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Dan Loney: New data from Fidelity
Investment, showing that
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Americans may be setting aside
enough money towards retirement,
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or at least are getting close to
those levels. The average
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savings rate, according to their
data, for the first three months
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of the year with their accounts,
was 14.3 percent. Analysts now say you
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should have at least 15 percent, but
that 14.3 percent number is a record
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high according to Fidelity.
Pleasure to be joined once again
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by Olivia Mitchell, who's a
Professor and Director of the
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Pension Research Council here at
the Wharton School, and someone
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we go to when we're talking all
things retirement savings.
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Olivia, great to have you back
on the show. Thanks for a couple
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of moments. Olivia Mitchell: My pleasure.
Thank you. - You and I have talked so
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much about this over the years.
When you see this data, though,
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what does it say to you about
where we are, but maybe where
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we're headed?
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- Well, it is true that the data
from Fidelity show that people
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are saving more in their 401(k)
plans than ever before, that is
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in their retirement plans
usually offered through the
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employer. And this is good news,
because it shows that more
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workers are prioritizing their
retirement savings, bringing
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them closer to the 15 percent that
financial advisors recommend.
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Personally, I think 15 percent is a bit
low, but we can come back to
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that. And I think part of what's
driving it is some of the
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developments in the retirement
space, including automatic
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enrollment, where people are
immediately engaged in their
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retirement saving, even if they
don't do anything themselves,
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they're defaulted in. Automatic
escalation, that's also been
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helpful. I think it's also the
case that people are saving more
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for retirement because they're
concerned about higher potential
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future tax rates and the
possibility of Social Security
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going insolvent, on top of which
we're living longer, prices are
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rising. There are a lot of good
reasons to save more for
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retirement.
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- So a couple of questions off of
what you just said there. First,
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the automatic enrollment and the
fact that, seemingly, I guess,
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companies realize how important
it is to go ahead and make that
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move when a new employee comes
on, or if an employee is
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transferring in funds from
another account so that they
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really don't even have the
option to not be a part of that.
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- Well, automatic
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enrollment is -- automatic
escalation is typically offered
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to new hires, could be offered
to existing hires, existing
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employees as well. Employees
usually do have the opportunity
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to opt out if they decide that
the saving is really burdening
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them, but the reality is, most
people just go along with the
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flow and stay in the plan and
save more, so it's to their
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benefit.
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- But there's something also to be
said from this report, they
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mentioned the fact that more
companies in general are using
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401(k) plans. Now, part of that
may be in some sectors switching
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over from a pension to a 401(k),
but the fact that companies
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realize that they want to have
this as part of their mix.
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- It's very attractive, especially
for the younger generations that
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see the problems that face all
of them with Social Security
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facing insolvency. It's very
attractive for employers to
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offer plans that automatically
enroll their workers into
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retirement saving. But there's
some caveats that we should
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think about. There is emerging
evidence that higher default
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saving rates in retirement plan
can also precipitate workers to
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take on more debt because they
have less cash to pay for the
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bills of daily living.
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- Now, if memory serves me, your
number that you believe is the
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number that people should be at
is more like 20 percent, correct?
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- I have tried to shop that number
to many people, including my two
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daughters. I think we had to
compromise at 18 percent. But the other
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issue, of course, that one could
consider is that if you're not
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able to save that much, you
could delay retiring, and every
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year you delay claiming, that
boosts your Social Security
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benefits. So there's a couple of
different ways to try to
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confront that problem. - So
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that 14.3 percent number is the
headline number, but as you
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mentioned, there's a
generational component that
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needs to be factored in here as
well, in how maybe the baby
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boomer generation didn't save as
much early, but they're saving
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more now getting ready for
retirement. And then you have to
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look at how Gen X and
millennials are responding to
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this, because you've mentioned
it, they're the generation that
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really can take advantage at a
younger age, if they start early,
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to be able to set themselves up
to have enough for retirement.
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- It's absolutely true.
So if you step back from 401(k)
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plans and just tally up total
household saving across all
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different assets that people
might have, there has been a
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generational change. So baby
boomers, my generation, saved
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about five to six percent of our income
over time. Gen X, only about four
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to five. Millennials, two to four percen.
And now the Gen Z generation,
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the people born 1997 to 2012, are
estimated to have be saving,
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they're still young, but about
three to five percent of their income. So
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the long term trend since the
'50s has been for Americans
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household saving rate to go
down, and that concerns me,
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because we are living longer and
some of our -- some of the things
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the boomers did well or were
lucky to have happen, namely,
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big increases in housing prices,
pretty low inflation for most of
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our lifetimes, that may not
characterize the next
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generation.
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- One of the things you've said to
me numerous times, and it's
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great to repeat, is the fact
that if you're an employee, you
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want to always make sure that
you are maximizing not only what
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you can save, but maximizing
what the company is willing to
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provide you as well.
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- Absolutely. So some companies,
like my university, provides a
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basic amount for everybody, even
if the employee doesn't
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contribute, but then they also
match contributions up to a max.
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And if at all possible, you
should definitely save that
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much. Otherwise, you're just
leaving money on the table, and
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that's not a sensible thing to
do. - What
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do you think then this data
potentially says for us longer
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term, moving forward? I mean,
you mentioned we're kind of -- it's
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good news, but are we truly on
the right path, and maybe the
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mindset of younger generations
has changed a little bit on
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this? - Well, the
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big unknown is the huge and
growing government debt that we
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all face, and even if households
are doing a better job to save
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for retirement and other
factors, the government is not
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doing that. And so part of what
might be driving people to save
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more on their own is that
they're concerned about the
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possibility of higher tax rates
and other factors. Studies
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suggest that private saving
offsets government borrowing by
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about 30 to 40 percent. So you know, this
is -- this means that as
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public debt grows, people may
increase their saving in
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anticipation of fewer taxes --
higher taxes in the future. So
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this is a time of a great amount
of uncertainty, a lot of
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volatility, and I'm happy to see
people saving more in their
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retirement accounts, but I am
also a bit of a budget deficit
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hawk. I wish we could do better
to try to not grow that as well.
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- Olivia, always great to get your
insight. Thanks again. - Thank
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you. - Olivia Mitchell, Professor
and Director of the Pension
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Research Council here at the
Wharton School.
