Why you should care
Because you aren’t getting any younger.
It wasn’t like this back in their day. Retirees of the past, present and even near future have lived through a very different world than the one today’s young people inhabit. Women were consigned to the role of mothers, inflation hobbled economies and the existential threat of nuclear war loomed. But it wasn’t all bad. The labor market was pretty simple: You got a job and worked your way up the career ladder. Annual returns of 8 percent or more from financial markets allowed for generous pension plans. Workers could expect to retire at age 60 and spend a decade, maybe two, living off a comfortable proportion of their previous income until kicking the bucket at the ripe old age of 75.
How “work” works today couldn’t be more different. The gig economy isn’t just about Uber drivers. The freelancer employment model is taking over dozens of industries, from advertising and journalism to financial consulting and law. According to a 2016 study, more than one in three U.S. workers is a freelancer. Even for those who still have a traditional employer, job turnover rates are rising, meaning the length of any single employer-employee relationship is falling.
Many nations’ retirement-savings schemes were not built for this era, and so workers in the new economy are falling through the cracks. Here’s the new normal: fluid labor markets, decreased long-run financial returns and hyper-longevity. (Those retiring today can expect to live into their mid-80s, while those babies born today may well live past 100.) Given all that, the way we plan for retirement has to change to ensure the math still adds up. While some think millennials will be forced to work into their 90s, or that the entire concept of retirement is threatened, policymakers, entrepreneurs and others are coming up with solutions.
Some of the most resilient national systems, such as Australia’s, involve mandatory contributions from employers into funds that follow workers from job to job. But in the U.S. and Canada, private pension funds are employer-bound and voluntary. “At any one point in time, only half the [U.S.] workforce is even covered” by 401(k) schemes, says labor economist Teresa Ghilarducci, referring to the employer-sponsored contribution-based savings plans, and not all of those employees actually enroll. She and others have suggested legislative programs to combat the issue, with automatic enrollment and portable accounts as key features of most proposed fixes.
If we are going to create a retirement system for today’s younger workers, we need to start now.
David C. John, deputy director, Retirement Security Project, Brookings Institution
But beyond these crucial agreed-upon features of what such a system would do, there are a number of competing proposals for how it should do it. Ghilarducci has proposed a government-managed system that pools workers’ savings. Meanwhile, the Retirement Security Project at the Brookings Institution argues for a system that maintains individual control over investments. The Obama administration repeatedly tried (but failed) to pass legislation mandating that all employers open Individual Retirement Accounts (IRAs) for workers; five states have now done so. This legislative trend is happening across the world: The U.K. is phasing in automatic enrollment, following a similar reform in New Zealand. Meanwhile, pension-pot portability may soon go global, too: The European Union is trying to make it easier for retirement savings to cross borders as easily as people and goods within its single market.
Perhaps the most futuristic proposal comes not from Washington but from Silicon Valley. While policymakers strive to facilitate automatic paycheck deductions for those in nontraditional employment, some techies think even that doesn’t go far enough. Automatic transfer is a “dumb” system, says Ethan Bloch, CEO and founder of Digit, a fintech app that uses algorithms to dictate precisely how much should be deducted from your income and saved, based on your earning and spending patterns. The complexity surrounding legal savings structures arises from the need to accommodate many different types of worker, something that Digit could solve, says Bloch: “There’s no one-size-fits-all, but there is potentially one intelligent algorithm that can adjust itself to your unique situation.”
Others don’t see Digit as a magic bullet. “My gripe with a lot of these investment apps is that they’re strictly using taxable accounts,” says Arielle O’Shea, an investment and retirement specialist at NerdWallet, a San Francisco-based financial site. O’Shea suggests prioritizing other forms of saving until legal and tax frameworks catch up to the 21st century. (Digit points out that it is a savings tool, not an investment app.)
But while the “vessel” may change (the actual savings fund behind the scenes), “the act of saving, with robots deciding how much and when … will absolutely replace” current systems, says Bloch. Several other fintech apps digitize how we save and invest, including Honest Dollar, which aims to make it easier for small firms or independent contractors to open IRAs. Lyft has partnered with Honest Dollar to enable its drivers to save for retirement, while Uber drivers in select cities can set up IRAs through the robo-advising platform Betterment. But “most other firms” in the gig economy “don’t offer anything like that right now,” says David C. John, deputy director of the Retirement Security Project at Brookings Institution.
However, “the private sector is just not built to solve a problem facing most people,” says Ghilarducci, who emphasizes legislative reform. In the meantime, millennials shouldn’t wait for the retirement problem to be solved for them. “In the new economy, it’s even more important to take advantage of every opportunity to set aside as much money for your future as you can, when you can,” says certified financial planner Kenneth Perine from Livermore, California, and existing schemes like the 401(k), imperfect as they are, “can be a great way to do that.”
Correction: This story’s characterization of Digit has been updated.