Retirement in the United States

This activity is appropriate for introductory macroeconomic course.

Overview

Students will examine:
- the current condition of the nation's retirement system,
- address important causes of inadequate retirement security in the United States, and
- propose potential policy recommendations.

Expected Student Learning Outcomes

In this exercise students will be prompted to analyze potential issues associated with the current U.S. retirement system.

Information Given to Students

Reading of, "Financial Security for Older Americans"

https://www.gao.gov/key_issues/financial_security_for_older_americans/issue_summary?from=topics#t=0

Reading of, "The Nation's Retirement System"
https://www.gao.gov/assets/690/687796.pdf

Every decision you make is a stepping stone for your future, either moving you towards a positive goal or potentially away from a goal. You choosing to be in school is a step towards a more financially secure future, so well done on you! One mistake we can make as individuals though is to delay in our planning for retirement. We get very busy in life and forget the future is coming whether we are ready for not! The average retirement age in the United States is around 66 years of age. While that might seem a long way off, remember that to be ready for retirement you need to have enough money put aside to sustain you from retirement to death. As life expectancy increases, this is an important point to consider because once you reach retirement age it's a bit late to begin planning.

In the required readings above, we see a number of complicated issues culminating together that are important to consider:
1. The unstainable path of the U.S. Social Security retirement program, unable to pay full benefits beginning in 2035, not long from now.
2. Medicare being depleted, for full benefits, by 2029.
3. That about a third of private-sector workers in the United States do not have access to a retirement plan through their employers
4. The shift from Defined Benefit Plans to Defined Contribution Plans (i.e. more responsibility on the individual)
5. When reading "Financial Security for Older Americans," it is very important to note that Figure 1 showing Retirement Resources for All Households only presents information for households aged 55 and older! These are people only 11 years away from average retirement.
6. In 2018, approximately 44% of the work force was 45 years or older, which means when this group is set to retire Social Security will only be sufficient to pay 75 percent of benefits.

You are the economists charged with addressing this unstainable trend in the United States. This is a complicated task, but you're up to the challenge because you know that your decisions will impact all the individuals you know working in the United States (including yourself!). The reality is that in the United States we have an overpromising-underfunding problem that needs to be resolved.

Which is the single most important factors (keeping in mind there are other pressing factors, too, that are not included) to address when you are getting ready to tackle this project. Be prepared to defend your choice.

A. Average life expectancy
B. Average retirement age
C. Projected inflation
D. Average savings & retirement plans (in number and monetary amount)
E. Average healthcare costs
F. Social Security monetary shortfall
G. Medicare monetary shortfall

Report by writing the letter corresponding to your choice large on your team's whiteboard. (Alternatively, sheets of scratch paper might be used for this kind of report.)

Terms/concepts that will be important for students to understand:
- Defined Contribution plan
- Defined Benefit plan
- Social Security retirement program
- Saving
- Retirement
- Inflation

Retirement can be a difficult subject to discuss with students because 1) it seems so far away to them and/or 2) they are too poor to consider the idea of putting any money away when they routinely have to borrow to make their basic bills. Regardless, of the reason(s) it is a remote subject to them, it's still worth addressing. It helps to make the scenario more personal, since they will face this issue whether they plan or not! It is easier for students to justify a solution they are not required to face or live with, but that isn't the reality.

I usually attempt to personalize this for students by having them work backwards. Say they are 20 years old and plan to retire at 60 years old, that provides 40 years to prepare for financial stability. I then have them consider how long it will take to complete enough school to have a career with retirement options and/or a salary which will allow for similar preparations. This calculation will provide the remaining years to work. I then ask them to calculate the amount of money they will need to retire, assuming they live until 90 years old (i.e. 30 years). You don't have to make this exceptionally labor intensive since it is just meant to spark thoughts and conversation. You can either have students do a search or you can provide some basic numbers given the location demographics, inflation, etc. This amount will allow students to work backwards to determine how much money they will need to set aside each year. Remind them this is money to be set aside, above and beyond money needed to live their current life. One could assign a homework project to do some very simple simulations in a spreadsheet before the class with this AE. This usually creates a quiet panic, but a great opportunity for discussion!

Students are required to choose the most important. With a topic this broad and complicated there is no one magic bullet to consider and they need to be reminded of that. Use the reporting process to identify the top two or three most important considerations.

After the students have had time for discussion, usually 15 minutes or so, ask a selection of student reporters to present and defend their choices. Highlight the most frequent choices of the class. There is no need to seek consensus on a single factor, as many are so important.

Either follow this one with another AE that asks students to identify the best of four or five possible policy responses to the issue or simply close by asking students what policy options could be created to address the most important components they just discussed. You can allow for another 15 minutes or discussion and a round robin discussion format or any other version you deem appropriate for your class set up.

Students should come up with one policy recommendation to address one aspect of the retirement challenges in the United States. They could create policy recommendations to address the long-run balance to Social Security and Medicare; a policy to incentivize individuals to save more at an earlier age; a policy to incentivize employers to contribute, etc.
These ideas could incorporate address extending the retirement age, requiring more money paid into Social Security/Medicare, changing qualification brackets, creating more opportunity for high-skilled, high-earning positions, etc.