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Low Savings Rate Is Real Retirement Crisis
By Rep. Rahm Emanuel, The Chicago Sun-Times
April 22, 2005
While the president may not have intended to start a broader dialogue on savings, that is what is occurring. The result is a political environment ripe for bipartisan consensus on the real crisis: the savings deficit in this country.
We need to take steps to save Social Security for the long term. But that will not solve our immediate savings crisis. The savings rate is at its lowest level since the 1930s -- lower than that of any other industrialized nation in the world -- and millions of families are financially unprepared for retirement.
A recent study by the nonprofit Employee Benefit Research Institute found that 51 percent of workers are falling behind in their retirement savings because of the high expenses of daily bills, child care and medical costs.
A separate study by the same organization found that half of those surveyed had to reduce their general savings or 401(k) contributions in order to pay medical bills. These results show families face more risk today, not less. Day-to-day living expenses continue to rob the middle class of its ability to save for retirement.
Compounding these challenges, American families have in recent years witnessed a sea change in the traditional retirement savings structure. Once, the average American could achieve retirement security by building a three-legged stool: a company pension, personal savings, and Social Security. For millions of families today, Social Security is the only leg remaining. For middle-income retirees, it is the predominant source of retirement earnings -- making up 64 percent of retirement income.
With pensions in peril and middle-class families squeezed by flat wages and rising costs, the savings rate has declined from 10 percent in 1980 to just 1 percent in 2004.
Only half of U.S. workers participate in employer-sponsored retirement plans, and 80 percent of small business employees have no plan at all. Nearly 40 percent of all households have no retirement savings accounts of any kind beyond Social Security. Half of the households headed by a worker aged 55 to 59 have $10,000 or less in a 401(k) or in an IRA. Of that age group, 36 percent have no 401(k) or IRA savings.
For single women, the problem is even worse. Only 38 percent have 401(k) plans from a past or current job, with a median balance of just $8,000, as opposed to married females, who participate at a 54 percent rate with a median balance of $27,000.
Given the reality of the savings deficit, we should devise new ways to help Americans save for retirement. We can achieve early bipartisan consensus on a number of initiatives, including the following four ideas I have proposed.
*First, I have introduced legislation encouraging companies to automatically enroll new employees in their 401(k) plans. Automatic enrollment makes 401(k) participation the "default" option for every new employee. You're "in" and saving for retirement unless you "opt out."
Employers implementing automatic enrollment, like Chicago-based RR Donnelley, have seen participation rates jump from 68 percent to 92 percent. In addition to automatic enrollment, the legislation provides a "step-up" provision so that as salaries increase, so do savings contributions.
*Second, we should make it easier for Americans to take advantage of savings opportunities at tax time. My Direct Deposit Savings Act of 2005 requires the IRS to allow taxpayers, by checking a box on their return or with the click of a mouse, to transfer their refunds directly into savings accounts.
A report by the Retirement Security Project at the Brookings Institution found that every year, about 100 million people receive a federal income tax refund, with an average return of nearly $2,000 per person. Direct deposit of those refunds will make it possible for Americans to save up to $200 billion annually.
*Third, the Retirement Savings for Working Americans Act of 2005 makes the Saver's Credit refundable and permanent. This bill would target the government's resources to helping those who currently save the least, giving 50 million families a new incentive to contribute to retirement accounts. Individuals earning up to $30,000 and couples up to $60,000 would receive a flat 50 percent government matching contribution for retirement account contributions of up to $2,000 per year.
*Fourth, consolidate the ''alphabet soup'' of 16 different retirement accounts created in the last 30 years, resulting in undue complexity. We should simplify the Savings Code so there is one plan rather than 16. That is why I proposed a Universal 401(k) for all Americans.
Despite the president's best efforts, it is increasingly clear that a majority of Americans reject the idea of private accounts under Social Security. By taking these steps to promote a savings revolution, we can help boost private savings outside of Social Security -- a goal that Democrats, Republicans and all Americans should share.
Rahm Emanuel represents Illinois' 5th District in Congress.
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