I wrote a column earlier this week about U.S. workers’ widespread and well-founded anxiety about retirement, and how, in the absence of any meaningful public or private efforts to address those concerns, many plan to work into their 70s.
I proposed that this newly-contemplated fifth decade of work presents a golden opportunity to fund retirements quite cheaply -- for just $16,500 per worker by my estimation -- assuming that: 1) We set aside that money at the beginning of workers’ careers in order to leverage the magic of 50 years of compounding returns, and 2) We invest the money in a straightforward 50-50 U.S. stock-bond portfolio.
The problem, of course, is that very few workers have $16,500 jangling around in their pockets when they start their careers. Nor do they earn enough at the beginning of their careers to save anywhere near that amount. According to the Census Bureau, the average full-time worker age 15 to 24 earned just over $24,000 in 2014.
The unfortunate reality is that the optimal time to save for retirement is when we begin our careers, which is precisely the time when most of us have no money. But there are several ways that government and employers can bridge the gap.
The rolling 50-year returns of a 50-50 portfolio of U.S. stocks and bonds have shown remarkably little deviation.
Methodology: 50 percent S&P 500 and 50 percent five-year U.S. treasury notes, including dividends.
First, the federal government can simply give every 21 year old an IRA with $16,500. Workers would repay the federal government through payroll taxes over time, which would be a fraction of the hundreds of thousands of dollars that workers currently pay in payroll taxes over the course of their careers. (Realistically, one or two or maybe even three future generations of workers will have to continue paying some additional amount into social security in order to make good on promises to current workers, but that amount should decrease over time.)
We can also give young workers the opportunity to fund their future retirements through public service. The federal government could sponsor a program in which 18 to 25 year olds volunteer to spend a year working in schools or on infrastructure projects or for non-profits in exchange for a more generous IRA contribution of, say, $24,000 -- the average annual income for workers that age.
The private sector can play a role too, as it stands to gain from a more efficient retirement system. Employers spend a fortune on workers’ retirements through 401(k) contributions or payroll taxes or both. Here again, those costs would be far lower -- and would go much further -- if they were made earlier in employees’ careers.
Employers are unlikely, however, to change their approach to funding workers’ retirements if left to their own devices. For one thing, as long as employers are required to pay payroll taxes, a good portion of the cost is outside of their control. The workplace also is increasingly transient and many employers would be reluctant to cut generous checks to new employees who can walk out any time.
This is where a public-private partnership would make sense. The federal government can offer employers a modestly better than one-to-one reduction in payroll taxes for IRA contributions between, say, $15,000 and $20,000 that they make to employees under the age of 26. Employers would actually save money by making those IRA contributions, and over time the federal government would also be better off because what it forgoes in payroll taxes it will more than makes up in funded retirements.
How these accounts are invested is equally important. My analysis hinges on a 50-year investment in U.S. stocks and bonds, so everyone has to be dedicated to the task of leaving that money alone for a long time. We also could think of different approaches to how Social Security funds are currently invested, but that's yet another complex issue and a prescription I won’t address here.
In 50 years, our economy will be much bigger than it is today, companies will be making much more money, and, as a result, stocks will be sharply higher. (If that’s not the case, we will have bigger problems than how to save for retirement.) Yes, there will be more than a few scary moments along the way, which is why a 50-50 portfolio of U.S. stocks and bonds is a sensible way to harness growth while balancing risk.
The playbook for a more efficient retirement system is simple. All that's left -- which is undoubtedly the bigger hurdle -- is making it a reality.
Nir Kaissar is a Bloomberg Gadfly columnist covering the markets. He is the founder of Unison Advisors, an asset management firm. He has worked as a lawyer at Sullivan & Cromwell and a consultant at Ernst & Young.
This column does not necessarily reflect the opinion of The Sun Bay Paper, Sea Level Broadcasting, Bloomberg LP or its owners.