Straight Story: Saving
TEXT OF COMMENTARY
TESS VIGELAND:Saving money is not easy. At least not for most of us. So it’s really quite amazing that the savings rate has jumped so much in the past year. An excellent side effect of the financial crisis. But, we’re still far from where most experts would like us to be. And a recent study shows that saving is much harder for some folks than it is for others.
Our economics editor Chris Farrell offers his thoughts in this week’s Straight Story.
Chris Farrell: The study, authored by the Ariel Foundation and Hewitt Associates, is called “401(k) Plans in Living Color.” The results of digging deep into retirement savings plans of some 3 million employees at nearly 60 of the nation’s largest companies are sobering.
African-Americans and Hispanics aren’t saving as much as their white peers. They’re less likely to participate in company retirement plans. They take out more loans from the plan. These results hold even after taking into account salary, education, age and other factors. The retirement savings gap is wide.
The paper offers a number of recommendations to address the problem. Among the ideas put forward are improving financial literacy and better communication with workers. Who can disagree with that? And companies likes McDonald’s and IBM are doing good work in this regard. For example, McDonald’s doesn’t rely on pamphlets and computer messages to convince employees that saving for retirement is important. It puts human resources folks out in the field to talk to workers about the topic and 401(k) plan.
Still, it’s not all bad news in the report. First, I was surprised how well minorities were doing with retirement savings. The African-American and Hispanic communities have very little wealth compared to whites. The gap in net worth is a deep canyon with many causes. But it would be a mistake to conclude that minorities aren’t saving. They are. But with different priorities. Hewitt’s research shows that African-Americans have put home ownership and a college education ahead of retirement, when it comes to savings and investing. I can’t criticize that.
My other reaction? The low level of retirement savings among minorities is the proverbial canary in the coal mine. The current retirement saving system is unstable. Witness the two major stock market meltdowns in eight years. What the study says to me is that the 401(k) system is letting down most people. It’s hardly surprising that minorities would be the most vulnerable. Companies should do more to encourage more savings and participation in these plans, especially by minorities. But the 401(k) retirement system relies too much on individual choice and market savvy. It doesn’t provide a predictable income for old age.
The study is just one more reason why reform is imperative.
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