This week is National Retirement Security Week! Proclaimed by an official declaration from Congress, each year supporters of 401(k)-style defined contribution plans use this week to promote their products. We’ve decided to take back retirement security from the salesmen of the financial industry and focus on the most reliable source of retirement security: defined benefit pensions. Today’s blog post will discuss the true state of retirement security in the United States. On Wednesday, we’ll highlight how defined contribution plans contribute to the retirement savings crisis. On Friday, we’ll wrap up by focusing on the strengths of defined benefit pensions.
The retirement security landscape looks rather bleak at the moment. According to a recent report from the National Institute on Retirement Security (NIRS), more than 100 million working-age Americans do not own any type of retirement savings. That means nothing in an employer-provided 401(k) plan, an Individual Retirement Account (IRA), or a pension plan. That is 57 percent of adults who are not preparing for retirement at a time when financial experts recommend saving more than ever.
Even among those who are saving for retirement, the statistics are not much better. NIRS uses the retirement savings targets recommended by Fidelity. These targets represent goals that working adults should try to reach by different ages. For example, Fidelity recommends saving 1 times annual income by age 30, 3 times annual income by age 40, 6 times annual income by age 50, and 10 times annual income by age 67. Unfortunately, few Americans are meeting these targets. NIRS reports that 76.7 percent of working individuals do not have 10 times annual income saved by age 67. These individuals are likely to face a lower standard of living in retirement.
Two major obstacles to saving for retirement are access and participation in an employer-provided plan. In 2014, only 51 percent of private sector workers had access to a retirement plan through their employer. The highest-ever rate of access was 60 percent in 1999 during the height of the dot-com bubble. Throughout recent decades, two-fifths or more of working adults have not been able to save for retirement through their employer.
Even if workers have access to a plan, it does not mean they participate. Only 40 percent of private sector workers participated in an employer’s retirement plan in 2014. Access to and participation in a retirement plan are very connected to income. Individuals who have a retirement account earn three times more than the annual income of those without a retirement account. Moreover, higher-income individuals are much more likely to have a retirement account than middle-class or lower-income workers. More than three-fourths of individuals in the top 25 percent of income earners have retirement savings compared to just 53 percent in the next quartile, only 27 percent in the second quartile, and just 16 percent in the bottom 25 percent.
This lack of retirement savings during one’s working life has consequences in retirement. In August, the Consumer Bankruptcy Project reported that the percentage of elderly Americans declaring bankruptcy has increased significantly over the past two decades. According to the report, “older Americans report they are struggling with increased financial risks, namely inadequate income and unmanageable costs of healthcare, as they try to deal with reductions to their social safety net. As a result of these increased financial burdens, the median senior bankruptcy filer enters bankruptcy with negative wealth of $17,390 as compared to more than $250,000 for their non-bankrupt peers.”
The current retirement savings system is clearly not working for many working families. On Wednesday we’ll explore how 401(k)s and other defined contribution plans have failed to provide meaningful retirement security.