Retirement savings support the economy as well as retirees
September 6, 2017
- Incentives for saving improves retirement preparedness.
- Workplace savings promote preparedness, but 42 million Americans lack access to a plan.
- Retirement savings may mean sacrifice today, but they can drive long-term economic growth.
Workers — encouraged to save through plan design, education, and policy — are better positioned to generate sufficient income in retirement, enabling them to maintain independence and a desired lifestyle.
The benefit of saving for individuals is clear. But the role of retirement savings in our financial system may not be widely understood. The fact is that U.S. retirement assets, which currently total $26 trillion, are a major driver behind economic growth in this country.
How capital markets benefit
Retirement assets add liquidity to capital markets in the United States and around the world. By investing in stocks and bonds, retirement accounts, like 401(k) plans and Individual Retirement Accounts (IRA), help fuel the growth of capital as well as benefit from the return on those investments. As companies grow and invest, the economy grows and accelerates job creation and innovation.
Household savings also add to overall GDP. This point was clearly illustrated in a 2014 study by Oxford Economics. The analysis showed that by raising household savings, even by only a few percentage points, we can supply more capital to our markets, lift growth rates, and add trillions to the GDP.
If the household savings rate rises by one to five percentage points, and boosts the overall investment level in the economy to an average of 22.5%, the U.S. could add 3% to GDP by 2040 — an additional $7 trillion or a total of about $3,500 per person, the study found.
The challenge of boosting saving
Still, saving behavior remains one of the biggest challenges for retirement success. More broadly, the personal savings rate in the United States, which in recent years has hovered around 5% (Source: BEA), has plummeted since reaching double-digit levels in the 1970s.
Whether it’s the subpar economy or stagnating wages, many Americans find it difficult to save. A Federal Reserve report in 2015 found that nearly half of those surveyed — 46% — did not have enough to cover an emergency expense totaling $400. The Fed also found that 31% of workers reported they have no retirement savings or pension.
Across all age groups, 40% of workers surveyed have less than $50,000 saved for retirement, according to a PwC survey. The GAO noted that in 2015, among those approaching retirement — ages 55 to 64 — the median household had between $10,000 and $20,000 in retirement savings, and 41% had no savings at all.
Introduce workplace savings into the analysis and the picture brightens.
How workplace savings can help
When workers have access to a retirement plan at work such as a 401(k), they participate in greater numbers and save more for retirement. For those benefiting from a plan that has automatic design features, such as auto-enrollment and auto-escalation, their projected income in retirement soars (Source: LIS). Even during periods of stagnant wage growth and economic downturn, workplace retirement savings still retain the ability to encourage saving, and “nudge” participants to save more.
Without workplace savings, only about 5% of workers save for retirement in an IRA, the Employee Benefit Research Institute says.
Yet 42 million Americans do not have access to a retirement savings plan at work.
Recognizing the critical role that retirement savings play in an individual’s quality of life, and its potential as an engine of economic growth for the country as a whole, it makes sense that access to workplace savings needs to be expanded to all workers. Expanding retirement savings can offer general benefits and calls for a public policy response.