Federal Reserve data shows that nearly half of American families have savings for retirement. For one, a slow recovery from a lagging economy certainly doesn’t help. However, statistics from the Bureau of Labor Statistics show that over 60 percent of working individuals from private businesses had access to retirement benefits. So why do so many U.S. workers lack the savings needed to retire comfortably? Senior Fellow at the National Center For Policy Analysis, Pamela Villarreal shares some of her insight.
People Are Trying to Catch Up
“We still have a pretty high unemployment rate,” said Villarreal. “So for people who are unemployed or who have recently been unemployed, or even recently got a job, they are trying to catch up. People still have credit card debt that needs to be paid.”
As of March 2014, the Federal Reserve reports the average credit card debt for a household at $15,252. That number more than doubles to $32,986 for student loan debt, and jumps to $152,209 for mortgage debt.
Villarreal has studied both saving and spending trends over the last twenty years. She has found that people, baby boomers in particular, carry more debt than they have twenty years ago. “Also, people have bigger houses,” Villarreal said. “In spite of the fact that interest rates are at an all time low, people have bought more houses than they can afford. So they’re paying mortgages for [as long as] thirty years.”
She went on to say that baby boomers that will be entering retirement will also be carrying their mortgage debt with them – something that was uncommon several decades ago.
No Incentives To Saving
“People have not, in today’s society, put saving as a priority,” said Villarreal. “Because interest rates are at an all time low, if you’re not investing in stocks, you’re not getting much on savings. So there’s not a lot of incentives to put money into a CD account and maybe get under 1 percent a year. Who’s really going to want to save money?”
Taxes that are subsidized also contribute to non-saving practices, added Villarreal. For instance, if you own a house you can deduct mortgage interest on your taxes. If you live in a state where there’s no state income tax to deduct, you can claim sales taxes. These types of practices contribute to consumer spending, rather than consumer saving.
“When you do save, if you’re not in a tax-deferred retirement account, then you basically pay taxes on the dividends that you receive,” said Villarreal. “So you’re kind of penalized for saving.”
“People today want to have everything. They want to have more than their parents did,” said Villarreal. “When they buy their first home, they want it to be a nice big home. They want to have a decent car…So we definitely have a culture of consumption that seems to diminish the incentive to save as well.”
In addition, the Employee Benefit Research Institute reports that only 18 percent of American workers are confident in the amount of savings they have accumulated for retirement. About 36 percent of workers stated that they have less than $1,000 saved. Daily expenses and overall cost of living are at the forefront of reasons why workers do not save or save more for their retirement (53 percent).
Villarreal also added that auto enrollment for 401 k plans are a good way to keep workers saving. This means that when people work for an employer who offers a 401 k, they are automatically enrolled unless they opt out.
“I also think that from a public policy standpoint, we should stop penalizing savings,” said Villarreal. “We shouldn’t be taxing interest that you earn from a savings account. We should probably do away with mortgage interest deductions because that encourages people to buy more houses than they can afford in order to get the tax written off…It’s important to change public policy to encourage more saving and less consumption.”