It was 43 years ago that I got my first “real” job working in a photo development plant on weekends cleaning chemical tanks. My pay was $1.60 per hour. That’s not a misprint; it was the minimum wage at that time. I was very excited to get my first real paycheck. In the past, I had worked mowing lawns and shoveling snow. This was to be a real working man’s paycheck.
It was simple math: 10 hours at $1.60 per hour – I should get $16.00. Imagine my surprise when my check was less, due to federal and state taxes and something called FICA.
“What are all these deductions?” I wondered. “And what is FICA?” It was easy to understand federal and state taxes, but taking money for my retirement? I was 17 years old – ludicrous, I said!
Payroll deductions are a valuable means of funding retirement
Fast forward 43 years, and I’ve done a 180: I love deductions! Although I didn’t realize it in my younger years, FICA (Federal Insurance Contributions Act) payroll deductions will eventually provide me with a Social Security benefit. Payroll deductions also provide me with health and life insurance, as well as a means of funding my 401(k) plan.
In fact, I believe payroll deductions are the only consistent way for many Americans to receive benefits and save for retirement. And while I’m reasonably sure I will receive a Social Security benefit, younger workers can’t be nearly as certain. For that reason, 401(k) payroll deductions could make for much happier retirements.
I’d like to see enrollment in 401(k) plans become mandatory for all workers. I could still support the ability to opt out, but required enrollment should be the starting point, in my view. This is really no different from today’s health insurance requirements and, I believe, is equally important for today’s workers.
The connection between payroll deductions and student debt
I also believe payroll deductions can be an important means of funding other investments – most notably, 529 college savings plans. In addition to our homes and retirements, one of the most important investments any of us can make is in our children’s college education.
One of the reasons we see students struggling with such staggering student loan debt is that parents didn’t save enough for their children’s education. Although their intentions may be good, many parents fail to accumulate meaningful savings outside of payroll deductions. I believe payroll deductions could be a huge step in the right direction for defraying education costs – attracting young parents to the workforce and retaining the most productive employees at minimal cost to employers.
Deductions? I love them. Looking back, I only wish they had started sooner and at a higher amount!
Read more expert views on college savings plans.
For information about CollegeBound 529, now by Invesco, advisors should contact their Invesco wholesaler and visit CollegeBound529.com. Investors should contact their advisor.
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Payroll deductions: The key to less debt and a lasting retirement? by Invesco
