Is the Financial Gap Because of Our Retirement System?

According to analysts in an issue brief published by the National Institute on Retirement Security (NIRS), the financial asset gap within American citizens keeps rising and is coupled with meager savings for retirement for most families presents a real challenge of being able to retire.

The researchers claim that the imbalance of financial assets is compounded by regressive tax benefits for pension savings and disproportionate accessibility to retirement plans offered by employers

It was discovered that the top 5 percent of the richest Baby Boomer’s share of financial assets rose 8 percent within 12 years. It went from 54 percent in ’04 to 60 percent in 2016. Across the same timespan, the share of financial assets held by the highest 10 percent increased from 68 percent to 75 percent. The top 25 percent went from 86 percent to 91 percent. Baby Boomer households ‘ share of assets owned by the lower 50 percent dropped from 3 percent in 2004 with less than 2 percent in 2016.

The analysis shows that Generation X, as well as Millennials, at younger ages, seem to have achieved similar levels of financial assets among the wealthiest households in the Baby Boomers generation.

Last year, a study from NIRS evaluating the U.S. Statistics from the Census Bureau revealed that retirement savings for working-age Americans citizens were significantly insufficient. More precisely, the average retirement account balance across all employed adults is $0. Around 57 percent of working adults do not have retirement account funds in an employer-sponsored defined contribution program, an IRA, or a pension. In the current study, the researchers think that insufficient accessibility retirement planning is what is mostly at fault.

The latest brief also notes that for a vast majority of people, Social Security provides vital income during their retirement. The Social Security system has a progressive benefit model that assists lower-income citizens to live outside the poverty threshold and allows those that are retired to keep up with adjusting to the standard of living that continues to progress every generation. Nevertheless, throughout time, the tax structure of Social Security continues to be more regressive. The Social Security payroll tax limit on income, AKA, the “tax max,” has completely lost touch with the rising inequality in earnings. While the share of jobs paid above the tax max has stayed quite stable at around 6 percent for generations, the program collects a progressively smaller percentage of U.S. wages annually.

The analysts give ideas on how to improve the imbalance in financial assets created by problems with the retirement system. For one, Social Security could be improved by Congress and the President, himself. Eradicating the income cap will raise profits, which would significantly improve the budget deficit of the Social Security Trust Fund. Such increased revenues can also fund program changes, like larger retirement benefits to low-income earners and providing credits for citizens that have to take time outside the workplace to assist with caregiving.

Secondly, researchers believe states could be crucial in developing state-sponsored retirement savings programs for those not provided a package in their workplace. This will give workers who do not have accessibility to employer-sponsored programs a chance to grow their finances. As of now, only ten states have set up workers’ retirement savings plans who cannot acquire them. The Oregon workforce generated $2.5 million every month with the state’s auto-IRA system only after two years of existence.

But on the other hand, U.S. Attorneys lodged a Statement of Interest in a case, presenting proof that the Employee Retirement Income Security Act (ERISA) preempts California’s state-run auto-IRA program.

Ultimately, the researchers believe that perhaps the federal government should strive to enhance and encourage the Saver’s Credit. The analysts claim that the aggressive phase-out at low-income levels and the absence of reimbursement limit the efficacy of the credit. The median credit given in ’14 was $174, and the expense of the federal government was minuscule in comparison to the tax expenditures that help fund higher-income earners’ savings with 401(k) tax policies.

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