It’s tax day, and I’m going to ask you two somewhat tax-related questions:
1. How much have you saved for your retirement?
2. On how much of those savings were taxes deferred?
Your answers will determine how you will spend your golden years when you no longer earn an income but need money for life’s necessities. This is more than a personal question; it is an issue with tremendous national ramifications.
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As Charles Ellis and Alicia Munnell warn in their recent book, Falling Short: The Coming Retirement Crisis and What to Do About It, we have a retirement problem:
“Because of economic and demographic developments, our retirement income systems are contracting just as our need for retirement income is growing. On the income side, Social Security is replacing less of our preretirement income; traditional defined benefit pension plans have been displaced by 401(k)s with modest balances; and employers are dropping retiree health benefits. On the needs side, longer lifespans, rising health care costs, and low interest rates all require a much bigger nest egg to maintain our standard of living...(M)illions of us will not have enough money for the comfortable retirement that our parents and grandparents enjoyed.”
Don’t say you weren’t warned.
We know exactlywhat we need to do: Save more and begin earlier to build our own nest eggs. If large numbers of people don’t have enough savings for retirement, that is an enormous potential future government obligation that will cost taxpayers trillions of dollars.
There are three simple things Congress can do to help avoid that fate:
1) Raise the tax-deferred limits on retirement accounts.
The Internal Revenue Service indicates the amounts you can contribute toward your retirement savings on a tax-deferred basis:
For 401(k) plans, the limit is $18,000 this year ($24,000 if you’re 50 or older).
For IRAs, the limit is $5,500 ($6,500 if you’re 50 or older).
These contribution ceilings haven’t risen very much. Back in 2008, the 401(k) limit was $15,500 (for workers under 50) and the IRA ceiling was $5,000; raising these limits will let more people put aside more money to build a self-sufficient retirement.
Increasing the limits will boost total nongovernmental retirement savings, and that’s a very good thing.
Solution: Double the 401(k) contribution cap, and raise the IRA contribution limit to $10,000 right away and increase it to $20,000 by 2020. (See chart at end of column for contribution limits.)
2) Reduce student-loan interest rates.
Some people, such as hedge-fund manager Bill Ackman, see the student-loan crisis as a risk to credit markets. That may be too limited a way to think about this. The big picture, long- term view is that high student-loan debt is actually part of the retirement crisis 50 years from now. High compound interest rates equal much lower retirement savings for the millennial generation.
As Patrick O'Shaughnessy wrote in Millennial Money: How Young Investors Can Build a Fortune, the best way for this generation to save is to begin early. But they can’t if they are saddled with expensive high-interest student loans.
Solution: Lower the interest rate on all student loans to the fed funds rate (now about 0 percent) and cap it at 5 percent for the next decade.
3) Fiduciary standards for all investment advice.
It is past time to establish standards for giving financial advice that put investors first while barring conflicts of interest.
As Wes Gray of Alpha Architect has noted, regulations let advisers recommend investments that charge fees so excessive they destroy returns. This is unacceptable. And it is the reason the Department of Labor is issuing stiffer rules to protect retiree cash.
Solution: Mandate a standard that makes investor interests paramount for anyone who provides financial advice.
We can radically improve the quality of retirement for all Americans. A few tweaks from Congress will go a long way toward achieving that.
Barry Ritholtz, a Bloomberg View columnist, is the founder of Ritholtz Wealth Management. He is a consultant at and former chief executive officer for FusionIQ, a quantitative research firm.
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