With the U.S. economy in a prolonged upswing, it is time for economic policy to focus on challenges that not long ago might have seemed less immediate. One notable and vital challenge for policymakers is to ensure that American families have adequate savings for retirement.
While nearly 80 percent of those Americans who have already retired say that they have the income for a comfortable retirement, roughly half of current workers fear they will not meet this mark. To make matters worse, many of those workers are not taking advantage of the savings vehicles that will help allay this concern.
One way to address this challenge is to increase the availability and use of S-Corporation Employee Stock Ownership Plans, or S-ESOPs, which meaningfully improve the preparedness of current American workers for retirement. S-ESOPs are private businesses of which the employees on aggregate own 90 percent or more through their retirement savings plan. Essentially all eligible employees participate and receive resources set aside for their retirement.
A new survey study by the National Center for Employee Ownership reminds us why policymakers should expand the availability of S-ESOPs: the employee-owners of S-ESOPs are far better prepared for retirement than the average American worker.
S-ESOP employees surveyed have more than twice the national average in their retirement accounts — $170,326 versus $80,339. Those savings don't just make their way to highly compensated workers; they are spread across the ranks. S-ESOP employees making less than $25,000 a year have on average more than twice the retirement savings of similar workers nationally.
Moreover, nearly all S-ESOP companies offer their workers at least one additional retirement plan beyond the ESOP. S-ESOP employees nearing retirement are thus better prepared, because their ESOP account balance is supplemented by savings in traditional accounts like 401(k)s. In contrast, the St Louis Fed reports, around 35 percent of U.S. households do not participate in any retirement savings plan, either on their own or through an employer.
The upshot? Workers in S-ESOPs save more and are far better prepared financially for life after work. With median S-ESOP balances of more than $20,000 and additional median non-ESOP retirement account balances of $10,000, millennial employees of S-ESOP companies are far ahead of their peers in preparedness for retirement.
Lower-wage employees in S-ESOPs also do better than similar employees elsewhere. The study finds that those with wages of $10 to $12.85 per hour on average have more than $6,500 in retirement savings, including more than $4,000 in the ESOP and another $2,000 in a non-ESOP retirement plan. In contrast, nationally, more than half of workers in this wage range lack any savings at all and have no access to any retirement benefits at work.
The St. Louis Fed research finds that low savings are a problem for many families. The median U.S. household has only $1,100 in its retirement savings account, compared to more than $300,000 in savings at the 90th percentile and more than $600,000 in retirement savings for the top 5 percent of households. Modest savings would not be a pressing concern for young workers. But the problem persists even for households approaching retirement, with the St. Louis Fed finding that households nearing retirement age have only around $25,000 in their retirement savings accounts. Higher-income families have more, but this inequality leaves the challenge of a large group of workers missing out on a natural way to save for retirement.
This is where the increased presence of S-ESOPs in the economy would be beneficial. These firms contribute to reduced inequality through the broad ownership stakes they provide. Moreover, past research finds that employees in S-ESOPs have better wage growth and job stability than workers in non-S-ESOP firms.
S-ESOPs provide a mechanism for workers to own their companies as part of a route to ensuring their retirement security. Policy steps to encourage more businesses to organize themselves as S-ESOPs will help hard-working, middle-class workers achieve the American dream, of which financial security in retirement is a vital part.
Phillip Swagel is a professor at the University of Maryland School of Public Policy. He was formerly assistant secretary of the Treasury for Economic Policy from December 2006 to January 2009.
As seen in the Washington Examiner.