Research & Innovation

Is It Time to Retire Rugged Individualism?

Research into retirement savings showing the idea of collectivism is “seeping into the American psyche.”

The phrase, “It takes a village,” is normally reserved for child-rearing discussions but what about taking care of older Americans?

Dr. Joelle Saad-LesslerDr. Joelle Saad-LesslerThe research being done by Dr. Joelle Saad-Lessler, Associate Dean of Undergraduate Studies at Stevens Institute of Technology School of Business, and Dr. Karen Richman at Notre Dame into how Americans save for retirement is showing a shift from the individualistic attitudes held for almost 250 years toward a more shared approach that relies on a network of friends and family.

Since the early 1980s when retirement savings shifted from a defined benefit pension structure where employers assumed the investment risk to a more employee-based 401K-like structure that put the onus on the individual worker to make decisions, the number of people who are prepared for retirement has been decreasing. People with the best intentions who do everything they’re advised to can just be “unlucky” if the market goes bad.

“Retirement researchers know that people don't save enough for retirement. If you look at how much is recommended to save, very few do,” Dr. Saad-Lessler explained. “Retirement finance is likened to a three-legged stool where people rely on social security, individual savings and pension benefits. When the pension leg fell away that put even more of a focus on individual saving for retirement, and the literature consistently finds people don't save enough.”

The idea of collectivism has long been modeled by many immigrant communities, and it’s through that lens that Dr. Saad-Lessler’s and Dr. Richman’s research began.

“Could it be that this idea of relying on family and friends is something that more and more Americans are following, and might that explain why they're not saving enough?” she asked.

Using data from the Survey of Income and Program Participation (SIPP), this research attempts to assign a dollar value to how much people are counting on their friends, family and community, including monetary and housing exchanges.

“Based on census data, we're able to see household composition, which reveals for each household who is the main householder, as well as if your mother-in-law is living with you or your brother-in-law, or your nephew,” Dr. Saad-Lessler explains. “We can also tell if you are not the household owner so if you're living with somebody else, we're saying you’re effectively getting in-kind housing support. We have information on the average amount that people spend on rent and utilities so if we look at any particular state and metro area we can effectively use that as the value of the housing that you're getting for free.”

Taking into account several other variables, “we do all of this to figure out how much you're getting from family, friends and community.”

The study follows two cohorts based on age. For individuals 67 and older, results show that 8% rely on family and friends. However, within that 8%, this support represents between 28-44% of their income.

“That's a very big number,” she said. “If you rely on family, friends and community, you rely on it a lot.”

The other group represents people 51-61 who are on the cusp of retiring. For this group, the impact of support from family and friends is more complicated because it depends on whether the support is a one-time payment or continual.

“If we don't take into account the informal support, only 41% of this group meet their retirement savings target.” Dr. Saad-Lessler said. “But when we include the value of informal support that goes up to 44%, if we assume that's a one-time deal. It goes up to 66% if we assume the informal support is a lifetime stream.” In other words, informal support mitigates some of the retirement savings shortfall.

However, these networks aren’t one-way streets. Just like Americans benefit from the support of their family and friends, they also provide informal support to their family and friends. A one-time gift to other members of the community reduces an individual’s retirement readiness by 1%, while a lifetime of support decreases it by 3%. Even with the reduction, Americans who give and receive are still ahead.

“America is a very individualistic country, but in the face of financial precarity and vulnerability, people start to look to family and community because they have no other choice,” she said. “Is that a good thing or a bad thing? I think it's a great thing because the reality is that family and community are things you always rely on.”

The results of the research can help better inform governmental policy that “lean into” forms of community support, including social security credits or tax breaks for taking care of your family and friends.

“The government can encourage this kind of collectivism that we're finding in the population,” Dr. Saad-Lessler explained. “It basically strengthens the social safety so that it's not just what the government is giving you in social security."

Read the full report here.