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October 18, 2022 at 02:42 PM
What You Need to Know
- Sita Nataraj Slavov made headlines recently with a paper asserting that young people should not prioritize saving for retirement.
- She and other scholars are questioning many long-held assumptions about the nature and desirability of 'retirement' in a changing world.
- Another of her papers examines how rule changes have made delaying Social Security less attractive for singles and substantially more attractive for couples.
Ever since Sita Nataraj Slavov earned a doctorate in economics from Stanford University in 2003, she has been keenly interested in topics pertaining to the intersection of economics, retirement readiness and financial planning.
The reasons why, she tells ThinkAdvisor, have to do with the inherent complexity involved in framing and answering questions about the financial lives of working Americans. This is what Slavov does every day as a researcher working at the Schar School of Policy and Government at George Mason University.
On the one hand, Slavov says, the U.S. retirement planning system is undergoing a generational transformation away from defined benefit pensions in favor of defined contribution-style plans.
At the same time, the long-term solvency of the federal Social Security system, upon which many millions of Americans rely for the bulk of their retirement income, is in question — as are long-held assumptions about the nature and desirability of “retirement” itself in a world in which longevity continues to increase.
All of these interplaying factors present rich ground for academic exploration, Slavov says. Any given research project, whether it seeks to understand the Social Security claiming patterns of immigrants in the U.S. or to measure the “implicit” taxation of work at older ages, will involve considerations that cut across the traditional fields of economics, psychology, public health, statistics and more.
The stakes are high, Slavov says, considering the impending retirement of the baby boomers and the new pressures being put on younger generations to manage their own financial wellness during and after their time in the labor force.
As such, Slavov hopes her work can provide ongoing insight and guidance to financial planning professionals, policymakers and the broader public alike. Only by grappling with tough questions can these stakeholders hope to optimize outcomes and improve the collective retirement readiness of workers in the U.S.
The Early Savings Debate
Among her most recent analyses is a paper that grabbed the attention of ThinkAdvisor readers in its conclusion that, as Slavov summarizes, “more savings isn’t always better.” Developed with a team of three other respected researchers, Slavov’s paper questions the common wisdom that it is almost always better for individuals to begin saving and investing for retirement as early as possible.
According to Slavov and her colleagues, this assumption is so deeply baked into the mind of the typical financial professional that it seems almost beyond dispute. But, according to the analysis, the assumption is often not evaluated against a meaningful benchmark, such that it deserves to be questioned.
The authors suggest a reasonable benchmark would be a lifecycle model, in which rational individuals allocate resources over their lifetimes with the aim of avoiding sharp changes in their standard of living.
In running their analysis, Slavov and her colleagues conclude that the lifecycle model implies that most young people should not, in fact, be saving for retirement. Rather, they should prioritize shorter-term needs and wants, from paying down student loan debt to enjoying vacations while life permits, and then start saving for retirement once their incomes grow in their 30s or 40s.
Slavov says she appreciates and welcomes the spirited responses the paper has generated among the financial planning community. Many advisors wrote to ThinkAdvisor expressing admiration for the academic work underlying the paper but questioning its assumptions and conclusions as they pertain to the practical reality of financial planning.
Slavov says she is not surprised by the feedback, and indeed, she says the real goal of the paper was to ask tricky questions and analyze some broadly held but often untested assumptions. In practice, she says, no single paper about such a complicated topic is going to be able to deliver a final verdict or conclusion regarding optimal savings behaviors.
“The real point is that these are fascinating and important questions to grapple with,” Slavov says. “Dealing with an aging society is one of the biggest collective economic challenges we face here in the United States. We have to bring a critical eye to this field and work to improve our understanding of the solutions and responses to this challenge.”
Social Security Claiming Strategies Under the Microscope
Among Slavov’s other popular analyses are papers asking whether the decision to retire actually results in greater happiness or better health outcomes among older Americans, and to what extent the ‘Great Resignation’ helps to explain ongoing changes in employer-sponsored retirement plans.
Slavov’s most widely cited paper, written in collaboration with Stanford’s John Shoven, examines the mechanics and efficacy of delaying Social Security claiming.
As the paper points out, upon reaching the age of 62, most Americans face an important and irrevocable decision, and that is when to claim Social Security benefits. While the vast majority of individuals claim immediately upon reaching age 62 or stopping work, claiming may be delayed until age 70.
