Fixing the Broken Retirement System

The percentage of homeless older people in the U.S. has increased dramatically. Experts point to a few major causes.

By Ed Prince

Adults age 55 and older are the fastest-growing homeless population in California, which has about one-third of the homeless population in the United States, according to CalMatters.

Kerry Hannon, a senior columnist at Yahoo Finance, pointed to those California statistics during a panel discussion at the fourth annual Century Summit at Stanford University Nov. 6 and 7. Hannon also noted the problem is not just in California – poverty is increasing for older adults in many areas of the country.

Others also participating on the panel “When Complexity Meets Longevity: Navigating Our Financial Futures,” said the nation’s retirement system is at least in part to blame.

Roughly half of the private sector workforce doesn’t have access to employer-sponsored retirement savings plans, said panelist Chris Farrell, senior economics contributor at American Public Media Group. “It’s not because people don’t want to be saving. It’s not because they’re having that Starbucks Cafe Latte.”

“The other thing is, life is hard. You lose your job. You’re taking care of aging parents. You have a medical issue, your child is sick. There are lots of interruptions throughout a life.”

A plea for a universal retirement savings system

The answer is to “bring everyone into the retirement system,” Farrell maintains. A bipartisan bill by Sen. John Hickenlooper (D-Colo.), and Sen. Thom Tillis (R-N.C.), could be the answer, Farrell said. The Retirement Savings for Americans Act would create a program giving eligible workers access to portable, tax-advantaged retirement savings accounts. It would also offer federal matching contributions for low- and middle-income workers.

But another panelist, economist Annamaria Lusardi, had a caveat. “I agree with all what you said,” she told Farrell. “But the problem is, even once we do that, it’s not enough.” Lusardi is a senior fellow at the Stanford Institute for Economic Policy Research at Stanford University and a professor of finance at the school’s Graduate School of Business.

Fixing America’s financial illiteracy problem

Many Americans lack financial literacy, making it difficult for them to make retirement investment and planning decisions, Lusardi said. Even the most basic knowledge — how long they could live — eludes many, she said, citing the findings of a study she is leading at the TIAA Institute.

“This is one of the fundamental pillars of planning for retirement,” Lusardi said. However, research she has done on financial literacy shows that the number of people who actually know how long a 65-year-old man or woman can live is really small. “Only 12% of the population has a sense of their longevity, has a sense of how long is our life. What are the chances to make it to 90? And what are the chances to have a shorter lifetime?”

Why is that important?

“This knowledge matters, and matters a great deal,” Lusardi said. “We find it to be associated with a variety of behaviors, from saving for retirement to feeling confident about your money.”

But being motivated to invest for retirement is not enough if you don’t know how, she added. Her study found that only one-third of Americans understand the “ABCs of finance” — interest, inflation, and risk.

“But this one-third is disproportionately white males from college-educated families. So, it’s a privileged group,” she said, stressing the need for financial literacy education for everyone. “And this is why we need to provide this knowledge and access to the whole population. Because women need it, and people with low income need it, and African American, Hispanic, and other racial groups.”

Lusardi said more colleges, including Stanford University, which hosted the Century Summit, are offering much-needed personal finance courses for students. But financial literacy training needs to start earlier, she added.

“In the U.S., even though we live in a country with the most developed financial market, people are not more financially literate than people in other G7 countries, and in fact, often they are less financially literate,” she observed. “There needs to be more and more formal personal finance education, and it should start in elementary school, she added.

“It should come when the tooth fairy comes; you get the money, financial literacy. But also certainly in high school and so on,” Lusardi said.

She noted some areas of personal finance are challenging even for college students.
“One of the things that people absolutely do not know and have the most difficulty with is risk, because risk — even the concept of risk — is inherently complex. And so, we teach risk toward the end,” she said of the Stanford personal finance course.

Speakers at the recent CFP Board Diversity Summit shared what it takes to retain good, diverse talent.

“One of the things I wanted to tell you, in particular, the people who work in the financial industry — annuity is something that even the students at Stanford do not understand. So, there is clearly a lot of work we need to do. To, I think, simplify, and also to be able to teach this in an effective way.”

Even financial professionals need help

It’s not just lower-income Americans who lack the know-how to plan for retirement, said panelist Tina Haley, senior vice president and head of product at Corebridge Financial in Houston. She found her own knowledge lacking.

“I’ve been fortunate to work at a company with 401(k) since I was in my 20s, but I got to a point where I went, ‘What? I need some help. I need financial advice. I need to understand what my needs are going to be in retirement and how I can start preparing for that.’”
That’s especially important today, because planning for retirement is a “just-do-it-yourself” affair for many people, Haley said.

Increased longevity and Social Security

Farrell said increasing longevity means we should rethink the concept of retiring at what is traditionally considered retirement age, and when to start taking Social Security.

“I think it is great that people can file for Social Security at age 62. There are a lot of people that need to file for it at age 62 or 63 or 64 … they’ve lost their jobs because of ill health or because they’re taking care of aging parents. But you want to reframe it, that you file for Social Security at age 70, because that’s when you get your maximum benefit. And that really makes a difference, and you cannot outlive that benefit,” Farrell said

With people living longer, the concept of people working past 65 or 70 should be “institutionalized” by society, he added.

In a four-decade career in journalism, Ed Prince has served as an editor with many of New Jersey’s leading newspapers, including the Star-Ledger, Asbury Park Press and Home News Tribune.

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