As we have covered before, America is facing a retirement security crisis. However, the issue disproportionally plagues lower-income workers more than middle-class and wealthier Americans. Because of this, most lower-income workers never achieve the expert-recommended 70% income replacement rate needed to take care of expenses securely after retirement. There are various reasons why low-income workers struggle to save enough for a secure retirement. In 2017, we wrote about those obstacles, and today we’ll examine what issues exist today:
- One of the biggest problems facing low-income workers is the lack of access to a retirement savings plan. This directly and significantly impacts their ability to save for retirement. If workers do not have a vehicle through which to save, then saving is almost impossible. According to Georgetown University’s Center for Retirement Initiatives’ report, 57 million Americans have no retirement plan through their employer–lower-income workers being the least likely to have access to retirement benefits. Research from the U.S. Bureau of Labor Statistics shows that of those in the bottom 25% of wages, only 42% have access to employer-sponsored retirement plans, compared to the 88% in the highest 25% of wages. However, due to a lack of national action, some states like California and Illinois have taken the initiative. In an effort to provide better access to retirement savings plans, various state-facilitated programs have been created, which adopted an Auto-IRA model requiring employers not offering retirement options to enroll their employees in the program. In Illinois, the Secure Choice program was launched in 2018 to provide equal access to retirement-saving programs for employees.
- Low-income workers encounter multiple obstacles throughout the course of their careers that harm their ability to save enough for retirement. These obstacles include periods of unemployment, earnings declines during their careers, and small employer contributions toward retirement accounts. These are obstacles rarely faced by wealthier Americans. Each obstacle lessens workers’ savings in their 401(k) accounts. Some of these obstacles faced by lower-income workers have been exacerbated by economic issues caused by the ongoing pandemic. A report by the Economic Policy Institute found that of the pandemic-induced job losses, low-wage workers were more greatly affected than those earning higher wages.
- Another reason many low-income workers fall behind in retirement savings is having to rely on their 401(k) accounts to cover emergency spending. According to a survey conducted by Bankrate, Americans don’t have enough money set aside to cover an unexpected $1000 expense.
- When faced with these unexpected expenses, many Americans will rely on their credit cards. Many, however, will also take hardship withdrawals or loans from their 401(k) accounts. Often these loans from their 401(k)s are to pay off large credit card bills. According to a survey by Transamerica Institute, 22% of full-time workers dipped into their retirement savings account, while 33% of part-time workers dipped into their savings.
Though efforts have been made to extend retirement savings access to all employees, it hasn’t put a dent in the current retirement crisis. Once the pandemic emerged, it worsened existing problems and highlighted new flaws within the system. Many lower-income workers either lost their jobs or saw a decline in their income and savings as many of them were forced to dip into savings to combat financial strain. It is apparent that while there have been some efforts to improve retirement security for all, there is still so much work to be done.
