Some disturbing projections came out of a study released this week by The Pew Charitable Trusts.
It stems from Americans not saving enough for retirement—something that without action could put a huge strain on state and federal budgets in the coming decades in the form of increased public assistance costs and reduced tax revenue. The new research found America’s retirement savings gap could create a $1.3 trillion economic burden through 2040.
Ouch.
The Pew study says as many as 56 million private sector workers lack access to an employer-sponsored retirement plan. The analysts who conducted the study for The Pew Charitable Trusts estimate that such limited savings could lead to a cumulative additional cost to the federal government of $964 billion between 2021 and 2040. State spending on these programs, stemming from administrative costs, required state match formulas, and supplemental state benefits, totals another $334 billion over that period, resulting in the $1.3 trillion projection.
Even with that social spending, Pew found many households would be required to reduce their standard of living in retirement.
Pew commissioned Econsult Solutions, an economic consulting firm, to quantify the fiscal and economic costs of insufficient retirement savings. The research and findings are grounded in population demographics. According to the analysis, the share of households with people at least age 65 with less than $75,000 in annual income—a level that indicates financial vulnerability—will increase by 43% from 22.8 million in 2020 to 32.6 million in 2040.
As these workers age, inadequate retirement savings will likely lead to reduced retirement income and quality of life for many. At the same time, this shortfall will put greater pressure on public spending and increase taxpayer burdens.
Demographic trends don’t help, as growth in the older population will not be matched by comparable growth in working age households. The Pew article states: The age dependency ratio—the ratio of households with people at least age 65 to those of working age—is expected to grow by 46% over that time period, increasing the strain on the tax base. In 2020, there were 37 households ages 65 and older for every 100 working age households. That ratio will increase to 54 older households for every 100 working-age households by 2040. As a result, the additional spending needed, for example on Medicaid and other assistance programs, would be borne by a smaller portion of the working-age population.
The average income shortfall in retirement among vulnerable older households in 2020 was $6,740, which will increase state spending for Medicaid and other assistance programs. The study estimated the cumulative additional taxpayer liability because of insufficient retirement savings to be $13,600 per household.
The good news
Quite the bummer so far, eh? But Pew points out that even spurring relatively small savings over a worker’s career could help offset the effects of the projected shortfall.
“For example, if households saved an additional $1,685 a year—about $140 a month—over a 30-year period, they could erase the retirement savings gap, eliminate the extra taxpayer burden, and help people maintain their lifestyles in retirement,” says a May 11 Pew article about the shortfall. “In addition, any savings above the status quo help to reduce the fiscal obligations and improve outcomes.”
The article points out that 11 states have already launched automated savings programs that allow people to set up state-sponsored IRAs to help more private sector workers routinely put money away for retirement. This year, lawmakers in more states are introducing measures to expand those opportunities.
Participants in these state-based automated savings programs are saving between $105 to $190 per month on average according to available state data.
The states that already approved programs are California, Colorado, Connecticut, Delaware, Illinois, Maryland, Maine, New York, New Jersey, Oregon, and Virginia.
SEE ALSO:
• State-Mandated IRAs Not Crowding Out Private 401(k)s: Pew Research
• Standard of Living in Retirement Will Decline for Half of Households: Report
• 2 in 3 Small Businesses Still Don’t Offer Retirement Plans: Fidelity
• 10 States Furthest From and Closest To Retirement Savings Benchmarks
Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.
