Editorial: Good retirement hinges on financial literacy

By The Herald Editorial Board

There’s new evidence of the need to stress financial literacy among ourselves and teens, particularly when it comes to saving for retirement.

A study presented this week at the annual meeting of the American Sociological Association in Seattle found that education level can affect participation in 401(k) savings plans offered by many employers. Where the defined-contribution plans are offered, employees with a bachelor’s degree or higher education are 1.2 times more likely to enroll in the savings plan than are high school graduates, after taking into account effects of annual earnings, occupation, industry, company size and other factors, the study found.

More concerning, employees with at least a bachelor’s degree saved an average of 26 percent more annually than high school graduates, even among those who earned the same income, the study reported.

The employees’ decisions on whether to enroll or save for retirement appeared to be influenced by more than earning level, said Chang-Hwan Kim, one of the authors of the study and an associate professor of sociology at the University of Kansas. Such decisions also may involve the level of financial knowledge and personal concern for planning for the future.

Kim and his co-author, Christopher Tamborini, a senior researcher for the federal Social Security Administration, examined workforce data from surveys in 2004 and 2008, matched to W-2 tax records.

Unlike traditional pensions, which have been gradually replaced in the workplace with defined-benefit plans, 401(k)s typically are voluntary with limited opportunities for enrollment. Many employers will match employee contributions but often don’t provide the contribution unless the employee participates. And opting out has long-term consequences.

“When you have options, sometimes bad things happen,” Kim said, in a press release. “You want to spend your money now, maybe to cover current necessities, but investing less for your retirement during your working years can have future costs that impact your retirement income security.”

Participation in retirement plans also is low among lower-income employees, many obviously because of more immediate needs. A report earlier this year by the Economic Policy Institute, “The State of American Retirement,” found that income level, itself, contributes to widening economical inequality, said its author, Monique Morrissey, an EPI economist.

According to the report, among those in the top 20 percent of income, 9 of 10 had retirement account savings and accounted for 74 percent of the total wealth in personal retirement accounts. Among the bottom 20 percent, fewer than 1 in 10 had any retirement savings.

That disparity in retirement savings could exacerbate inequality during retirement, Kim said, which emphasizes the importance of protecting the solvency of Social Security.

The need for Social Security is clear. A 2014 report by the Government Accountability Office found that half of all households of those 55 and older have no retirement savings; nearly 30 percent had no pension; and of those between 55 and 64 who had a 401(k) or an individual retirement account, the average monthly check upon retirement would amount to only $310 a month.

There are options for strengthening Social Security and keeping its trust fund solvent past 2035, including raising the payroll tax’s income cap from the current $118,500 to $250,000.

Likewise, there are options for retirement saving, even for those who are self-employed or whose employers don’t offer a 401(k) plan, including IRAs and the new myRAs launched by the Obama administration in 2015. MyRA is a Roth IRA that allows direct deposits from a paycheck; have no fees; don’t require a minimum contribution or balance; are invested in Treasury savings bond, protecting the investment; and while it doesn’t offer a tax deduction for contributions, interest is not taxed while the money is in the account, according to a U.S. News and World Report article on MyRAs.

Just as our elected representatives are responsible for protecting Social Security, whether we’re just starting out on a career or nearing retirement, we’re personally responsible for our financial literacy and our individual security.

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