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Changing “Rules” in Retirement Planning and Other Areas

Contributing Author: James H. Boyd

It’s no secret that it’s harder to retire now than in the past. The “rules” changed over the years:  the economic forces and the literal “rules” that guided our parents’ and grandparents’ paths toward retirement don’t hold true for us or our students.

A recent study by the Government Accounting Office (GAO) highlighted the following “stresses” undermining the “three main pillars” of the nation’s retirement system:

  • Social security. Social security is designed to replace about 40% of a beneficiary’s pre-retirement income. Yet, for over one-third of retirees, social security accounts for 90% or more of the household’s income. Further, even with relatively low payouts, the social security system is projected to be unable to provide required benefit payments by 2035.
  • Employer retirement plans. In the past 40 years, private sector retirement plans have shifted strongly away from defined benefit plans (plans that provide targeted retirement income) to defined contribution plans (such as §401(k) plans; i.e., plans that allow specified amounts to be set aside for retirement, but do not address the amount that must actually be available at retirement). Because contributions are optional, many plan participants don’t maximize their contributions. In addition, the PBGC (Pension Benefit Guaranty Company) – the insurer of defined benefit plans – is woefully underfunded, with liabilities of almost $80 billion at the end of fiscal year 2016.
  • Individual retirement savings. Personal savings are often low or nonexistent. Savings rates have reduced from about 14% in the mid-1970s to 5% or less in recent years. The GAO points out that, if individuals have not provided enough for retirement, they will rely more heavily on government “safety nets.”

The GAO report mentions several economic factors that hinder an individual’s ability to save, either through a defined contribution plan or through personal savings:  stagnant wages in real dollars in most fields since the mid-1970s, high personal debt levels, and escalating medical costs. As a side note, the report fails to consider that now there are simply more things to buy:  bigger houses, fancier cars, electronics of all kinds, data plans, cheap clothes and accessories from overseas, a myriad of new restaurants to try – and Starbucks.

Similarly, these factors and others raise the amount a person needs to have available during retirement years:  more money to pay for rising health costs and income to cover longer post-retirement life expectancies. In addition, an increasing percentage of people are remaining single, and, so, cannot obtain the benefits, for example, of a spouse’s cost-sharing, retirement savings, and social security survivor benefits.

At this writing, Congress is in the throes of deciding how to approach the “largest scale tax reform since 1986.” From a tax standpoint, deductible contributions to IRAs and §401(k) plans cost the U.S. Treasury millions – not trillions – per year. Still, with a budget that must be balanced up to an agreed-upon threshold, retirement savings are one tax deduction potentially on the chopping block.

So, the question for the day is: How might Congress encourage retirement savings without substantially increasing the Federal deficit? Should tax incentives play a role in this?


  • S. Government Accountability Office report: THE NATION'S RETIREMENT SYSTEM: A Comprehensive Re-evaluation Is Needed to Better Promote Future Retirement Security (October 18, 2017)

Possible Classroom Activities and Assignments

  • Review the GAO report, or at least a summary. What are some tax-favored ways to allow retirement savings? If some of the students’ ideas are in place now, have them research the annual cost to the U.S. Treasury and determine a way to offset any lost revenue.
  • One proposal is to convert the current IRA deduction to a Roth-IRA nondeductible plan. Discuss the pros and cons of this in an era where a retiree’s tax rate will be either lower in retirement or the same. Does this amount to “kicking the can down the road?” How?
  • Review the changes to retirement savings options in any enacted tax reform or in the most current tax reform proposals. Discuss whether any of these proposed changes address the GAOs three inherent goals: reduce reliance on Social Security, increase participation in available retirement plans, increase personal savings.
  • Discuss other areas in which financial “rules” have changed during your students’ lifetimes.
    • Education: How did your students’ parents finance their education? How are your students’ financing their educations? Why did the strategies change? What changes are likely in the future? How will your students adapt?
    • Dependents: What kinds of deductions or tax credits did parents claim for these students as “dependents”? What are some of the proposed changes to these rules?
  • High school financial literacy classes often allocate expenditures into three categories: Spend, save, share (charitable contributions). As many students know from personal experience, a fourth category of expenditure looms in their lives: repayment of debt principal and interest. Revenue (cash flow) sources are generally limited to income (including gifts), withdrawals from savings, and debt financing. Ask your students to write a memo indicating how (and why) allocations among those four expenditure categories might shift during the major future phases of their lives. How do these allocations affect withdrawals from savings and borrowed cash?
    • Stages of life might include college, early career, “coupledom” or marriage, life while children are young, life when children are being educated (private school through college), later career (pre-retirement), active retirement, late retirement.
    • Students can think ahead to a realistic career for themselves or envision the lifestyle of their favorite successful or fallen (i.e., bankrupt) celebrity or business mogul.

How do current tax rules impact these allocations? What are some actions that can ease the transitions from one stage of life to the next?

This post is helpful when covering the following chapters in the SWFT Series:

SWFT Individuals Chapter 19