Let’s raise a coffee mug to Rep. John B. Larson (D-Conn.). Larson finally found a good use for the so-called “latte factor,” the idea promoted by financial scolds that claims we would all retire multimillionaires if only we could give up on small luxuries and put the money in the stock market instead. Larson’s got a better idea: He thinks we should take that money and use it to shore up Social Security.
In return for a small and staggered increase in the payroll tax, combined with doing away with the payroll tax cap on income in excess of $400,000, Larson’s plan would offer an increased benefit to people at the lower end of the income spectrum, as well as notch future benefit increases to a slightly more generous consumer price index that takes into account the actual expenses elderly people face in retirement. (Hint: They spend much more on medical services than their younger cohorts.)
According to his calculations — which are backed up by the Social Security Administration’s chief actuary — the tax increase would take about 50 cents a week from the average workers paycheck. As Larson frequently says, “It costs less than a Starbucks latte to fix Social Security.”
The “latte factor” came about in the 1990s, as retirement experts began to realize that, with the decline in guaranteed pensions, Americans were not putting enough in their 401(k)s to give themselves the best possible chance at a financially secure retirement. “Wake up and smell the $3 caffe latte,” Money magazine opined in 1994. “Unless you begin saving and investing now, chances are you will be forced to reduce your standard of living in retirement.”
Luckily for Starbucks, few listened. Current projections say many younger baby boomers, Gen Xers and millennials are not putting aside enough money to guarantee themselves a secure retirement. The reasons for this are numerous: People are unaware of what they need or are convinced they can simply work till they drop (something almost always untrue). The financial service industry, in the form of fees, makes sure to take a nice-sized cut of that money. And there’s the all-too-human instinct to prioritize immediate needs over those in the far-off future.
But there is a bigger picture, too. The American retirement crisis is part of our age of inequality and is compounded by the staggering increases in the cost of health care, housing and education over the past several decades.
According to the Center for Retirement Research at Boston College, possessing college debt doesn’t impact whether one uses a 401(k), but it most certainly impacts exactly how much money is put aside in them. By the age of 30, college graduates with student debt have put in significantly less in the way of assets than their peers who didn’t need to borrow money to complete their educations. In addition, despite the advice of every two-bit financial pundit out there to prioritize a person/couple’s own savings over the cost of their children’s educations, many don’t. Some actually plan to use their retirement savings to pay for college bills. There is also the money that’s not set aside because of the impossibly high cost of child care, or the parents — mainly mothers — who drop out of the workforce because they can’t afford the expense of it.
At the same time, one reason Americans need to save so much for retirement is because of the high cost of medical care in the United States. Even with Medicare, a typical couple aged 65 years old who retired in 2017 could expect to spend $280,000 on health care over the course of their remaining lifetimes, according to an annual survey published by Fidelity Investments. This is an increase of 75 percent (not adjusted for inflation) since 2002. Inflation during the same period was just under 40 percent.
But our age of hyper-financialization made things worse in another way, too. As mentioned earlier, many savers are often charged high fees on their retirement investments, something that has the potential to eat up a chunk of their lifetime gains. And here, the Trump administration is actively hurting Americans. At the behest of the financial services industry, the administration did away with an Obama-era regulation that would have forced those financial advisers offering advice about retirement savings to adhere to a standard that put their clients financial welfare above their own, something that is costing Americans an estimated $17 billion annually. The financial industry also fights efforts to make individual saving for retirement easier and less expensive, such as Sen. Jeff Merkley’s (D-Ore.) plan to offer a low-cost savings option similar to the Federal Thrift Savings Plan to people who don’t have access to a 401(k) or other savings option at work.
Larson’s effort has just more than 200 co-sponsors. That’s not going to help it in the short run — Good luck with the Republican Senate! — but it’s a testament to an increasing awareness that our current retirement system is failing all too many people. As it turned out, telling people to give up lattes one by one wasn’t up to the task. But telling them to come together to fix Social Security and simultaneously make a small dent in Howard Schultz’s fortune might just do the trick.