Retirement (In)security: Why Financial Literacy Matters
This is the first piece in a three-part series about pensions and healthcare. Each piece will include insights gained at different state municipal league meetings across the country.
The National League of Cities recently visited Wichita, Kansas for the annual conference of the League of Kansas Municipalities. The conference had a huge turnout, and while most probably came to see our CEO, Clarence Anthony, deliver a heartfelt keynote speech, some also happened to stumble into our public sector retirement panel discussion. And the number one concern among participants was financial literacy.
Most public servants do not know how much they need to save for a comfortable retirement. In fact, a 2017 survey by the Center for State and Local Government Excellence (SLGE) and the TIAA Institute found that, startlingly, only 19 percent are very confident that they are saving and investing appropriately for retirement; 51 percent are somewhat confident. Meanwhile, particularly since the Great Recession, most state and local governments have introduced reforms to their retirement plans, furthering the confusion among employees, and especially young employees, over how to save for their future.
These reforms have included increasing employee contributions, reducing benefits, increasing the retirement age, increasing the number of years required to vest or some combination. These changes disproportionately affect new hires, meaning that the next generation of public sector employees will need to work longer and save more in order to receive the same level of benefits as their predecessors.
As expected, this next generation also tends to be more career-mobile than former generations. A 2017 Pew survey found that 60 percent of public sector employees under age 30 do not expect to work for their current employers until retirement. For these employees, defined contribution (DC) plans (whether as the primary pension plan, or as a supplemental plan as part of a hybrid system) may offer greater portability, especially when the employee’s tenure is not long enough to vest. However, in order for DC plans to generate a sufficient amount of retirement income, employees must contribute early, adequately and diligently, and funds must be invested appropriately. The problem is, they don’t know how, or they don’t know they should at all.
The Imperative for Employers
Amid the uncertainties in long-term employer-provided benefits and compensation, there is a growing need for public sector employers to offer education programs geared at increasing financial literacy and helping workers understand and prepare for their financial futures. This is particularly true for younger workers, who will need to bear greater individual responsibility, and for managing their retirement savings efforts in order to successfully generate sufficient retirement income.
Ideally, financial literacy programs offered by employers should be comprehensive, covering not just retirement planning and the benefits offered, but also everyday budgeting and money management, financial planning for lifestyle changes, and the financial impacts of health care. SLGE’s research has found that with better financial literacy, employees experience less stress, decreased absenteeism, increased salary satisfaction and improved productivity, making the return on investment for financial literacy programs positive.
Implementing Effective Financial Literacy Programs
While financial literacy programs have value, not all programs and formats are equally effective. Examples of effective programs that provide employees with the tools they need to get their finances on track include:
- The city of Los Angeles, California, offers a Retirement Income Replacement Calculatorthat allows employees to input information about their current situation, savings behaviors and desired retirement age to determine if they are on track to obtain the percentage of income replacement they desire to achieve their retirement goals.
- The state of Indiana also offers a retirement calculator for employees who contribute to a deferred compensation plan, or a 457(b), which the state will match up to a certain percentage. The calculator allows employees to compute the monthly benefit available to them in their retirement based on how much they contribute right now.
- Through their “Learning Center,” Mecklenburg County, North Carolina, offers employees courses to help plan for and handle the financial impacts of lifestyle changes, including “So You’re Having a Baby,” a course to help pregnant employees (or spouses) and those adopting understand the financial and lifestyle impacts. Another is entitled, “Investing in Your Future,” which is a course designed to provide employees with the information that they need to take advantage of the county’s supplemental 401k savings plan.
As more younger workers enter the workforce, it is increasingly important for local government employers to ensure their retirement plan offerings are well understood and to provide education and guidance to help their employees get on the path to more secure financial futures.