Today, Explained - The Future of Work: Retirement should be fun

Episode Date: November 19, 2021

But somehow it got very scary. Today’s show was produced by Victoria Chamberlin, edited by Matt Collette, engineered by Efim Shapiro, fact-checked by Laura Bullard and hosted by Sean Rameswaram. Transcript at vox.com/todayexplained Support Today, Explained by making a financial contribution to Vox! bit.ly/givepodcasts Learn more about your ad choices. Visit podcastchoices.com/adchoices

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Alright, let me check the traffic. Traffic and weather on the 8th and when it breaks, we go to Dave Dildine in the WTOP Traffic Center. Traffic on the Beltway, heavy early on the spur northbound past democracy boulevard the work zone keeps the left plane on the spur blocked oh come on volume building on the outer loop how many more years am i going to have to put up with this between the beltways on 95 at the bottom of... It's the future of... It's the future of... It's the future of... It's the final episode of The Future of Work on Today Explained, and we figured we'd go out on retirement.

I'm a good millennial, so retirement freaks me out, and I figured retirement might freak a few of you out too, so I asked you if it did on Monday, and you confirmed. I'm really worried that I'm not going to be able to have enough money to retire. I honestly don't know anything about it. I logged into my brokerage account,

looked at it, felt like it was way too complicated, and I just gave up. For retirement, I feel completely lost. I feel like it's just really anxiety-inducing to think about. I would like to save for my son to go to college, but then that means I can't put away anything for my retirement. Being in a liberal arts school, I mean, nobody pays artists. Yep, never retiring. I'm $160,000 in student loan debt. I'm just feeling really like this whole life thing is kind of a bummer. So looking forward to finding a job I love so much, but I never want to retire. My job has a 401k for me that I contribute to. I don't know what those

things mean. I am bitter because my parents' generation and older generations were given pensions and retirement funds and were guaranteed to have government retirement money to cushion them. Would you like a house to retire in or would you like retirement at all? You know, I know I'm supposed to be saving about 15% of my income. How can you even hit that number when, you know, when you live in such a high-cost living area? Every job that I apply to in the Bay Area, I have hundreds of competitors, young, smarter competitors. So I am facing an early retirement that I hadn't anticipated.

So we're trying to slowly save up to live off-grid with each other and live sustainably, you know, in case everything collapses or there's another pandemic. It's a scary thought, but, you know, maybe with global warming and everything that's going on in the world, maybe I won't live to see retirement and it won't be a problem. I just don't really see the point in retiring when scientists are telling us that the world will more or less end by 2050. And if I'm going to be 55 when that occurs, why would I start saving for retirement? It doesn't make a whole lot of sense to me. I'm starting to realize that I should start saving up some money because I have a feeling that Social Security alone won't be enough.

A lot of anxiety, a lot of confusion, and we heard from several of you who had lost all faith in Social Security. You're concerned that the government safety net for retirees won't be around to catch you when you finally reach retirement age. But forget when you reach retirement age. It isn't around to catch people right now. That's what public policy researcher turned writer Stephanie Murray discovered a few years ago. She wrote about her mom in the Atlantic. My mom, who was about 58 at the time, made the very difficult decision to

leave my dad. It was a very complicated circumstance that I don't think that anybody chooses to get into. It had to do with mental health and really complicating their relationship. And so she told him that she was going to leave if he didn't start treating his mental illness, which was getting worse as he was aging, and he didn't believe her. He had some pretty good reasons for not believing her, which namely were that she didn't have a job. She didn't have any money. She didn't have any retirement savings of her own. She had been a stay-at-home mother, raising me and my four siblings in Fredericksburg, Virginia for almost three decades. On top of that, she was rapidly approaching sort of what we consider retirement savings of her own. And on top of that, the way that social security is structured, she would have a very small benefit. At most, she would have about half of what my dad would be getting, which would be about $650 a month, which you can't live

on. She has managed to find work over and over again. She's worked a series of insecure, low-paying jobs. She worked at, you know, because she didn't have any credentials, really. She had a decades-old medical degree, but that doesn't get you anywhere. She's worked at some sort of small, private Montessori school. She worked as a dispatcher at her local police station, which was really, really difficult hours and low pay. She moved across the country twice to sort of take new opportunities that she hoped would give her a livable wage. But it's just a lot of very insecure work. And I think the big question for all of us throughout all of this has just sort of been, how long can she keep this up?

And then this past summer, my dad died suddenly of a heart attack. And he was pretty young. He was 67 years old. So none of us expected it. Let's just put it that way. And one weird thing for me as her daughter was that in the weeks after he died, one of the first questions that kind of came to my mind was, what happens to his social security? And we learned that she would now be entitled to it. That led to some complicated feelings for me because obviously I was relieved

that she would have a significant step up in her benefit. It would double. And yet at the same time, it felt really kind of cruel to think that my dad had to die for that to happen. Stephanie, I imagine you're around my age. People in their 20s and 30s don't think a ton about Social Security. I think the general understanding is that we're paying into a system for the benefit of our elders, but we might not end up benefiting as much from it when we retire. How was Social Security supposed to work when it debuted in the 1930s? There was growing recognition and frustration with the fact that the usual ways that we took care of the elderly in society just weren't working anymore.

Not that long ago, in the grand scheme of things, you know, most people in America were living in rural areas, working on farms. They were kind of self-employed on their own land. Industrialization kind of changed that. The civilization of the past hundred years, with its startling industrial changes, has tended more and more to make life insecure. So suddenly people were moving to cities, they were working for wages, and the fact that they were moving away from home, moving away from their parents, was pretty significant. It sort of led to kind of a breakdown of the extended family,

which was really how elderly people were taken care of before. When you couldn't work anymore on your farm, well, there was a bunch of other people related to you who could continue working and care for you. But that industrialization just sort of disrupted that whole system. And so there was emerging elder poverty that was becoming a huge problem and really became a problem during the Great Depression. Young people have come to wonder what would be their lot when they came to old age. The man with the job has wondered how long the job would last. There was a ton of frustration with that at the time. There were calls for different policy changes.

And when it was conceived by FDR, the purpose was essentially to acknowledge that those sort of familial safety nets just didn't exist anymore. And we needed some kind of formal way of making it so that elderly people could be taken care of in the absence of those more traditional modes. We can never ensure 100% of the population, against 100% of the hazards and vicissitudes of life. But we have tried to frame a law which will give some measure of protection to the average citizen and to his family against the loss of a job and against poverty-stricken old age. It was sort of this contributory system. We want people to have some kind of income that they can rely on that reflects their contributions throughout their working life. The government takes a little chunk of your money out of your paycheck.

It goes into this fund. Your retirement contribution is a reflection of how much you paid into the system throughout your working life. So what does that mean practically for the average American worker? What are they getting out once they retire? Broadly speaking, it's derived from your average monthly income during your 35 highest earning years. There's also a spousal benefit that you could be entitled to if you just don't really have much of a work history, which as I said before, it maxes out at half of whatever your spouse's benefit is. So if they get $1,500, you get $750. It's probably worth saying at this point that the whole system is kind of stingy. The maximum benefit that you could get

in 2021 is about $3,900. But that's if you retire at 70. And in order to get that amount, you would have had to have an income that exceeded the maximum taxable income, which just for reference is $140,000 this year. But you'd need to make that for all 35 years that goes into that calculation. That's not what most people get. And so the average benefit is much, much lower than that. It's about $1,500. But as we heard from the story you told about your own parents, there are sort of disparities and blind spots in the system, right? So first of all, right out of the gate, the system is designed to sort of give a higher benefit to people with higher incomes. And I think that there are some people who just have a problem with that, just generally speaking, because that means, you

know, people with higher incomes also tend to have a bigger 401k or whatever, you know, a retirement savings account of their own. So they probably need it less. Some people, of course, would say that's the point. They paid in more, they have higher incomes, so they deserve it, right? Because this system is tied so directly to income, by design, it penalizes anybody that steps back even temporarily from their career in order to raise children, which a lot of people do in one way or another. You know, a lot of people take a few years out of work in order to raise kids, be with their kids when they're really little, either because they want to or

because child care is extremely expensive and they just can't afford to work. Or they work part-time, right? Another thing that's very common is that especially women often sort of self-select into lower paying but more family-friendly careers. That explains a huge portion of the gender pay gap. Basically, by design, the system is kind of stacked against parents and specifically mothers because they shoulder a greater portion of the child-rearing responsibilities. The average retirement benefit for men is about $1,600, but it's about $300 less for women. And that has everything to do with the fact that women just tend to have more parenting-related career breaks. Thinking back to when this system was designed, I imagine the thinking was this is a benefit for men who will then take care of their women.

Yes. If the system were designed today, how could it better be suited to our modern workforce and our contemporary culture? culture. Feminist economists have floated the idea of privatizing the benefits of child rearing by just basically giving the payroll taxes that are currently funding social security directly to the parents that raised those taxpayers, right? A lot of European countries just give caregiving credits so that if somebody steps out of the labor force for a couple of years, they're not having like zero dollar incomes incorporated into the calculation for their benefit. They're still building Social Security credits. parent and someone whose mother raised five children who are all paying these kinds of taxes, the big question for me is how can you really argue that a woman who raised five children is any less entitled to social security than anyone else? I certainly wouldn't argue with it. It

doesn't make a lot of sense that social security rewards work and really kind of ignores parenting when it needs both to function. Part of me thinks we should just sort of give everybody the same retirement benefit, regardless of how much they worked or how many kids they had. You know, there are a lot of different ways you could go about it. Did writing this essay for The Atlantic and going through what you went through with your own parents change the way you thought about Social Security you might one day receive? up and, you know, my own life was sort of moving forward. So as this became increasingly clear that like how precarious my mom's circumstances were, I don't know, it made me worried for my own future, scared of having more children, you know, because really as it works now, you know, it doesn't, if you want to have a comfortable retirement, I don't want to say don't

have kids, but make sure you can have kids and also maintain your career because otherwise you become very vulnerable to elder poverty. And there's just no denying that at this point, I think. It is very difficult to support someone in the way that our current economy works. I live very far away from my mom. So do all of my siblings, right? We all moved for work because that's how working in America and getting a good job works. We are all committed to taking care of my mom, but it will require lifestyle changes and cross-country moves in order to make that happen. Tell me how your mom's doing now. She's got half your late father's social security. Does she still have to work? Does she feel more secure in her retirement? For the rest of her life, she'll get that, which is $1,300 a month, which is not enough to live on,

but it's a meaningful step up for her. She still has to work. We don't know how much longer she's going to be able to work or how long people will continue to hire her. That's another thing that I think is really important here. There's a lot of ageism in hiring practices. It's hard for people who are over 60, especially if they don't have a robust work history, to maintain work, right? So we don't know how long she'll be able to continue working.

Our only option is for us to support her, which I think the reason I wrote this essay is that the system doesn't work for a lot of people. And if my mom didn't have us, or maybe we did have a bad relationship with her, which is true for lots of people. Maybe we didn't make much money. We wouldn't be able to take care of our mom, and she wouldn't have a social safety net to fall back on. So it's providential that I think we'll be able to make something work, but that's just not true for everybody. Social Security is just one part of this retirement picture. The rest of it in a minute. Also, retirement is supposed to be fun. We'll talk about whether that's a possibility, too.

Support for Today Explained comes from Ramp. Ramp is the corporate card and spend management software designed to help you save time and put money back in your pocket. Ramp says they give finance teams unprecedented control and insight into company spend. With Ramp, you're able to issue cards to every employee with limits and restrictions and automate expense reporting so you can stop wasting time at the end of every month. And now you can get $250 when you join Ramp. You can go to ramp.com slash explained, ramp.com slash explained, r-a-m-p.com slash explained. Cards issued by Sutton Bank, member FDIC, terms and conditions apply. Vicky Bogan, you teach behavioral economics at Cornell University. We spent the first half of the show focused on Social Security, but that isn't exactly the cornerstone of American retirement, is it? Well, I would say that the majority of Americans shouldn't plan to depend entirely on Social Security for retirement. One risk is that Social Security won't be adequately funded in the future. And so by the time they retire, there will be insufficient funds for them to count on that. The other risk is that the benefits that

you're eligible to receive won't adequately sustain your life. What does the typical retirement picture portfolio look like for most Americans these days? Well, for some Americans, in addition to Social Security, they rely on a defined benefit pension plan. And that's a type of pension that is connected to an employer, where after you've worked with an employer for a certain number of years and you become vested in the pension plan, once you retire, you know, the pension promises to kind of cut you a check every month until you die. Sounds dreamy and increasingly rare. Other Americans have what we call a defined contribution plan, or you've probably heard the term 401k plan. That's where you work for a company and you put money into your 401k plan. And then when you retire, whatever money you have in that plan, that's what you have. And you have to make do with what's in that plan.

Sounds more familiar, more capitalistic. And then other people decide that they want to save for their retirement using their own investment strategy. The sense I get from hearing all of these voicemails from our listeners is that not a lot of them have what we think of as a traditional pension, where you work at a company for 40 years and then you retire and they basically take care of you for the rest of your life. How common is it to see that kind of traditional pension in America these days? Well, when I talk about retirement savings and pensions in one of my finance classes, I usually call that your grandma's pension or your grandpa's pension.

My savings alone, Ted, wouldn't have been enough. The General Electric pension plan was a tremendous help. And, you know, in the 70s, around 40% of, you know, private sector workers were covered by this type of defined benefit plan. Today, Estelle and I have very few worries. In March of 2020, only 15% of people had access to a defined benefit plan. So for those types of plans, those are really being phased out and more and more people are having to rely more on voluntary contribution types of pension plans. How is this shift going so far for households, for families?

For families, I think it's a bit of a struggle. And there are a couple of reasons why that's the case. The first is it's difficult for people to even know how much money they needed for retirement. So what's your magic number? Most people have no idea. They know in general, I should try to save, you know, 10 to 15% of my income, but will that be enough? It's hard to tell. And so that's a very difficult problem for households to solve. The other issue is even if the households were able to clearly identify what the magic number is for their household, how much money they would need, saving is often difficult for a lot of families. And so there are a lot of sort of behavioral factors that make it difficult for people

to save in general, and especially to save for retirement, which can be in people's minds really far away. I think about traveling around with my husband and a dog and being in a camper van and just seeing the different national parks. When I think about how far away that is from right now, I'm 32. So that seems like forever away. And yes, it is a little anxiety inducing. Depending on what survey you look at, a significant portion of U.S. households have no saving for retirement. And so, you know, starting is important. Getting over that kind of inertia and starting, I think, is important. There are ways to encourage people to save for retirement. One of the kind of big pushes that we've seen recently that is the result of a lot of behavioral economics research is to structure and configure voluntary contribution plans such that they are opt-out rather than opt-in. And so what I mean by that is when you

start your job, you're given a lot of material, you have to sign up for things. It's the worst. People hate it. Exactly. You have to sign up for things. People see, oh, I have to sign up for this 401k plan, and they really don't know what to do, and they don't have much to save. And so because they really don't know what to do, they just don't do anything. They've seen that participation rates for some of these 401k plans have been really low. People just don't engage. There's been some research and a lot of firms have been adopting an opt-out type of policy, which means that when you start working for the firm, you're automatically signed up for the 401k plan at some default level. And if you don't want to

participate, then you can say, no, and I don't want to participate in the plan. And they found that when firms change from an opt-in strategy to an opt-out strategy, that participation rates in the plan increase quite a bit. And so automating more of the retirement savings process is kind of a way to get over some of the inertia that people have with regard to managing their retirement plans. We'd be remiss to not address the people out there who feel like they've got this locked down. The people who are extremely confident about retirement. We even heard from a few of them. My name is Brian. I am a 25-year-old electrical engineer living in Tucson, Arizona. I'm a part of the FIRE movement, which stands for Financial Independence Retire Early.

I plan to retire in four years at the age of 29, and I am not at all worried about retirement. What do you make of the FIRE movement? Is that realistic for average working people, or is that just a thing for the super rich? The FIRE movement sounds cool and exciting, but it's not clear to me how feasible it is for most people. We've been talking about how difficult it is for people to save 5% to 15% of their income. I think it's really difficult for people to consider saving 50% of their income. The other issue that I haven't heard that people that support the FIRE movement have really addressed, healthcare in the context of an entire family, too, is just too expensive without a job. And no disrespect to the few guys who called in to say

they were feeling really good about retiring by 30 or 40, but we heard from far more people who were saying that they were dreading the idea of retirement and that they were thinking they would work forever. It got pretty bleak. Some people even said that they figured they would just die before they had the chance. My retirement plan is almost non-existent because I have no savings, no property, no family. I don't know where the fuck I'm going to live.

I don't know how I'm going to pay for it. And right now I'm really kind of leaning towards the Soylent Green solution. That is pretty bleak. You probably should expect to work beyond 65, but I hope it's not the case that you have to work until you die. And I hope it's not as bleak as that. But those retirement ages were set when average lifespans were a lot shorter. But this whole idea of saving for retirement is pretty daunting. Really understanding what the magic number is requires you to have some sense of what's inflation going to be like? What are my average returns going to be over this period of time? And those are complicated concepts, especially for people that don't feel that comfortable with their financial literacy. Is part of the issue here with

retirement that people just don't think that much about their end of life planning because they don't want to think about the end of their lives. Is it partly as simple as like we're just bad at thinking about death? Well, I think that question is outside of my area of expertise. I think that's a question for another type of scholar. Fair, fair. When I think about planning for retirement, I think about how much fun I could have. And saving is a great idea because the more I save,

the more fun I'll have when I have some time to enjoy things. So I think about it a little differently, but perhaps it would be interesting to test your hypothesis, to test your theory. It's never too late to start saving. It can always help. Make retirement fun again. Yeah, exactly. Murpha. Dr. Vicki Bogan is an associate professor at the S.C. Johnson College of Business at Cornell University in New York.

Our episode today was produced by Victoria Chamberlain, edited by Matthew Collette, fact-checked by Laura Bullard, and engineered by Afim Shapiro, who's been singing along in his car for four weeks. We had lots of help with our series on the future of work from Lauren Katz, Liz Kelly Nelson, Jillian Weinberger, and Amina Alsadi, who's also our supervising producer. Happy birthday, Amina. You made it.

If you love the series, hated it, or would like to recommend we spend lots of time on another series in the future, let us know. Our email is todayexplained at vox.com. The rest of the Today Explained team includes Miles Bryan, Hadi Mawagdi, Halima Shah, and Will Reid. We use music from Breakmaster Cylinder and Noam Hassenfeld. We had extra help this week from Paul Mounsey. I'm Sean Ramos for him. Today Explained is part of the Vox Media Podcast Network. Thank you.