A retirement crisis is looming in the United States.
According to The Pew Charitable Trusts, an estimated 56 million workers in the private sector do not have any kind of retirement savings plan at work. This has contributed to many people saving too little for their future.
It’s not just the workers without a big brokerage account balance who are in trouble. The fact that so many people have too little money to support themselves is going to cost the government when it has to step in to provide assistance and when it collects less tax revenue.
The Pew Charitable Trusts estimates the federal government is going to incur costs of about $964 billion between 2021 and 2040 due to insufficient retirement savings, while states will spend an estimated $334 billion.
Some quick math shows that’s $1.3 trillion in costs that governments — and thus taxpayers — will have to bear. The big question is, why is this such a problem and what can be done to solve it?
Here’s why there’s a looming retirement crisis
Pew’s research is clear: People simply are not going to have enough money to live on given their current level of savings.
In 2020, about 43% of households comprising people aged 65 and over have less than $75,000 in income (which is the amount of income Pew reports indicates financial vulnerability). There’s going to be a 43% increase in the number of those households by 2040, when 32.6 million people are going to have less than $75,000 coming in.
The gap between the resources retirees will have and the resources they need is substantial. In 2020, the average shortfall was $6,740.
Unfortunately, as the population ages, there will be fewer workers relative to the number of seniors facing these shortfalls, so a smaller number of people will need to cover these big costs. As a result, Pew reports that the additional taxpayer liability due to inadequate retirement savings will be about $13,600 per household.
Here’s how it can be fixed
The best way to fix this problem is obvious — people need to save more.
But, that is a lot easier said than done. Most people know they should be saving for retirement, but they simply can’t due to other pressing obligations. And some people may not even be aware of how big their income shortfalls will be if they are counting on Social Security to support them and don’t realize these benefits are only designed to replace about 40% of pre-retirement income.
Pew research suggests that if more states offer automated savings programs similar to IRA accounts, this could help to address the shortfall by encouraging people to save more. Eleven states have put these programs in place already, and although there is some variation, generally any worker without an employer plan is automatically enrolled unless they choose to opt out. More states are also implementing similar plans.
If these programs are successful at encouraging more saving, the retirement shortfall could be solved relatively easily, as Pew found that it would disappear if households saved only $1,685 per year extra. Automated enrollment in a savings account could make that happen for some, especially if the account comes with generous tax breaks. Many people tend to stick with the status quo, so while they might not sign up for retirement savings on their own, they’ll be more likely to stick with making contributions if the default is that they are signed up.
With the state and federal government — and the taxpayers — facing such large looming costs, hopefully more states will decide it’s at least worth a try. This way, those without access to a workplace plan will soon have a new solution to help prepare them for their future.
