To fix retirement, we need to understand it

Retirement means big money in America. Social Security and Medicare spending totals $1.8 trillion—about one-tenth of the whole U.S. economy. The tax code annually offers roughly $250 billion in incentives to retirement savers, who have amassed nearly $18 trillion in 401(k)-type plans and IRAs. Even Medicaid, rarely recognized as a retirement program, devotes roughly one-third of its spending to long-term care—primarily for older Americans living in nursing homes. 

Yet despite these massive resources, the retirement landscape is poorly understood. While the conventional wisdom is that most Americans enter retirement underprepared and with meager resources, evidence is mixed on whether there is a retirement crisis at all. Let’s figure it out. 

We can begin by actually evaluating the $250 billion budget for retirement tax incentives to see if they actually work. Just as spending programs undergo congressional review and periodic assessment, so too should the “spending through the tax code” aimed at retirement. 

Government spending programs should similarly be better-evaluated to see whether they are working. Results for America – an evidence-based policy group for which I serve as the chief economist – has long backed a 1 percent set-aside for evaluation. Most programs fall far short of this threshold. Social Security’s administrative budget, for example, devotes just 0.78 percent to research and evaluation—and this is a far higher share than many other agencies. 

We also need better data. One of the most elucidating studies on retirement ever published – a look into what drives savers in Denmark – was made possible by a remarkably comprehensive dataset. In the U.S. must of our understanding about wealth and saving comes from a survey conducted by the Federal Reserve once every three years on only 6,000 or so households. Given the scope of the problem, we need more and better public data. 

Importantly, too, policymakers need to understand what drives consumer behavior. Economists are so befuddled by why more people don’t buy income annuities that we have assigned the mystery a name: the annuity puzzle. Demand for products like reverse mortgages and long-term care insurance is also far below what some might predict. Insurance companies are no doubt studying these trends; government agencies should too. 

Lastly, Congress should create a temporary commission dedicated to studying retirement and suggesting policy reforms. While these types of reforms aren’t sexy, they can offer thoughtful paths forward for policymakers. Rep. Tom Cole (R-Okla.) and former Rep. John Delaney (D-Md.)  proposed a commission on Social Security reform, but we would benefit from an approach that examines retirement more broadly. 

The natural vehicle for these changes is bipartisan legislation currently making its way through Congress. These bills, which represent the most important changes to retirement since the Pension Protection Act of 2006, would help more workers get access to saving plans at work and would expand options for savers seeking to turn their savings into lifetime income. 

The bill’s incremental changes are worthwhile and will improve retirement at the margin. But it’s tough to fix a problem you don’t fully understand. Let’s get to the bottom of the American retirement enigma once and for all.  

Benjamin H. Harris is the executive director of the Kellogg School of Management’s Public-Private Interface and was the chief economist to Vice President Joe Biden.