in lower benefits because they are determined by lifetime earnings.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/247145/original/file-20181126-149320-1v0a1c3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/247145/original/file-20181126-149320-1v0a1c3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=397&fit=crop&dpr=1 600w, https://images.theconversation.com/files/247145/original/file-20181126-149320-1v0a1c3.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=397&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/247145/original/file-20181126-149320-1v0a1c3.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=397&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/247145/original/file-20181126-149320-1v0a1c3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=499&fit=crop&dpr=1 754w, https://images.theconversation.com/files/247145/original/file-20181126-149320-1v0a1c3.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=499&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/247145/original/file-20181126-149320-1v0a1c3.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=499&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Social Security checks may get a lot smaller down the road.</span>
<span class="attribution"><a class="source" href="http://www.apimages.com/metadata/Index/Social-Security-Good-Deal/c2dcb5c2421f4efaa8b8d40142fa5319/129/0">AP Photo/Bradley C. Bower</a></span>
</figcaption>
</figure>
<h2>How not to save Social Security</h2>
<p>That brings us back to Social Security, perhaps the <a href="https://news.gallup.com/poll/182921/nonretirees-expect-rely-social-security.aspx">last leg still standing</a> for tens of millions of Americans as they head toward their twilight years in the coming decades. Increasing benefits for some Social Security recipients is required to avoid increasing poverty among retirees.</p>
<p>The system was designed so that today’s workers pay for today’s retirees. Back in 1960, there were 5.1 workers for every recipient. That ratio is projected to fall to 2.6 in 2020. </p>
<p>This fact, coupled with increasing life expectancy, is behind the system’s impending fiscal crisis, putting the Social Security Trust Fund into deficit. </p>
<p>Republicans have typically argued that the best way to fix the system is to <a href="https://mic.com/articles/188861/a-brief-look-back-at-paul-ryans-crusade-to-cut-benefits-to-the-poor">cut benefits</a> and encourage more workers to save through through savings plans like 401(k)s and IRAs. A bill that would erase the Social Security deficit for the rest of this century <a href="https://www.congress.gov/bill/114th-congress/house-bill/6489">would cut benefits for 75 percent</a> of recipients – requiring them to save on their own, which is not an option for workers stuck in low-wage employment.</p>
<p>The only alternative for those financially unprepared for retirement will be to continue to work into their 70s and beyond. But substantial evidence has shown that <a href="http://webarchive.urban.org/UploadedPDF/411705_aging_boomers.pdf">opportunities to work</a> in the retirement years are greatest for the best-educated and highly skilled. That leaves the rest – the vast majority – in dire straits. </p>
<p>The result seems inevitable: More Americans will grow old in poverty.</p>
<h2>A commitment to retirees</h2>
<p>Whether Americans will tolerate more poverty among retirees is a political question. And I believe this debate should be about values as much as affordability. </p>
<p>The fact that <a href="https://www.cnbc.com/2017/07/18/the-us-is-losing-ground-to-other-nations-on-retirement-security.html">other highly developed countries</a> spend more to support their retirees makes clear the reducing poverty among retirees is a matter of commitment, not affordability. </p>
<p>So if Americans agree that our elders should never again return to having to age in poverty, there are several ways we can shore up the Social Security system. </p>
<p>One involves extending the Social Security tax to include all earnings: In 2018 it was levied on <a href="https://fas.org/sgp/crs/misc/RL32896.pdf">only the first $128,000</a> of income. Another is more controversial but may be necessary: use general government revenue, financed by higher taxes on the wealthy, to permanently ensure Social Security remains a bedrock of retirement. </p>
<p>While increasing taxes is hard, the only question is whether we have the political will to do so.</p><img src="https://counter.theconversation.com/content/99359/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>David W. Rasmussen does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Americans are increasingly struggling to save enough for retirement. If Social Security isn’t saved, growing old in poverty will likely become more common.David W. Rasmussen, James H. Gapinski Professor of Economics, Florida State UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/972122018-05-25T10:46:18Z2018-05-25T10:46:18ZWhy we hate making financial decisions – and what to do about it<figure><img src="https://images.theconversation.com/files/220377/original/file-20180524-51135-1r54rxq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Financial decisions can be a real maze. </span> <span class="attribution"><span class="source">Andrii Vodolazhskyi/Shutterstock.com</span></span></figcaption></figure><p>The advice to use your head, not your heart, might not be helpful after all.</p>
<p>We all make tough decisions, but choices relating to money send many of us running in the other direction. Unfortunately, ample evidence indicates that aversion toward financial decisions leads many of us to put off things like <a href="https://www.mitpressjournals.org/doi/abs/10.1162/REST_a_00100">funding a 401(k)</a>, <a href="https://academic.oup.com/jcr/article/43/1/134/2379613">saving at a sufficient rate</a>, or just doing a better job <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=843826">managing our credit card debt</a>. All of these things can hurt <a href="https://www.aeaweb.org/articles?id=10.1257/aer.91.1.79">our long-term financial health</a>.</p>
<p>Economists and behavioral scientists have proposed several explanations for this phenomenon. For example, financial products are often quite <a href="http://journals.ama.org/doi/abs/10.1509/jppm.11.061">complicated</a>, and we may feel we <a href="http://journals.ama.org/doi/abs/10.1509/jmr.10.0518">lack the necessary expertise</a>. We may be overwhelmed by <a href="https://www.sciencedirect.com/science/article/pii/S0047272710000290">too many choices</a> – such as when picking mutual funds to put in our 401(k) portfolio.</p>
<p>But as valid as these reasons may be, my co-author <a href="https://site.warrington.ufl.edu/jane-jeongin-park/">Jane Jeongin Park</a> and I felt that there was more to the story. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/220378/original/file-20180524-51091-ob6nzs.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/220378/original/file-20180524-51091-ob6nzs.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/220378/original/file-20180524-51091-ob6nzs.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/220378/original/file-20180524-51091-ob6nzs.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/220378/original/file-20180524-51091-ob6nzs.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/220378/original/file-20180524-51091-ob6nzs.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/220378/original/file-20180524-51091-ob6nzs.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">A typical look when dealing with finances.</span>
<span class="attribution"><span class="source">Pormezz/Shutterstock.com</span></span>
</figcaption>
</figure>
<h2>Money matters</h2>
<p><a href="https://sites.google.com/view/anersela/home">Take me</a>, for example: I have an MBA with a concentration in <a href="https://scholar.google.com/citations?user=w-VZnkwAAAAJ&hl=en&oi=ao">finance</a> and a Ph.D. in business, yet I still hate dealing with financial decisions. Whenever I get a statement from my bank, my instinct is to shove it in my desk drawer. </p>
<p>Clearly, knowledge regarding financial products or subjective perceptions of competence do not explain this type of behavior very well. What is going on here?</p>
<p><a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2966299">Our research</a> suggests that the culprit might be our stereotypes about money matters. We discovered that people perceive financial decisions – more so than decisions in many other equally complex and important domains – as cold, unemotional and extremely analytical – in other words, as highly incompatible with feelings and emotions.</p>
<p>This may not be surprising considering how media gurus <a href="https://www.kiplinger.com/article/investing/T031-C032-S014-the-high-cost-of-emotion.html">routinely caution people</a> against allowing <a href="https://lifehacker.com/how-emotions-drive-bad-financial-decisions-and-how-to-1637678746">feelings to get in the way</a> of our personal finances, and how popular culture often portrays <a href="https://www.imdb.com/title/tt1645089/">Wall Street</a> and other financial professionals as “cold fish” who are <a href="https://www.imdb.com/title/tt1596363/">morally</a> and <a href="https://www.imdb.com/title/tt2140479/">emotionally</a> apathetic.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/220385/original/file-20180524-51130-1gqcxs4.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/220385/original/file-20180524-51130-1gqcxs4.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/220385/original/file-20180524-51130-1gqcxs4.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/220385/original/file-20180524-51130-1gqcxs4.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/220385/original/file-20180524-51130-1gqcxs4.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/220385/original/file-20180524-51130-1gqcxs4.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/220385/original/file-20180524-51130-1gqcxs4.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Finance is cold and calculating.</span>
<span class="attribution"><span class="source">Matej Kastelic/Shutterstock.com</span></span>
</figcaption>
</figure>
<h2>Emotional thinkers</h2>
<p>Consistent with this notion, we conducted several studies to examine how people’s perceptions of their own thinking style might influence their tendency to avoid financial decisions. </p>
<p>In our initial study, we asked about 150 people to fill out an online survey, which involved several sets of questions. First, we asked about their tendency to rely on emotions in decision-making generally. We then tried to ascertain their tendency to avoid decisions in a range of domains, such as finance or health. We also asked specific questions reflecting engagement in everyday financial decisions like, “Do you read your bank statements?” or “Have you ever tried to figure out how much you needed for retirement?” Finally, we looked for evidence of financial literacy with questions like, “Do stocks or bonds normally fluctuate more over time?”</p>
<p>We found that the more people perceived themselves as emotional thinkers, the higher their tendency to avoid or neglect their personal finances. For example, people who ranked high on emotional decision-making were less likely to have ever tried to figure out how much they needed to save for retirement, read financial statements, or know the fees and interest rates on their credit cards. </p>
<p>Interestingly, this relationship did not extend to decisions in other areas, such as buying clothes or making health care decisions. It was also unrelated to respondents’ financial literacy or feelings of competence.</p>
<p>In four more separate studies, we led half of the participants to view themselves as emotional decision-makers and the others as more analytical. We did this by asking them to reflect on a prior decision in which they used either emotions or analytical thinking. In each study, we measured participants’ propensity to avoid – or engage in – financial matters by asking them to choose between two types of tasks – one involving financial decisions and the other one not – or by offering them an opportunity to take advantage of a financial workshop. </p>
<p>We found that when people were led to view themselves as emotional decision-makers, as opposed to analytical, they became more likely to avoid tasks in which they had to engage in financial decisions and instead preferred to work on other tasks that were equally difficult and time-consuming. </p>
<p>They were also more likely to decline our offer to participate in an educational workshop on personal finance, which could potentially improve their financial well-being. </p>
<p>In other words, our studies show that the more people perceive themselves as emotional beings, the more they feel alienated from money matters. This appears to be because they perceive the type of person they are – warm, emotional – as incompatible with how financial decisions are made – cold, unemotional. </p>
<p>We found that these perceptions of incongruity – namely, that financial decisions are just “not me” – account for a significant portion of the tendency to shun financial decisions regardless of people’s actual knowledge about financial matters and their confidence in their ability to make sound financial decisions.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/220379/original/file-20180524-51130-1v1v9zd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/220379/original/file-20180524-51130-1v1v9zd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=393&fit=crop&dpr=1 600w, https://images.theconversation.com/files/220379/original/file-20180524-51130-1v1v9zd.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=393&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/220379/original/file-20180524-51130-1v1v9zd.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=393&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/220379/original/file-20180524-51130-1v1v9zd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=494&fit=crop&dpr=1 754w, https://images.theconversation.com/files/220379/original/file-20180524-51130-1v1v9zd.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=494&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/220379/original/file-20180524-51130-1v1v9zd.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=494&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">They saved wisely.</span>
<span class="attribution"><span class="source">Spotmatik Ltd/Shutterstock.com</span></span>
</figcaption>
</figure>
<h2>A lifestyle hack</h2>
<p>So is there a way to get around this problem? </p>
<p>The good news is yes. We found that study participants were less likely to avoid financial decisions when those exact same choices were reframed as decisions about their lifestyle. </p>
<p>For example, in our survey, when we asked participants to think about choosing annuities for their retirement portfolio as “a decision about your life in retirement” instead of “a decision about financial investments for retirement,” seeing themselves as emotional thinkers no longer resulted in decision avoidance. </p>
<p>That’s a hack you can use to tackle a money matter you’ve been putting off. Try to picture the pleasant outcome you’re creating down the line, not the icky decision facing you right now.</p>
<p>These insights could also help employers, policymakers and financial product providers to present information in ways that make us more likely to engage – instead of run screaming. Advertising financial services as being about life outcomes, such as lifestyle goals in retirement, instead of as “financial investments,” may reduce people’s tendency to shun these decisions. </p>
<p>Considering that the cost of doing so is ridiculously low, this may be worth a shot.</p><img src="https://counter.theconversation.com/content/97212/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Aner Sela does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Research suggests that the reason people may put off funding their 401(k) plans or managing credit card debt is because our perception of finance as ‘cold’ conflicts with our hot-blooded emotions.Aner Sela, Associate Professor of Marketing, University of FloridaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/537982016-02-03T11:10:21Z2016-02-03T11:10:21ZWhy are so many Americans struggling to save for retirement?<figure><img src="https://images.theconversation.com/files/110064/original/image-20160202-6966-gtt9k.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Most Americans will be pinching pennies after they retire. </span> <span class="attribution"><span class="source">Retirement pennies via www.shutterstock.com</span></span></figcaption></figure><p>This week <a href="http://www.wsj.com/articles/hillary-clinton-beats-bernie-sanders-by-slim-margin-in-iowa-1454438068">marked</a> the beginning of the presidential primary season, and economic fears such as jobs and wages have taken center stage on the campaign trail. </p>
<p>Yet one of voters’ biggest economic problems has thus far received short shrift from the candidates: Americans’ growing inability to save for retirement. </p>
<p>A handful of Republican and Democratic candidates <a href="http://crr.bc.edu/newsroom/featured-work/2016-presidential-candidates-views-on-social-security/">have laid out proposals for Social Security reform</a>, but none have adequately addressed the substantial and growing deficit in total retirement savings.</p>
<p>The retirement crisis is real, as I’ve also been documenting for the past 15 years and most recently in my new book, <a href="http://www.palgrave.com/us/book/9781137395627">Retirement on the Rocks</a>. More than half of us won’t have enough savings when we retire to maintain our current standard of living and will have to make substantial spending cuts once we stop working. </p>
<p>How did we get here, what are the consequences and how can we fix the problem? </p>
<h2>An inability to save</h2>
<p>The share of households with working-age adults that could expect to have to make substantial and potentially harmful cuts to their spending in retirement has <a href="http://crr.bc.edu/briefs/nrri-update-shows-half-still-falling-short/">spiked</a> in recent decades, rising from 31 percent in 1983 to 52 percent in 2013, according to the National Retirement Risk Index at the Center for Retirement Research. </p>
<p>Some groups are particularly likely to have <a href="http://research.upjohn.org/up_press/214/">insufficient retirement savings</a>. Communities of color, single women and those with less education, for example, tend to be less prepared for retirement than white households, single men and those with more education. </p>
<p>For example, 60 percent of African Americans and Latinos near retirement in 2010 <a href="http://www.cornellpress.cornell.edu/book/?GCOI=80140100291230">were deemed likely to struggle economically</a> when they stopped working, compared with only 45 percent of whites. </p>
<h2>Why aren’t we saving enough?</h2>
<p>This crisis is a result of the extended period of economic uncertainty we’ve lived through for the past 30 years.</p>
<p>Wages have become <a href="https://global.oup.com/academic/product/the-great-risk-shift-9780195335347?cc=de&lang=en&">more volatile</a>, while the <a href="http://www.brookings.edu/about/projects/bpea/papers/2011/unemployment-insurance-and-job-search-in-the-great-depression-rothstein">duration of unemployment</a> and underemployment has also gone up. As a result, people have less discretionary cash, requiring them to set aside more for emergencies – and less for retirement. </p>
<p>But that’s only part of the economic uncertainty story. </p>
<p>Even when people do manage to sock away money for their later years, these savings have become less stable. The stock and housing markets have been <a href="http://www.brookings.edu/%7E/media/Projects/BPEA/Spring-2005/2005a_bpea_baker.PDF">going through cycles of boom and bust</a> with increasing frequency in recent decades, destroying wealth and adding a layer of confusion and uncertainty to people’s decisions about their futures. </p>
<p>Record-low interest rates since the financial crisis are making matters worse. </p>
<h2>Five policy shortcomings</h2>
<p>At a time of such growing volatility in the labor, financial and housing markets, logic suggests that people should reduce their exposure to risky assets. </p>
<p>Yet when it comes to retirement savings, exactly the opposite has happened. This is due to five clearly identifiable policy shortcomings, which have led to greater economic risk exposure at a time of ever-rising risks.</p>
<ol>
<li><p>Social Security benefits <a href="https://www.socialsecurity.gov/OACT/ProgData/nra.html">have decreased in value</a> as the age at which people can receive full benefits has increased. At the same time, the <a href="http://www.pentegra.com/announcements/IssueBrief-_who_killed_the_private_sector_db_plans.pdf">decline</a> of defined benefit (DB) pension plans has further eroded people’s retirement security. In their stead, people have saved more and more with retirement savings accounts, <a href="https://www.ici.org/pdf/per12-02.pdf">such as 401(k) plans</a> and Individual Retirement Accounts (IRAs). These individualized accounts <a href="http://www.palgrave.com/us/book/9781137395627">offer fewer protections</a> against labor and financial market swings than is the case for Social Security and DB pensions. </p></li>
<li><p>Congress <a href="https://www.americanprogress.org/issues/economy/report/2015/10/30/124315/the-inefficiencies-of-existing-retirement-savings-incentives/">has increasingly made</a> private employers the primary gatekeepers controlling access to good retirement plans, giving them additional tax benefits for doing so. However, since the 1980s, companies <a href="https://www.ebri.org/pdf/briefspdf/EBRI_IB_405_Oct14.RetPart.pdf">have reduced contributions</a> to their employees’ retirement savings accounts and increasingly ended such benefits entirely. In 2012, the last year for which data are available, <a href="http://www.palgrave.com/us/book/9781137395627">employers contributed</a> an average of US$1,765 (in 2013 dollars) to workers’ 401(k) plans, down from $1,947 in 1988.</p></li>
<li><p>Existing savings incentives such as tax breaks are fairly inefficient. The largest incentives are offered to high-income employees working for an employer that offers retirement benefits – the people who arguably least need the help in saving more. At the same time, <a href="https://www.americanprogress.org/issues/economy/report/2015/10/30/124315/the-inefficiencies-of-existing-retirement-savings-incentives/">the smallest incentives</a> go to lower-income employees, especially those who work for an employer that doesn’t offer retirement benefits. A high-income earner who expects to pay lower taxes in retirement than during working years <a href="https://cdn.americanprogress.org/wp-content/uploads/2015/10/29075443/ExistingRetirementIncentives-brief.pdf">will reap about twice</a> as much as a low-income earner for the same contribution to an IRA or 401(k) plan.</p></li>
<li><p>Savings incentives in the U.S. tax code are unnecessarily complex. A dozen <a href="http://www.hamiltonproject.org/papers/modernize_retirement_savings">savings incentives</a> exist, in addition to specific incentives for <a href="https://www.americanprogress.org/issues/economy/report/2013/07/19/70058/the-universal-savings-credit/">housing, health care and education</a>. This complexity often confuses people and keeps them from saving enough or from saving at all. The share of households without any tax-advantaged savings <a href="http://www.palgrave.com/us/book/9781137395627">increased from 18.9 percent in 2001 to 23.5 percent in 2013</a>, despite the more widespread efforts to get people to save more.</p></li>
<li><p>And finally, while policymakers focused their efforts largely – and ineffectively – on getting people to save more, efforts to actually protect those savings from <a href="http://www.brookings.edu/%7E/media/Projects/BPEA/Spring-2005/2005a_bpea_baker.PDF">increasingly volatile market swings</a> fell on the back burner. As a result, people <a href="https://www.americanprogress.org/wp-content/uploads/2013/03/WellerMiddleClass.pdf">invested ever larger shares</a> of their savings in stocks and houses, just as the odds those assets would lose value went up. As <a href="https://www.americanprogress.org/wp-content/uploads/2013/03/WellerMiddleClass.pdf">people borrowed record amounts</a>, they exacerbated the risk associated with a market downturn even further.</p></li>
</ol>
<h2>The consequences</h2>
<p>Exact data on how people handle insufficient retirement savings are hard to come by. It seems clear, though, that there are a number of strategies people use to “<a href="https://www.americanprogress.org/issues/economy/report/2014/08/06/95222/keep-calm-and-muddle-through/">muddle through retirement</a>.” </p>
<p>Some people will live with economic hardships, from not being able to pay for their utilities to simply living in poverty. Others will rely on help from local governments, charities and family members, and some will even move in with their adult children. Others will simply delay retirement and keep working, even as physical and mental difficulties develop. </p>
<p>As a result, many people will struggle economically and possibly suffer from worse health than otherwise would be the case, government budgets and charities will be strained and economic growth could slow. </p>
<p>The <a href="https://www.americanprogress.org/issues/economy/report/2015/01/26/105394/the-reality-of-the-retirement-crisis/">bottom line</a> is that the retirement crisis is large, becoming more severe and potentially harming the economy.</p>
<h2>Addressing the shortcomings</h2>
<p>The good news, though, is that policy can tackle the retirement crisis in doable steps by addressing the five identifiable shortcomings described above. After all, the retirement crisis is in large part a result of inattentive and wrongheaded policies.</p>
<ol>
<li><p>Congress could update Social Security, especially for vulnerable populations, which would increase households’ protections from labor and financial market risks. For instance, policymakers could create a <a href="https://www.ssa.gov/oact/solvency/provisions/charts/chart_run277.html">meaningful minimum benefit</a> that would ensure nobody who paid into Social Security for 30 years would receive a benefit less than 125 percent of the federal poverty line – currently $11,354 per year for an adult 65 or older. Other updates could include <a href="https://www.ssa.gov/oact/solvency/provisions/charts/chart_run275.html">improvements to the survivorship benefit</a> and a <a href="https://www.ssa.gov/oact/solvency/provisions/charts/chart_run249.html">new benefit</a> for beneficiaries who reach age 85. </p></li>
<li><p>Congress and state legislatures could create low-cost retirement savings options that are not dependent on employers choosing to offer a retirement benefit. The exact details of such an alternative to employer-provided retirement benefits could vary from state to state, especially since the federal government is <a href="http://www.dol.gov/opa/media/press/ebsa/EBSA20152218.htm">currently in the process of developing guidelines</a> for states to establish retirement savings for private sector workers. </p></li>
<li><p><a href="https://www.americanprogress.org/issues/economy/report/2013/07/19/70058/the-universal-savings-credit/">Congress</a> and <a href="https://www.americanprogress.org/issues/economy/report/2015/11/18/125712/laying-the-groundwork-for-more-efficient-retirement-savings-incentives/">state legislatures</a> could redesign savings incentives that would offer more help to lower-income savers than is currently the case. This could include a <a href="https://www.americanprogress.org/issues/economy/report/2013/07/19/70058/the-universal-savings-credit/">refundable tax credit</a>, rather than a deduction from taxable income that disproportionately benefits higher-income earners. </p></li>
<li><p>Simplification of savings incentives should be part of a policy effort to make tax incentives for savings more effective. This would mean <a href="https://www.americanprogress.org/issues/economy/report/2015/11/18/125712/laying-the-groundwork-for-more-efficient-retirement-savings-incentives/">streamlining existing incentives</a> and making them easier to use. </p></li>
<li><p>Finally, Congress and state legislatures should make protections against market swings an integral part of savings policies. This could <a href="https://www.umb.edu/editor_uploads/images/centers_institutes/institute_gerontology/wellerFeb2011.pdf">include</a> automatic risk management of retirement savings accounts and incentives to diversify savings – not putting all eggs in one basket.</p></li>
<li><p>Finally, Congress and state legislatures should make risk protections an integral part of savings policies. This would <a href="https://www.umb.edu/editor_uploads/images/centers_institutes/institute_gerontology/wellerFeb2011.pdf">include</a> comprehensive, concise and comparable risk disclosure in retirement savings accounts, and new incentives to balance risks between savings in financial assets, such as stocks and bonds, and savings in nonfinancial assets, such as housing.</p></li>
</ol>
<h2>Restoring a dignified retirement</h2>
<p>The retirement crisis in the United States is real and getting worse. It will have severe effects on Americans, the government and the economy unless policymakers respond to this challenge. </p>
<p>The bad news is that past policy decisions have substantially contributed to this crisis. The good news is that policies can change, if the political will exists.</p><img src="https://counter.theconversation.com/content/53798/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Christian Weller has received funding from AARP for his research on risk exposure and retirement savings. He is a senior fellow with the Center for American Progress, a research associate at the Economic Policy Institute and a member of the Academic Advisory Board of the National Institute on Retirement Security. </span></em></p>The presidential candidates are largely ignoring one of the biggest economic issues facing Americans: more than half are struggling to save enough for retirement.Christian Weller, Professor of Public Policy and Public Affairs, UMass BostonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/468862015-09-02T02:32:56Z2015-09-02T02:32:56ZOur super system isn’t perfect - but for a failure, look to the US<figure><img src="https://images.theconversation.com/files/93422/original/image-20150831-25771-bkomzx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The compulsory super scheme in Australia is clearly superior to the voluntary 401(k) scheme utilised by the United States.</span> <span class="attribution"><span class="source">Image sourced from www.shutterstock.com</span></span></figcaption></figure><p>Debate swirls around the strengths and weaknesses of Australia’s superannuation system. But there is one aspect where change should not be countenanced: its compulsory nature. </p>
<p>As an American Fulbright scholar studying workplace retirement schemes, I am undertaking a comparative analysis of super with the American 401(k) workplace retirement system. </p>
<p>There are many subtleties and nuances to be discussed concerning which occupational retirement system is better in areas as diverse as member engagement, corporate governance, and the best way for individuals to spend-down their funds in retirement. </p>
<p>One thing, however, is clear: the compulsory super scheme in Australia is clearly
superior to the voluntary 401(k) scheme utilised by the United States. As a result, whereas the American retirement system is in full-out crisis mode, the Australian super scheme is comparatively tranquil and well set up to continue to mature as the overall Australian population ages throughout the 21st century. </p>
<p>To share just a few of the more galling statistics from the world of voluntary American 401(k) retirement plans: 48% of current US workers between the ages of 50 and 64 are on track to being poor when they reach retirement; the aggregate national retirement deficit number is currently estimated to be $4.13 trillion for all US households where the head of the household is between 25 and 64, and, on average, a typical working family in the anteroom of retirement — headed by somebody 55 to 64 years old — has only about $104,000 in retirement savings, according to the US Federal Reserve’s Survey of Consumer Finances. </p>
<p>Most retirement experts agree that people need to replace somewhere between 60%-
70% of income in retirement to live comfortably. Needless to say, the vast majority of Americans are not even close to meeting this standard. </p>
<p>How did the retirement situation become so out-of-whack in the United States? Quite simply, US employers do not have to sponsor workplace retirement schemes, and US employees are not compelled to participate in such schemes even if their employer offers one. The US voluntary workplace retirement system has led to only about 40% of the working population participating in such plans.</p>
<p>There is a common misperception that many people hold in both the US and Australia: the more choice that individuals have in matters of finance, the better. Although I normally subscribe to that maxim, in the world of retirement savings, I do not. </p>
<p>Wealthier individuals, with financial savvy, tend to understand what others do not: that a dollar put away today is equivalent to much more money when that person retires. </p>
<p>We call this the “time value of money.” Unfortunately, most people do not save
voluntarily for retirement, especially in their 20s, 30s, and 40s. This makes sense. </p>
<p>Younger individuals have other pressing concerns to consider: student debt, their
rent/mortgages, childcare expenses, groceries, etc. Retirement is the last thing on their mind and the last thing for which they save. </p>
<p>When you add in the natural tendencies of individuals to procrastinate, avoid complex financial decisions, and overestimate their ability to save for the future, you end up where the United States is today: the average person from age 22-48 has less than $50,000 put away in savings. </p>
<p>Further, compulsory super contributions spur the economy during periods of slow
economic growth. Super funds, as institutional investors, place a large portion of that money back into the Australian economy through the purchase of Australian equities, infrastructure, and bonds. The purchasing power of all working Australians is multiplied by being able to place their money in investment vehicles that are not generally available to low and middle-income workers on an individual basis. </p>
<p>So, given the same amount of money in a lump sum, super funds are significantly better able to save and invest that money in diversified, low-cost ways that translate into better retirement outcomes for more Australians. </p>
<p>Compulsory workplace retirement savings schemes are imperative for any well-
functioning occupational pension scheme. My sincere hope is that the United States chooses to emulate this aspect of the Australian super system.</p><img src="https://counter.theconversation.com/content/46886/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Paul M. Secunda is a law professor at Marquette University Law School in Milwaukee, Wisconsin. This year, he serves as the Chairman of the ERISA Advisory Council of the US Department of Labor, which advises the U.S. federal government on retirement plan pension policy. He is spending six months this year studying the Australian Super Guarantee as a senior Fulbright Scholar and Senior Fellow at Melbourne Law School. All opinions presented here are done so in his individual capacity, and do not represent the views of any of the organisations with which he is affiliated.</span></em></p>When you consider that the average US household will have just $104,000 in retirement savings, Australia’s compulsory super system starts to look like a really good idea.Paul Secunda, Senior Fulbright Scholar in Law (Labour and Super), The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/334252014-11-05T11:12:36Z2014-11-05T11:12:36ZPrivate equity chases new investors – your aunt Edna<figure><img src="https://images.theconversation.com/files/63420/original/7z8vmvyg-1414779896.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Private equity is eyeing smaller investors.</span> <span class="attribution"><span class="source">Image sourced from www.shutterstock.com</span></span></figcaption></figure><p>Private equity is becoming much less private these days. But it is still not clear who will benefit from this new-found openness and accessibility.</p>
<p>Not so long ago, private equity operated largely outside the attention of the general public; related to the earlier era of “leveraged buyouts” that were eventually condemned for their hubris and greed, but not considered quite as excessive. </p>
<p>In the 2000s, however, after the arrival of multi-billion dollar funds and a few spectacularly high-profile birthday parties, the titans of private equity could no longer remain in the shadows.</p>
<p>When Mitt Romney captured the Republican nomination for President in the spring of 2012, it was difficult to find someone who did not have an opinion about private equity, good or bad. The structure and tax treatment of their profit participation – known colloquially as “carried interest” – was singled out as one of the ways the rich could avoid paying their fair share. Many critics, perhaps wistfully, thought that the era of private equity would come to a close.</p>
<h2>Just who should participate?</h2>
<p>Private equity not only survived but thrived in the years following the global financial crisis. Today, the question is not whether the financial model underpinning the industry will be viable in years to come, but rather how broadly should participation in private equity be allowed to expand.</p>
<p><a href="http://dealbook.nytimes.com/2014/10/20/private-equity-titans-open-cloistered-world-to-smaller-investors/?_r=0">Recent reports</a> of a new campaign by Wall Street firms to widen the number and types of investors who have access to private equity funds raises a series of potentially difficult questions. Traditionally these funds have been limited to small numbers of highly sophisticated and experienced individuals. Under the proposed change there is concern whether my Aunt Edna should take some of her life savings out of her 401K and seek her share of the staggeringly high returns that the best private equity funds routinely deliver.</p>
<p>My Aunt Edna is not a “qualified purchaser,” which the SEC has defined as someone with $5 million or more in investments. In fact, she is not even an “accredited investor,” meaning someone who earns at least $200,000 a year. No, Aunt Edna is a typical retail investor who has entrusted her savings to regulated mutual funds and shares that are listed on big stock exchanges like NYSE and Nasdaq. </p>
<p>Why would private equity funds be targeting my Aunt Edna and countless retail investors like her? It’s simple. While their funds have largely done well in the years since 2008, many of their traditional investors – large pension funds, mutual funds and the like – have not fared quite as well. As private equity firms seek continued growth, they must have access to new sources of money and new groups of investors. Hence, their focus on “retailization” and the need to market to the millions of savers and investors who have previously been ignored. </p>
<h2>Allure of high returns</h2>
<p>For now, products are being constructed to cater to lower and lower tiers of the high net worth crowd. Eventually however the allure of the trillions of dollars stashed away in 401K plans will prove overpowering. What should I say to my Aunt Edna when she eventually calls me ask for my advice?</p>
<p>I will probably explain to her the basic model that private equity generally follows – namely, that they tend to buy sick and damaged companies in need of repair. Often, like the house she and my uncle bought many years ago, they do so with a significant amount of borrowed money in addition to their initial equity. Then I will point out that private equity firms don’t work for free. In addition to whatever fees she will be paying in the “feeder” vehicle that is created for her and people like her, Aunt Edna will have to understand that she will also be paying 2% each year in management fees and she will have to give 20% of any profits with the private equity firms. </p>
<h2>Promising more than it delivers</h2>
<p>Ultimately, though, I will explain to her that although many of the best private equity funds do exceptionally well for their investors, many funds do not generate the high profits they promise. I will advise her to carefully scrutinize any private equity funds opening their doors to retail investors like her. Are they among the top quartile performers or the bottom quartile? Are the funds reaching out to her because they are expanding beyond the traditional sources of capital that has backed them for many years or because experienced and knowledgeable investors do not think the fund is up to scratch?</p>
<p>The California Public Employees Retirement System <a href="http://www.businessinsider.com/calpers-ditches-hedge-funds-2014-9">attracted attention around the world</a> last month with their sudden announcement that they were exiting from hedge funds. Their investments with private equity, however, still remain in place. In fact, if my Aunt Edna had been a state employee, her monthly retirement checks would have been provided to her courtesy of many private equity funds, since public pensions plans like CalPERS are the largest single investors in this asset class.</p>
<p>Private equity has been with us since the early 1970s, and it is here to stay, at least for another business cycle or two. When my Aunt Edna asks me whether she should invest in private equity, I will have to tell her that if she picks the right fund, she could earn high returns, and if she picks the wrong fund, she could lose some or even all of her money. She will need to do her homework. In that way, at least, it is like every other important investment decision she has been making for years and years.</p><img src="https://counter.theconversation.com/content/33425/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Timothy Spangler does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Private equity is becoming much less private these days. But it is still not clear who will benefit from this new-found openness and accessibility. Not so long ago, private equity operated largely outside…Timothy Spangler, Adjunct Professor, University of California, Los AngelesLicensed as Creative Commons – attribution, no derivatives.