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Tuesday, April 19, 2005

Fed Governor Bies: Young Workers Face Increasing Financial Risk

Fed Governor Bies remarks on the increasing financial risk faced by young workers and their failure to take advantage of voluntary private 401(k) retirement accounts even when contributions are matched by their employers:

Remarks by Governor Susan Schmidt Bies
At the Canisius College Richard J. Wehle School of Business Community Business Luncheon, Buffalo, New York
April 18, 2005

The Economy and Managing Personal Finances

… I am expressing my own opinions, which are not necessarily those of my colleagues on the Board of Governors or on the Federal Open Market Committee…

…In the household sector, some analysts have expressed concern about the rapid growth in household debt in recent years and the decline in the household saving rate. They fear that households have become overextended and will need to rein in their spending to keep their debt burdens under control… As I have already noted, in the aggregate, household debt has grown more rapidly than income in recent years. Of special relevance to this audience is that the increase in consumer debt loads in recent years is particularly apparent among younger adults… Moreover, there are indications that some of these younger households are having difficulty managing their debt successfully… Finally, surveys continue to indicate that many workers are not currently saving for retirement, and many that are saving, by their own calculations, are not saving enough…

…Turning to retirement savings in particular, workers entering the labor force today will bear more of the risk of financial security later in life than workers of a generation ago. Far fewer workers will be covered by defined-benefit pension plans established by their employers, which provide pre-set benefits after retirement…studies have found some troubling patterns related to individual savings in 401(k) plans that suggest that workers may not be giving adequate attention to their retirement savings. First, despite the tax advantages of 401(k) contributions, one-quarter of workers eligible for 401(k) plans do not participate at all, even if the employer would match a portion of their own contributions. These workers are effectively giving up a pay raise. And among those that contribute, many save just a little. In a survey last year, one-quarter of firms reported that their rank-and-file 401(k) participants saved an average of less than 4 percent of pay…

…These patterns are troubling because they raise doubts about the financial security of workers in later life…

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