Impediments to Saving for Retirement - The Barriers, Part 1

Today’s typical histrionic, hyperbolic headline: “Retirement Crisis: Workers Can’t Afford to Save For Retirement Due to Crippling Out of Pocket Medical Expenses and Crushing Student Debt!”¹ The accurate rewrite: “Saving For Retirement is Doable – Almost All Workers Have Low, Budget-able Out-of-Pocket Medical Expenses, and Student Debts.”² 

My discussions with other plan sponsors are often focused on increasing retirement savings plan participation and contributions. A frequent topic is the perception that many workers are financially incapable of saving for retirement. 

Certainly, studies show most Americans live paycheck to paycheck. However, payday-to-payday living is not a barrier to saving.³ Others cite out-of-pocket medical costs or student debt. Recent studies show those aren’t a barrier, either. Consider:

• The median annual out-of-pocket medical expense was $264⁴,  a very small portion of medical spending⁵, and
• A minority of households have student debt. More importantly, the median monthly student loan payment was $203.⁶  

Total National Health Expenditures – 1970 vs. 2016
Out of pocket spending has declined from 34% of all medical expenditures to only 10%

So, most workers have minimal out-of-pocket medical costs.  Fifty percent of Americans account for less than 5 percent of all medical spending.  In other words, medical spending is concentrated among approximately 5 percent of Americans who account for more than half of all medical spending.  Most are retired or disabled.⁷ And, more than 95 percent of all workers have either no student debt or student debt that is manageable and budget-able.  

The bottom line is that those financial challenges are not a barrier. And, plan sponsors don’t have to wait for new legislation or more regulation (examples being sidecar accounts for emergencies⁸, more guidance on “matching” employer contributions for student loan debt payments or a retirement savings mandate).   

Part 2 of this series will reconfirm an effective solution- regardless of the nature or size of workers’ financial challenges. 

¹T. Ghilarducci, T. James, There is a retirement crisis. And workers can’t fix it alone, Marketwatch, 1/26/18, Accessed 10/22/18 at:  https://www.marketwatch.com/story/there-is-a-retirement-crisis-and-worke... ; See also:  Politico, How to solve the retirement crisis, A POLITICO Working Group Report. 06/07/18, Accessed 10/22/18 at:  https://www.politico.com/agenda/story/2018/06/07/future-of-prosperity-re... ; See also: C. Farrell, Calling For A Blue-Ribbon Panel On The Retirement Crisis, Forbes, 5/20/18, Accessed 10/22/18:  https://www.forbes.com/sites/nextavenue/2018/05/20/calling-for-a-blue-ri...  See also: S. Harris, America's Retirement Savings Crisis, 1/10/18, Accessed 10/22/18 at: https://www.jackson.com/financialfreedomstudio/articles/2018/01/americas... A. Tergesen, Bankruptcy Filings Surge Among Older Americans; Authors of recent study cite reductions to social safety net, shift from pensions to 401(k)s, 8/7/18, Accessed 10/22/18 at:  https://www.wsj.com/articles/bankruptcy-filings-surge-among-older-americ... See also:  D. Thorne, P. Foohey, R. Lawless, K. Porter, Graying of U.S. Bankruptcy: Fallout from Life in a Risk Society, 8/18/18, Accessed 10/22/18 at:  https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3226574 See also:  P. Fronstin, L. Greenwald, Workers Rank Health Care as the Most Critical Issue in the United States, Employee Benefits Research Institute and Greenwald & Associates, 9/24/18.  “… Of the one-half of workers reporting cost increases, 24% state they have decreased their contributions to retirement plans …  30% delayed retirement, … 17% have taken a loan or withdrawal from a retirement plan …”  Accessed 10/20/18 at:  https://www.ebri.org/pdf/EBRI_IB_459_WBS.24Sept181.pdf  See also:  R. Moore, Health Care Costs Affecting Retirement Savings and Financial Wellness, 10/15/18, Accessed 10/22/18 at: https://www.plansponsor.com/health-care-costs-affecting-retirement-savin... See also:  Annie Nova, More people are unprepared for retirement because of student loans, 5/23/18, Accessed 10/20/18 at:  https://www.cnbc.com/2018/05/23/how-your-student-loans-can-hurt-you-late... \

²Andrew Biggs, The Media's Coverage of Retirement Saving Really is Terrible, Forbes 7/2/18, Accessed 10/22/18 https://www.forbes.com/sites/andrewbiggs/2018/07/02/the-medias-coverage-..., J. Towarnicky, Retirement in America - A Life of Poverty? 6/29/18, Accessed 10/22/18 at: https://www.psca.org/blog_jack_2018_32 See also: J. Towarnicky, Retirement in America - Individual Account Retirement Savings Plans ARE Good Enough! 7/5/18, Accessed 10/22/18 at: https://www.psca.org/blog_jack_2018_33 ; J. Towarnicky, The Sky is Not Falling On Older Americans, 8/27/18, Accessed 10/22/18 at: https://www.psca.org/blog_jack_2018_40 

³American Payroll Association, Employees in America Living Paycheck to Paycheck Even After Tax Reform, Getting Paid in America, September 2018. More than 70% of workers live paycheck-to-paycheck (they would have some or significant difficulty if a paycheck was delayed one week). However, among those same workers, nearly 90% of those who are eligible for an employer-sponsored savings plan also contribute to retirement savings. Accessed 9/28/18 at: https://www.prnewswire.com/news-releases/employees-in-america-living-pay...

⁴E. Mitchell, Concentration of Health Expenditures in the U.S. Civilian Noninstitutionalized Population, 2014, November 2016, Accessed 10/20/18 at:  https://www.ncbi.nlm.nih.gov/books/NBK425792/  

⁵Kaiser Family Foundation, Out of Pocket Spending Represents a Smaller Portion of Total Expenditures (in 2016) Than It Did in 1970, Accessed 10/21/18 at:  https://www.healthsystemtracker.org/chart-collection/u-s-spending-health...  

⁶Cleveland Federal Reserve Bank, Is There A Student Loan Crisis, Not in Payments, 5/16/16, Accessed 10/20/18 at:  https://www.clevelandfed.org/newsroom-and-events/publications/forefront/...

⁷B. Alemayehu, K. Warner, The Lifetime Distribution of Health Care Costs, 2000.  “… Nearly one-third of lifetime expenditures is incurred during middle age, and nearly half during the senior years. … The distribution of health care costs is strongly age dependent … After the first year of life, health care costs are lowest for children, rise slowly throughout adult life, and increase exponentially after age 50 … annual costs for the elderly are approximately four to five times those of people in their early teens. Accessed 10/21/18 at:  https://www.ncbi.nlm.nih.gov/pmc/articles/PMC1361028/  See also:  J. Jones, M. DeNardi, E. French, R. McGee, J, Kirschner, The Lifetime Medical Spending of Retirees, May 2018.  “… households who turned 70 in 1992 will on average incur $122,000 in medical spending, including Medicaid payments, over their remaining lives. …”  Accessed 10/21/18 at:   https://www.nber.org/papers/w24599  See also:  CMS, National Health Expenditures 2016 Highlights. “Out-of-Pocket expenses were 11% of total health spending.”  Accessed 10/21/18 at: https://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Tren...  See also:  P. G. Peterson Foundation, Spending on Elderly and Disabled Medicaid Beneficiaries is High.  Of the $402B in Medicaid spending, 42% was spent on ~11MM Medicaid beneficiaries, ~$15,000 a year.  Accessed 10/22/18 at: https://www.pgpf.org/chart-archive/0094_spending_medicaid_beneficiaries See also: J. Cubanski, T, Neuman, A. Damico, Medicare's Role for People Under Age 65 with Disabilities, Kaiser Family Foundation, 8/12/16, “… Medicare covers 9.1 million people with disabilities who are under age 65… (average annual spending was) ~$13,000.  Accessed 10/22/18 at:  https://www.kff.org/medicare/issue-brief/medicares-role-for-people-under...

⁸J. Towarnicky, Sidecar = Suboptimal, 7/28/18, Accessed 10/22/18 at: https://www.psca.org/blog_jack_2018_36