Working Longer Won’t Fix America’s Retirement Savings Crisis, Says This Expert

Many retirees end up leaving the workforce without enough savings to last them through retirement. While some experts think working longer may be a fix to people’s lack of retirement savings, labor economist and retirement security expert Teresa Ghilarducci thinks that probably isn’t the solution.

Instead, she advocates for changes to the existing system for retirement savings to improve access. One example, is the Retirement Savings For Americans Act (RSAA), a bill that’s been introduced in Congress. The RSAA would automatically enroll workers without access to a workplace retirement plans into a retirement account. Low-income and middle-income workers would receive a matching contribution and a refundable tax credit too.

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Investopedia spoke with Ghilarducci, a Professor of Economics and Policy Analysis and Chair of Economics at The New School for Social Research, to understand what she thinks needs to change about the U.S. retirement system and how people should save for retirement in the meantime.

Here’s an excerpt of the conversation, edited for brevity and clarity:

INVESTOPEDIA: Why do people have to work longer or delay retirement beyond what they expect to do?

TERESA GHILARDUCCI: I have to refer to two Americas, or a tale of two retirements. Some people, a minority of people, I estimated about 12% of people between 62 and 70, are working longer because they love their jobs. But the majority of people who are working, between 62 and 70 are doing it because they don’t have enough money to retire and maintain their living standards.

There’s another whole group we have to worry about, people who can’t work longer and don’t have enough money to retire on.

INVESTOPEDIA: Why don’t you consider working longer to be a solution to the retirement crisis?

TERESA GHILARDUCCI: So, I agreed before that working longer was a good thing because we wouldn’t have to spend taxpayer money or raise savings rates. People could just work longer, and that’s good for the worker and it’s good for the economy. But over time, as I did more research, I found that those three big myths weren’t true.

First of all, working longer isn’t the best solution because most people can’t choose to work longer—a better solution is to help people save for retirement and expand Social Security and fully fund it. 

The second myth is that work is good for people. My research showed that work was good for the types of people who make pension policies, like politicians and professors. But they have jobs with status where they can control the pace and content of their work. For people who don’t, data shows their stress and cortisol levels are higher. For most people, their job doesn’t provide meaning, satisfaction, or personal growth. 

The last myth was that working longer was good for the economy because you’re adding more workers. If you’re adding workers whose productivity is falling and not fully employing younger people, you’re not gaining productivity. We would have a higher GDP if seven year olds worked, but we’ve decided that our economy’s wealth is not just dependent upon our output, but our quality of life. By saying people should work longer, we’re eroding the features of a good economy. 

INVESTOPEDIA: Is there another solution that could fix some of the issues with the U.S. retirement system?

TERESA GHILARDUCCI: Half of the workforce doesn’t have a 401(k) or pension plan, so they don’t have a way to save for retirement. These are temporary or self-employed workers who work as freelancers or Uber drivers, and they’re a growing portion of the workforce. 

We should offer workers the ability to automatically save in a retirement account. That’s why I support a bill in Congress, [RSAA], that came about from research that Kevin Hassett and I did.

INVESTOPEDIA: While people are waiting for Congress to act, what’s the best way to save for retirement?

TERESA GHILARDUCCI: If you’re in your 20s and 30s, saving 3% to 4% of your pay for the rest of your life should, while supplementing Social Security, maintain your standard of living. When that 3% compounds, you will be able to replace about 45% to 50% of your income. 

If you start when you’re 40, you have to save 10%. In your mid 50s, you have to save 50% of your pay.

And how do you know you’re on track? You want to save 10x your salary in your retirement account. If you’re 30 years old, you want 1x your salary. When you’re in your 40s, you should have roughly 4x your salary.

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And the rules of thumb work. When you’re younger, have more in stocks than in bonds. And as you get older, move it over to bonds. If you follow a 60/40 portfolio with low fees and you don’t take it out, you might not maximize your returns, but you’ll do pretty well.