Background
Americans are bad at saving money. Since the last Boomer turned 21, the savings rate has plummeted. As the government floods bank accounts with COVID-related stimulus checks, will we change our spots and start saving more? Or is forced savings the only way to get us to put money aside?
Findings
- We save a bunch in three big savings programs: Social Security, pensions, and defined contribution (mostly 401(k) plans) get close to $2 trillion of inflows a year, including both employer and employee contributions.
- Two of these programs are forced: Employees don’t have a choice with Social Security or pensions – it’s done for them.
- The other is often “forced” and/or “bribed”: Employees are often automatically opted in to 401(k) participation, and often “bribed” with large employer matching contributions to encourage increased participation.
- Savings from these programs dwarfs other savings: The total personal savings amount in 2017, for comparison, was $1.2 trillion. That includes much of the contributions to these “forced” plans. Understanding the government definition of savings is quite complex. However, most of Americans’ savings, including their retirement savings, comes from these three forced plans.
- What about IRAs?: Aren’t these a way that people save on their own? Yes, it’s the single largest category of retirement savings (chart below). But – most of the IRA assets are actually rollovers from 401(k)s. In 2017, 84% of traditional IRA “contributions” were rollovers. Those assets were usually originally saved in a defined contribution plan.
Implications
As Horace Greeley put it in 1867, “We are energetic, we are audacious, we are confident in our own capacities and in our national destiny, but we are not a systematic, a frugal, economical people”.
All three of the highly successful programs that drive savings in this country, work because they are automatic. Even a 401(k) is now structured to make it hard for employees to not use it. Yet…despite decades of financial services companies trying to educate customers, pursue behavioral finance motivational techniques, and encourage savings, it’s not working. The only significant new savings for most Americans is their forced retirement plans.
From a policy perspective, governments may choose to double down on these forced savings plans. However many financial services companies will resist this approach – either because they believe in the private sector as a superior solution, or because they want to acquire and manage the assets. Suffice it to say that a new approach will be needed to drive Americans to save more. Future perspectives in this blog will continue to explore innovation in this area.
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The small print
There’s no one easy source for this data, and the most recent that’s easily available across the programs is from 2017. Social Security data comes from their website. Defined contribution and private pensions comes from the Department of Labor. Government pensions comes from federal data and state summaries. Assets in retirement plans and percent rollover contributions comes from the ICI.