Millions of Americans are in danger of not having enough money to maintain their standard of living in retirement, and the problem is getting worse.
A Center for American Progress report says there are three clear trends in particular that illustrate how Americans are unprepared for retirement: a large percentage of Americans aren’t saving for retirement, families that are saving often have insufficient assets, and households should increase their savings relative to prior generations but aren’t doing so.
Barely saving
The report cites a recently released household survey conducted by the Board of Governors of the Federal Reserve System that shows about 31% of Americans reported having zero retirement savings and lacking a DB pension. This finding is in keeping with the results of other comprehensive Federal Reserve surveys and means that nearly one-third of people in the United States currently have no money put away in any type of retirement account to supplement their Social Security benefits.
Among respondents ages 55 to 64—those nearest to retirement who already should have built up significant savings—the share that reported having no savings or pension was still 19% of near-retirement households.
“That such a large share of Americans lacks any savings should not be particularly surprising given that so many still lack access to the primary savings vehicles used by workers today: workplace retirement plans,” says the report.
As of 2014, only 65% of private sector workers had access to a retirement plan through their jobs, and only 48% participated in one. Even when looking just at full-time workers, more than one-quarter still lacked access to an employer-sponsored retirement plan, and more than 40% did not participate in one.
Moreover, these numbers have not been getting significantly better.
“In fact, studies that use data that allow for long-term analysis indicate that the share of private sector workers with access to workplace plans is actually lower now than it was in the late 1980s,” notes the report.
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Balances increasing for some
As many American companies have abandoned DB plans, they have shifted to DC plans. However, as of 2013, the median retirement account balance among all households ages 55 to 64 was only US$14,500. Even after excluding all households that had saved nothing, the median account balance of near-retirement households was still only US$104,000.
“If a household uses all of this money to purchase an annuity from a life insurance company that will pay a guaranteed monthly income for the rest of the household’s life, this income will provide only approximately $5,000 per year in retirement—nowhere near what the household is likely to need,” says the report.
Although the total sum of savings in these plans has grown significantly over time (topping more than US$12.1 trillion in 2013), the wealthy hold most of these assets, while the middle class and the poor have comparatively little.
As of 2013, the top 20% of working-age households by income owned 67.7% of all retirement account assets, while the bottom 50% owned only 7.4%.
Among older households, a study for the Social Security Administration found that only 19% of families headed by a person over age 65 were actually receiving distributions from a retirement account as of 2009, with only 8% of families in the bottom income quartile receiving any such distributions.
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No increase in saving rates
One way to measure how capable households will be of maintaining their standard of living in retirement is to look at the ratio of their total wealth to their income.
While these ratios did improve for older households during the 1990s and early 2000s, they subsequently collapsed following the Great Recession and have shown no signs of recovering.
“All told, households near retirement age were worse off in 2013 than they were in 1989,” says the report.
This stagnation of wealth-to-income ratios might be fine if retirement needs had stayed the same over time, but life expectancy has increased, healthcare costs have risen substantially, and the decline in interest rates since 1983 means that a given amount of wealth accumulated today now produces less retirement income than it would have in previous decades.
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The road ahead
While studies that use different methodologies may arrive at different estimates of the exact percentage of Americans at risk of struggling financially in retirement, even the most optimistic, which use pre-recession data, still find that about 25% of retired Americans are falling short and that preparedness is growing worse over time. The most middle-of-the-road estimates available place the share of current American workers at risk at more than 50%.
The report concludes that “A large percentage of Americans are not building up sufficient assets needed to maintain their standard of living in retirement, and the problem is only getting worse for younger generations.”
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