In a blog post last week, we discussed the fact that many Americans plan to work in retirement just to make ends meet. As we’ve mentioned before, though, many people won’t be able to continue working in retirement and may have to retire earlier than planned. A new report from the Schwartz Center for Economic Policy Analysis (SCEPA) indicates that many middle class families risk falling into poverty in retirement due to inadequate retirement savings.
It’s a well-documented fact that the United States is facing a retirement savings crisis. The simple fact is that many Americans are not saving enough to maintain their standard of living in retirement. Most retirement experts advise that workers should aim to replace 70 to 80 percent of their income in retirement. Most Americans will replace a significant portion of their income with Social Security benefits. However, Social Security is only supposed to serve as a floor to prevent extreme poverty in retirement; it is not supposed to replace the full amount needed for a dignified retirement. Social Security only replaces roughly 40 percent of income on average and that replacement ratio is declining.
On top of Social Security, many working people have some type of retirement plan provided by their employer. In earlier generations, this plan was usually a defined benefit pension. In fact, in 1983, 62 percent of workers who had a retirement plan through their employer had a pension. Now, that number is only 17 percent.
Instead, most private-sector workers today have a defined contribution 401(k) plan. These plans are risky, though, and often fail to provide an adequate retirement. 401(k) plans are also heavily skewed in favor of the wealthy. Well-paid corporate executives and other upper-class professionals derive the most benefit from 401(k) plans and have much larger account balances than middle-class or working class employees.
As the dominant retirement plan has shifted from defined benefit pensions to 401(k) plans, working people are saving less for retirement. One consequence of this lack of savings is that a significant number of middle-class families risk falling into poverty in retirement. According to the report from SCEPA, 40 percent of older workers and their spouses will be downwardly mobile in retirement. More distressingly, 8 percent risk moving below the poverty line in retirement.
What should be done about this? The first step is to protect the programs and institutions that do provide a secure retirement: Social Security, public pensions, and other sources of reliable monthly income. Second, employers and policymakers should consider how to expand access to retirement savings plans for private-sector employees. As we discussed in our post on Millennials and retirement savings last week, lack of access to a plan is a major hindrance for many Millennials (and other workers). Many states have considered adopting “Secure Choice” savings plans and, so far, nine states have done so.
At the end of the day, there will be no solution to the retirement savings crisis except for increased savings. Working people need access to safe, reliable retirement savings plans and they need a relatively easy way to contribute to these plans. Through a combination of employee and employer contributions, workers need to be saving a sufficient amount in their plans, and this amount may need to be higher for the Millennial generation than it was for previous generations. Until we as a society acknowledge this retirement savings crisis, we cannot take the necessary steps to avert it.