When I was in college, there was no publicly available internet. Papers were typed on typewriters. Class notes were taken in notebooks with pens or pencils. Research was conducted using books (or microfiche). Phones made or received calls, and didn’t fit in your pocket.
My teenage children groan aloud at these kinds of comments. For them, my college memories are museum pieces from a world that is long gone. They’re right, but therein lies an important warning for their generation and others: our world is changing at a rapid rate, and not just in school.
"The world of work — the “real world” for which schools prepare us — is also changing rapidly with potentially dramatic and vast consequences."
The world of work — the “real world” for which schools prepare us — is also changing rapidly with potentially dramatic and vast consequences. This article considers the future of work and its implications for the future of retirement. To make this vast topic more manageable, I will focus on four questions.
Question #1: Will we have enough jobs in the future?
In 1930, eminent economist John Maynard Keynes posited that compound interest and “science” would make employment so economically unnecessary that it could be spread thin like bread on butter, and exist only to satisfy those unable to break the habit of working. “Three-hour shifts or a fifteen-hour week may put off the problem for a great while,” he predicted.1 Keynes’s prediction has not proved true, but serious modern observers worry that Americans displaced by job-stealing technologies could be left without wages or salaries to support their families.2 They argue our government should provide a “universal basic income.”
The loss of tens of millions of jobs would certainly disrupt a U.S. retirement system that has been centered around employers since World War II. Most Americans planning for retirement are enrolled in employer-provided plans.3 Because greater effort is required, and tax advantages may be less valuable, Americans in the “individual” (i.e., not employer-provided) retirement market are less likely to save, or save enough. Further, most retirement savings come from income derived from a job. The disappearance of jobs, therefore, would almost certainly make government the source of all retirement income for many Americans, adding at least hundreds of billions of dollars to government spending annually.
The good news is jobs will not disappear from America. No doubt, some jobs will be lost to technological advancements. For example, autonomous vehicles could displace hundreds of thousands of truck, taxi, and limousine drivers, and other commercial vehicle operators. But America already has seen decades of dramatic technological change, with the introduction and rapid expansion of the commercial internet and a host of other innovations. Jobs have not declined. To the contrary, more Americans are employed today than ever before.4 The percentage of “prime age” (ages 25 to 54) workers who are employed is rising, and only a couple of percentage points below its modern peak.5 Evidence that robots and computers are taking millions of jobs from Americans is not showing up in the Bureau of Labor Statistics’ productivity data.6
Simply, our economy has not turned radically in a direction that suggests Keynes’s prediction will come true. Our answer to Question #1 is “yes.”
Question #2: Will we work differently in the future?
The answer to this question is also “yes.” As I detailed on the Studio in “America's Retirement Savings Crisis,” the most important change will be the continued decline in employer-provided defined benefit retirement plans that deliver reliable “retirement paychecks” for a lifetime. Pension checks are being replaced with defined benefit contribution plans that put the burden of savings and investment decisions squarely on the individual with no guarantees about how long the money will last, or whether investments might lose value. However, this shifting of retirement risks from employers to individuals will be magnified by the growth of alternative work arrangements (AWAs) — that is, work configurations different from the traditional employee-employer relationship.
AWAs include independent contractors, temporary staffing agency workers, contract workers (typically from sub-contracting agencies) and on-call workers. According to a study by two renowned labor economists, workers in these AWAs represented almost 16 percent of the American workforce in 2015, an increase of more than 50 percent from 2005.7 We can expect continued rapid growth in AWAs in the future.
Independent contractors, currently 10 percent of the workforce and the largest AWA group, are not employees.8 Unable to participate in employer-provided retirement plans, they must create their own plans, like a SEP-IRA, Keogh, or Solo 401(k), and bear all of the costs and risks, including investment risks. There can be no payroll deduction or employer contribution, so the contractor also bears the savings risk. Because of the added cost, complexity, and risk, self-employed people, including independent contractors, have a very low rate of participation in retirement plans.9 Independent contractors also must pay both the employer’s and employee’s portion of Social Security taxes. There is no employer to withhold their payroll taxes and send them to the IRS. As a result, independent contractors have lower rates of tax compliance, which reduces their Social Security benefits and, therefore, their retirement income.
Temporary workers and contract workers — the two fastest growing AWA categories — face a different retirement savings challenge. They are employed by one boss (an agency) and work for another (the agency’s client). They almost never qualify for the client’s retirement plan. Because their work is often temporary, they may not work enough hours to qualify for their agency’s plan, if it has one. This is a bigger issue for employees of temporary staffing agencies who earn less and often do not have access to any employer-provided plan.10
In sum, Americans will work differently (or alternatively) in the future, and should expect to bear more of the risk of retirement planning than they do today.
Question #3: Will future jobs provide wages and benefits that will support middle-class families?
The answer to this question is “yes and no”; or, more precisely, for some Americans but not others.
Real (i.e., inflation-adjusted) earnings have been stagnant or declining for most American workers since the 1970s.11 The highest paid workers have seen meaningful raises, while virtually all others have been left behind.12 Low unemployment over the last few years has increased real average wages a little, but they have a long way to go, and the likeliest future trend is that most workers’ pay will rise too slowly or not at all. That’s largely because the underlying trends that contributed to unprecedented income inequality and wage stagnation are likely to continue, and perhaps get worse.
One significant contributor is the decline over the last decade in middle-wage, middle-skill jobs in the American economy; that is, jobs that allow people with high school degrees to earn middle-class wages with benefits, including a retirement plan.13 The Bureau of Labor Statistics’ predictions about job growth by occupation over the next 10 years strongly suggest that low-wage and high-wage jobs will continue to grow much faster than middle-wage jobs.14 Also, while unions raise wages and guarantee benefits, union membership has been shrinking for six decades in the U.S., and will likely continue its long decline. Further, legally enforceable U.S. labor standards that raise wages and strengthen workplace benefits are weaker today than they have been for a long time. In sum, many “guard rails” that protected middle-class wages and benefits have eroded and likely will not get stronger soon.
"In sum, many 'guard rails' that protected middle-class wages and benefits have eroded and likely will not get stronger soon."
On the other hand, high school and college degrees increase wages and expand employment opportunities. Americans are more educated today than ever,15 and the percentage with degrees is expected to continue to grow over the next decade, and likely beyond.16 As a result, more Americans will be qualified for middle-skill and high-skill jobs. In turn, these workers can expect to earn higher wages and secure benefits, and avoid unemployment.17
Question #4: What does the future of work mean for my retirement?
These trends in the future of work signal that Americans could bear significantly increased risks to their retirement. The challenge will be to prepare for and reduce these risks. In another article on the Studio, I offered “Six Starter Steps to Avoid a Personal Retirement Crisis.” These tips will give you a place to begin.
These two additional tips specifically relate to the future of work:
Educational credentials, skills, and knowledge will continue to matter in the future — go get them. Get the degrees, certificates, and training you need to evolve along with the labor market and workplace. Degrees and credentials are entry tickets to good jobs and provide foundational skills and knowledge. You must watch the trends in your occupation and industry, and learn how to stay employable until you are ready to retire.
If you don’t have an employer, get expert help setting up a plan that’s like an employer-provided plan. Self-employed people, like independent contractors, must take the initiative to establish their own retirement plans that reap the maximum tax benefits and facilitate savings. Set up an automatic withdrawal from a business or personal bank account — just like automatic payroll deduction by an employer. Save the most you can afford, and then increase your savings each year. Also, talk with a financial planner about guaranteed lifetime income products like variable annuities* that re-create, and even improve upon, many of the benefits of a defined-benefit pension.†‡
Since we know some of what the future is going to bring, we can and should prepare for it — and plan for the retirement each of us wants.
*What is an annuity?
Annuities are long-term, tax-deferred investments designed for retirement. Variable annuities involve risks and may lose value. Earnings are taxable as ordinary income when distributed and may be subject to a 10% additional tax if withdrawn before age 59½. Optional benefits are available for an extra charge in addition to the ongoing fees and expenses of the variable annuity.
Annuities are not for everyone. And, it’s important to remember that these products are meant to be long-term investments designed for retirement, so there are restrictions in place to discourage you from withdrawing all of your money at once or taking withdrawals before age 59 1/2. However, most annuities do allow for exceptions based on specific circumstances such as a terminal illness or other emergencies.
† Guarantees are backed by the claims paying ability of the issuing insurance company.
‡ Optional benefits are available for an extra charge in addition to the ongoing fees and expenses of the variable annuity.
The opinions and forecasts expressed are those of the author and individuals quoted and should not be construed as a recommendation or as complete.