Grant’s Go-To’s: What is the Cost of Doing Nothing?
In the last “Go-To” I wrote about the start-up costs of state-facilitated retirement savings programs (SFRPs).
This time I thought I’d flip the cost question upside down and ask: what are the costs of not doing anything to make it easier for workers to save for retirement?
In the last “Go-To” I wrote about the start-up costs of state-facilitated retirement savings programs (SFRPs). This time I thought I’d flip the cost question upside down and ask: what are the costs of not doing anything to make it easier for workers to save for retirement?
It’s an important question, but one that’s difficult to answer.
Projections about cost savings that might be generated by SFRPs depend, among other things, upon reasonable and well-informed assumptions about how changes in the income of the retirement-age population affect economic growth, tax revenues and the costs of social services.
Fortunately, our friends at the Georgetown Center for Retirement Initiatives (Georgetown CRI) Econsult Solutions Inc., and the Center for Retirement Research at Boston College have already asked about the costs of doing nothing and conducted research to find answers.
What exactly are the costs associated with insufficient retirement savings? If retirees have less to spend, they contribute less to the economy and to tax revenues. In addition, states and the federal government face increased costs of social service programs that provide healthcare, housing, food and energy assistance for retirement-age people with insufficient income.
What has the research found about the costs of doing nothing?
Colorado: Lost budget and revenue impact due to insufficient retirement savings is projected to create a cumulative fiscal impact to Colorado of almost $10 billion over the 15 years from 2021 to 2035 according to a 2020 Colorado Department of Treasury report. However, additional savings of just over $100 a month over 30 years could close the gap and achieve recommended income replacement levels in retirement.
Virginia: A 2021 fiscal impact statement for the legislative proposal establishing the VirginiaSaves auto-IRA program projected that under-saving would create an additional cost of $11.8 billion to Virginia taxpayers over the next 15 years. The study also concluded, however, that the average Virginia household with less than $75,000 in annual income could close the retirement savings gap anticipated by 2035 by saving an additional $1,930 annually.
Pennsylvania: A January 2018 Econsult Solutions report to the Pennsylvania Treasury Department estimated that insufficient savings in 2015:
o Increased costs of state assistance by $702 million;
o Decreased household spending in the state by $20 billion; and
o Resulted in a $2.8 billion decrease in total economic output and $70 million in lost state revenue.
According to a December 2020 Georgetown CRI and Econsult report, states are creating retirement savings programs specifically because they recognize the need to address the financial consequences that will result from residents retiring with insufficient income.
“Cost of doing nothing” research serves to highlight how SFRPs might address these costs and close the retirement income gap.
Is there also a moral cost to consider that is not explicitly captured in these studies? What is the cost to us as a society if we fail to do more to enable people to save for a retirement that provides the security to live without worrying about basic needs, the comfort to enjoy life in one’s retirement years, and the dignity that comes with both?
In our next installment, we’ll turn our attention to the numerous efforts in 2021 to establish or expand SFRPs throughout the U.S. Not all proposals will make it to the finish line this year, but it’s encouraging to see how many there were.
Stay tuned! - Grant
This piece was featured in the June 17, 2021 edition of Retirement Security Matters. For more fresh thinking on retirement savings innovation, check out the newsletter here.
