Just how insecure is the American retirement situation?
Aaron Keating, Director, Economic Opportunity Institute & a PSARA member
It’s been five years since the 2008 economic collapse. While the focus of economists and politicians is still on the recovery, the next crisis is looming and potentially more devastating. Unfortunately for most Americans, this crisis is fast approaching and will hit them hard.
Nari Rhee, the Manager of Research for the National Institute on Retirement Security, recently outlined the impending retirement crisis in her aptly named June 2013 report, “The Retirement Savings Crisis: Is It Worse Than We Think?”
While Rhee doesn’t conclude that all hope is lost, she details the dire prospects facing a substantial part of the U.S. population – particularly those in the low-to-middle income brackets. According to Rhee, the estimated savings gap between what Americans have saved and what they need to save for a secure retirement is between $6.8 and $14 trillion dollars.
Many contributing factors have led to a decrease in retirement investments. One of the biggest contributors, Rhee writes, is the country’s historical shift from defined benefit (DB) plans to defined contribution (DC) plans. While DC plans provide more portability, employees are often required to invest more of their own income into retirement. Traditional pensions (DB plans) tend to provide higher retirement income, are managed by the company, and offer a secure, stable monthly income to retired workers.
In 1989, 73.4% of households in which either the individual or one of the spouses had a workplace retirement plan were enrolled in a defined benefit plan of some sort, with only 26.6% solely enrolled in a DC plan. Just two decades later, those numbers had shifted dramatically; in 2010, 58.3% of the households with workplace retirement plans were covered by a DC plan only, with just 41.7% being covered in part by a DB plan. While employers reduce their financial liability by shifting the risk of retirement savings to the employees themselves, the prospects for sufficient income in retirement have plummeted.
So just how little is the typical American household saving? Very little.
The average American household with a head of household between 25-64 years old has only $3,000 saved. Just as importantly, four out of five households have retirement savings less than one times their annual income, with 40% not saving anything at all. This could be due to the fact that nearly 45 percent of working-age households, according to Rhee’s analysis, do not own assets in a retirement account.
Even more problematic is the savings of those approaching traditional retirement age. For those aged 55-64, the average household retirement savings is a mere $12,000, and only 59.8% of those households have assets in a retirement account, Rhee writes. This will necessarily lead to one of two outcomes: either these individuals will stave off retirement and continue working if possible, or they’ll find other options to make ends meet.
So with a multi-trillion dollar collective retirement savings gap, the problems individuals will soon face in retirement becomes magnified at the national level. Increased reliance on government support due to low savings will deplete public resources, an aging (and not retiring) workforce will push younger workers out of jobs, and low savings will result in less discretionary spending.
The retirement crisis is real, and Rhee’s report helps us understand the consequences at the national level. But the problem stems from an inability for many individual Americans to save for retirement through their workplace. Policy solutions such as Saving Toward A Retirement Today (START) or expanded Social Security benefits could successfully stave off another economic crisis and ensure a dignified retirement for all.
This article will also serve as the first in a series of EOI blogs on retirement security. In the next post of the series we’ll address the structural
issues, explaining why so many everyday Americans have struggled to put away money for retirement. You’ll find the blog at http://www.eoionline.org/ eoiblog/