Eligibility for participation in a defined contribution plan like a 401k was found to have a big impact in reducing the “retirement savings shortfall” for U.S. households, according to EBRI’s newest study, released March 7.
The study, “Retirement Savings Shortfalls: Evidence from EBRI’s 2019 Retirement Security Projection Model,” projects that the retirement deficit for U.S. households with a head ages 35–64 decreased 13.7%, from $4.44 trillion (in current dollars) in 2014 to $3.83 trillion in 2019.
The largest improvement was experienced by younger workers, with those ages 35-39 projected to have a 22% decrease in their average deficits.
You can thank that factor of eligibility for participation in a DC plan for the good news. “The average retirement deficit for households with a head ages 35-39 with no future years of eligibility in a defined contribution plan is $78,046 per individual,” said Jack VanDerhei, EBRI research director and author of the study. “This is more than five times the deficit for those fortunate enough to have at least 20 years of future eligibility in a defined contribution plan.”
The results illustrate the importance of expanding coverage to those not currently eligible to participate in an employer-sponsored retirement plan.
The study also finds the percentage of households projected to have a “successful” retirement (defined as NOT running short of money in retirement) increased from 57.7% in 2014 to 59.4% in 2019.
When looked at on an individual basis, the average Retirement Savings Shortfall for those ages 60-64 ranges from $12,640 per individual for widowers to $15,782 for widows. It increases to $24,905 for single males and $62,127 for single females.
Other key takeaways from the latest EBRI Issue Brief:
- Low-wage workers will see bigger deficits than high-wage workers
- Longevity risk is a critical factor—overall, the average retirement deficit for those in the longest relative longevity quartile is 10.2 times the average retirement deficit for those in the shortest relative longevity quartile
- Reductions in Social Security benefits would have a material impact—A 23% pro rata reduction to Social Security retirement benefits beginning in 2034 would increase average retirement deficits by an average of 17% for those currently ages 35-39
EBRI launched a major project to measure retirement security back in the late 1990s for several states concerned whether their residents would have sufficient income when they reached retirement age. A national model—the EBRI Retirement Security Projection Model (RSPM)—was developed in 2003.
New versions of the model have been generated periodically to include updates for financial and real estate market performance, employee demographics, and real-world behavior of 401k participants (based on a database of 27 million 401k participants) and IRA account holders (based on a database of 20 million unique individuals).
Quantifying the retirement readiness of American households in this way, EBRI says, provides valuable insight for employers, providers, and policymakers.