Rise in Savings for Retirement Not a Fluke

How swiftly flow the years. Twenty years after Woodstock, the generation of young people who attended the 1969 peace and rock festival is thinking about saving for retirement.

And not only that generation. According to several recent studies, saving for retirement has become Topic A among great numbers of Americans--and hopes are high. The majority of those 35 to 44 years old hope to live well in retirement on $42,000 in annual income, according to a study by Investors Diversified Services, the financial planning firm. Those 45 to 64 years old--called “pre-retireds” in the IDS survey--reckon to live well on $32,000 a year on average.

In fact, hopes are brighter than that. People want to retire early rather than wait till age 65, says a survey by Merrill Lynch, the brokerage firm. The 45-and-over folks want to kick back at 62, and the younger, 35-and-up generation aims for retirement at 60.

But with the hopes there are fears of not having enough money on which to live in retirement. Younger people even worry that Social Security won’t be there for them, that the government will give them only an IOU when they retire in 2019 or thereabouts.

Social Security Safe

So what’s the story? Are the fears unfounded, the hopes unrealistic?

The answer is that there’s no reason to worry about Social Security, but whether you can save enough on which to live is cause for concern.

First, the anxiety about Social Security arises paradoxically because the system has too much money. The Social Security trust fund--which receives deductions from your paycheck--is taking in more than it has to pay out these days because active workers greatly outnumber retirees. So a big reserve, currently $169 billion, is building up for the day when today’s workers retire.

Meanwhile, that $169 billion is being invested in Treasury securities--meaning, in one sense, that Social Security funds are hiding the size of the federal deficit. That’s worrisome, perhaps, but the issue is a complex and long-term one--depending on how the government spends the money and whether its budget moves toward balance early in the 1990s.

But there’s no doubt about “individual cash benefits, which are well financed for 75 years out,” says Alicia Munnell, research director of the Federal Reserve Bank of Boston and author of “The Future of Social Security.” The reserves will keep growing until the year 2030, when they will amount to $12 trillion. And after that there is no conceivable way that Social Security could get into difficulty until 2046--when today’s 18-year-old worker will be 75 years old.

Savings Rising

So benefits are secure. But Social Security only gives a maximum of $11,000 a year. How are people who hope for $32,000 to $42,000 a year going to come up with the rest of the money? Financial experts--who suggest 70% of working income as a target for retirement--assume that some funds will come from company pensions. But there is a hefty gap to be filled by personal savings.

And that’s why “the current rise in the national savings rate is no fluke,” says Michael Hines, a vice president of Fidelity Investments who travels the country sampling consumer attitudes. “Americans are saving more because of a deep desire to do something about their own retirement.”

However, saving is hard to do, given the effect of taxes, inflation and the need for safe investments when the nest egg is at stake. A return of 3% to 4% over the inflation rate is all you can really count on. And to get that you need to earn 8% to 9% on your savings--based on the annual inflation rate that the Social Security Administration assumes will prevail in the years ahead.

But taxes can reduce even a 9% return to a measly, after-inflation 1% or so--and that won’t build many nest eggs.

What you need is a tax break on savings, and that’s hard to come by since Congress cut back the Individual Retirement Account in 1986. In the classic IRA, you could deduct $2,000 of income and put it away to earn interest that was tax-deferred until withdrawal at age 59 1/2 or later. That is, savers could put away money earned in high-income years and pay tax on it later, in retirement, when it was assumed that they would be in a lower tax bracket.

But the new tax laws sharply limited the IRA deduction for employees covered by company pension plans. And even though IRA savings could still earn income tax-deferred, the non-deductible IRA proved less attractive to the public and the national savings rate fell to an all-time low.

Which is why there is a growing demand to bring back the old IRA--although, given today’s federal budget troubles, the classic IRA has no chance in Washington because it would reduce government tax receipts by $14 billion.

However, proposals to give tax benefits at the IRA’s “back end”--at time of withdrawal--are gaining attention in Washington. Sen. William Roth (R-Del.) has a bill proposing an IRA that would allow non-deductible savings to earn income tax-free as opposed to just tax-deferred. There would be no tax at withdrawal.

Federal tax receipts would suffer no immediate reduction, but the IRA holder would get the full benefit of compound interest--which at 9% can double your savings in eight years.

A lot of people with high hopes for retirement think that it’s an idea whose time has come.