Preparing for retirement when there’s a savings glut

In this February 11, 2005 file photo, printed Social Security checks wait to be mailed from the U.S. Treasury’s Financial Management services facility in Philadelphia.

There’s increasing evidence that the United States has a looming retirement security problem on its hands. Many Americans have not been able to save enough to secure an adequate income after they retire. As this fact has sunk in, researchers, policymakers, and advocates have all suggested reforms to our retirement savings system such as automatic enrollment in savings plans or expanding Social Security benefits. What should we think of these proposals in light of the possibility that we’re living in a world of secular stagnation, where more saving may be a problem?

Consider two recent pieces about retirement savings in the United States—the first by Derek Thompson of The Atlantic and the second by Dylan Matthews of Vox. Thompson focuses in part on why a broad swath of Americans haven’t been saving enough when it comes to retirement, running through a number of hypotheses including slow income growth, rising income inequality, and conspicuous consumption. He wonders if the best way to increase their retirement savings is just to make them save more via a forced savings plan or to expand Social Security.

This second option is the focus of Matthews’ piece. Matthews wonders if we should just scrap the entire private savings system and then massively expand Social Security. The expansion that he proposes—a guaranteed benefit equivalent to either the poverty line or 80 percent of average earnings up to just over $60,000 a year, whichever amount is greater—would effectively end the need for most Americans to save for retirement.

Now a large chunk of Americans would no longer have to actively save for retirement by buying stocks or bonds through their retirement plans. As Matthews points out, this could affect economic growth if private savings are reduced enough that investments also get reduced. But remember that the original concern was that most Americans weren’t saving much in the first place. During the mid-2000s, the bottom 90 percent of Americans by wealth had a negative savings rate. Around 80 percent of financial assets are held by the richest 20 percent of U.S. households. Matthews’ proposal might result in some decrease in how much these richer households save, but a significant reduction in their savings rates seems unlikely.

And of course, there’s the chance that the economy has a persistent surplus of savings relative to investment opportunities, also known as secular stagnation. Not reducing the supply of savings might actually be a problem. Then again, increasing households’ future wealth by guaranteeing a significant amount of income in retirement would probably boost households’ consumption in the present. In fact, according to Larry Summers, John Maynard Keynes viewed Social Security benefits as a boost to aggregate demand. And research by Christina Romer and David Romer of the University of California, Berkeley shows that there have been significant consumption increases in response to past benefit increases. So while most of the debate about expanding Social Security will center on retirement security, it’s also worth keeping an eye on the potential macroeconomic impacts.

April 20, 2016


Nick Bunker


Economic Wellbeing

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