“Too Thin a Cushion”

The Economist’s Free Exchange blog has a great post up on the long-term decline of the savings rate in America. “Too Thin a Cushion” also charts the rise of the 401(k)and the concomitant rise of the penalized withdrawal from the 401(k). The bottom line is that there’s a huge level of financial insecurity out there, that our government supports saving but only for these long-term accounts, and we shouldn’t be surprised when families have nowhere else to turn. The question is whether or not it makes sense to keep jamming square pegs into round holes.

As A.C.S. says in the Free Exchange post:

To me the sudden increase in 401(k) loans is less about myopia and more a symptom of under-saving. As people save less to liquid assets and are being defaulted into a 401(k) plan; it’s not surprising they turn to their main source of saving when times get rough. Rather than make savings more illiquid, we need to do more to make all forms of saving more attractive.

Italics are mine, but this is spot on. If we want to shore up long-term retirement security we could bolster Social Security (as our colleagues in the Economic Growth Program at NAF have suggested) or we could move to a more inclusive system of universal accounts and change our savings incentives to recognize the reality that families have multiple savings needs and that the one-size fits all approach of our current system is part of the problem and self-defeating. That’s the core of our proposal for a Financial Security Credit, make savings supports available to everyone and let them choose the savings product that makes the most sense for them, whether it’s a retirement product, a college savings product, or an emergency savings product, like a savings bond or CD. We need a system that’s more universal, more fair, and more flexible than the one we have now, or we’re going to end up with a lot more folks struggling with poverty in old age.