Some Retirement Math

9/11/2012 01:21:00 PM
The BLS reported today that on average employers spend \$1.02 per hour per employee on retirement benefits. That reflects the cost to the employer, not the benefits to the employee, but lets suppose that all of that money eventually gets paid out in retirement savings for the employee. On average people work 34.4 hours per week. There are 52 weeks in a year, and lets suppose a person works from age 25 to 65. That means that employers typically contribute roughly \$72983.04 to each employee over their lifetime, assuming they had no major spells of unemployment. A retired person typically needs roughly \$32,000 per year to live at the same standard of living as they did when they were working (yes, this factors in things like the fact that the house is paid off and the kids are through college).

Conclusion: employers, on average, pay for 2.3 years worth of retirement. The life expectancy of the average 65-year-old is 83.4 years, meaning that the typical person should plan on being retired for 18.4 years (minus the number of years they plan to continue working past 65, plus some amount in case they outlive the average).  Thus, employers pay for 12.5% of what people need to retire, on average.

My inclination is to think that this system of employer-based retirement schemes is a farce. The tax benefit we offer on employer contributions to retirement plans is one of the most expensive on the books, and has done nothing to encourage retirement savings. Furthermore, since tax benefits are really just a form of government spending, all we are really doing is taking tax money and putting it into high-risk 401ks instead of using that money to beef up social security. From the retiree's perspective, it would be a lot better to just put that money into social security. So here's my suggestion: recind all tax benefits for retirment savings. We can then use the money in one of two ways: 1) lower income tax rates, which will allow households to save more for retirement, and also boost incomes relative to the status quo through the incentive effect, or 2) put the money into social security, which will give households more money in retirement, and also (arguably) boost incomes through the incentive effect, since social security is graduated so that people get out the same amount as they pay in (hence, increasing SS benefits acts the same as a cut in the income tax rate).