Economic Perspective: Expanding Options for Retirement Savings

MARY WALDEN:

“Today’s program looks at expanding options for retirement savings. Mike, the federal government recently approved changes affecting how people save for retirement. What are the changes, and why are they important?”

MIKE WALDEN:

“Well, first of all, these changes are very, very important because it’s been estimated that people are not saving enough for their retirement. That there’s a collective deficit in retirement savings of almost four trillion dollars. So if you believe those numbers we do want to encourage people to save for retirement, and one of the ways that the federal government has done that is to offer plans, like the 401(k) plan that are available through employers, where people can save money for retirement and not be taxed on that money that they put aside.”

“There were two changes in the 401(k) program that are going to go in effect. Number one: it’s going to be broadened. More companies are going to be able to offer 401(k) programs, and more workers will be able to qualify to participate. So that’s one big change.”

“Another change is on how people who have 401(k) plans ultimately take that money out, and the federal government is now approving one way to do that through what is called an annuity. An annuity is something that allows you to take a pot of money, receive that over time, but never run out of money over your lifespan. It’s a guaranteed payment for as long as you live, and heretofore that kind of technique has not been widely available for 401(k) plans. Now it will be.” 

“Now that does raise some concerns. There’s some concerns about fees on annuity programs. What kind of investments annuity programs have so certainly people who participate want to watch that, but I think overall most observers think these two changes in the retirement savings plans that are available to workers are very positive for the economy and for workers.”

Mike Walden is a William Neal Reynolds Distinguished Professor and Extension Economist in the Department of Agricultural and Resource Economics at North Carolina State University who teaches and writes on personal finance, economic outlook and public policy.