Wage stagnation, insufficient retirement plan coverage and an ageing population are contributing to a retirement savings crisis in America.

Research from Boston College’s Centre for Retirement Research warns that a majority of American households do not have adequate retirement savings to support their lifestyles for the rest of their lives. Some key findings include:

• 28 per cent of non-retired adult Americans have no retirement savings or pension (Federal Reserve Board).
• 52 per cent of households age 55 and older have no retirement savings. Among those with retirement savings, the median amount is approximately $109,000 — enough to generate only about $405 per month of income for a 65-year-old (US Government Accountability Office).
• Social Security — designed to replace only a portion of workers’ pre-retirement earnings — provides most of the retirement income for about half of households age 65 and older (US Government Accountability Office).

These statistics point to a looming retirement savings crisis in America. But how did we get here?

Real wages and the "payday dilemma"

Real wages for most Americans have been stagnant or declining for about four decades. They have risen recently, but too slowly to help most of those approaching retirement. As a result, many working Americans face an increasingly pressing dilemma each time a pay check arrives. Should the money go to immediate needs, like the mortgage or rent, food, clothes, transportation? Should it go towards savings funds for children, or a “rainy day” fund in case of a job loss or health crisis? Or should it be set aside in a retirement account? Amongst these competing priorities, for many Americans, immediate needs, near-term risks, and their children’s futures triumph over retirement saving.

Insufficient coverage

A “coverage” problem exacerbates the savings crisis, with the US Labor Department estimating that only about 70 per cent of American employees have access to an employer-provided retirement plan. Only 77 per cent of these employees enrol, sometimes due to eligibility barriers. As a result, only 54 per cent of all American employees have employer-provided retirement accounts. The other 46 per cent either have no private retirement account, or they participate in the individual market for retirement products like Individual Retirement Accounts (IRAs), some of which offer reduced tax advantages and leave retirement savers to wrestle with the payday dilemma.

And those are the employees. According to a 2016 academic study, about 9 per cent of Americans are “independent contractors” who, by definition, do not have employers. Independent contractors — a growing workforce segment — are on their own in the individual retirement plan market. They also face added Social Security risk. Employers pay half of Social Security taxes and withhold the employees’ half, whereas independent contractors must pay both the employer’s share and their own.

Source: US Department of Labor

The shift in retirement plans

One of the most important contributors to the retirement savings crisis is the shift in the type of retirement plans employers offer. Defined-benefit plans, in which the employer provides a specified retirement sum, based on factors such as an employee’s wages and years of service, have decreased in the private sector. In contrast, defined-contribution plans, in which the contributions of employers and employees are invested have increased among private sector employees. In 2015, the total assets in defined-contribution plans stood at $12.6 trillion, whereas the figure for defined-benefit schemes was $2.9 trillion. The shift away from defined-benefit plans in recent decades has meant that guaranteed lifetime retirement income from pensions is now the exception, rather than the rule.

Americans are living longer

Compounding these issues, increasing life expectancy mean that Americans face the prospect of stretching their retirement money over a longer life span. In the United States, life expectancy at birth has risen from around age 70 in 1968 to just shy of age 79 in 2015. But these aggregate numbers mask the true picture. A man reaching age 65 today can expect to live, on average, until age 84.3; a woman turning age 65 today, on average, will live to age 86.6. About one out of every four 65-year-olds today will live past age 90, and one out of 10 will live past age 95.

Whilst this is a testament to our technological and medical progress, retirement economics has failed to keep up with longer life spans. Greater average longevity puts pressure on the solvency of America’s Social Security system. The risk that people will outlive their retirement savings is steadily growing along with life expectancy.

Read the full report.

Related content
Analysis
Mike Wells at 2019 Singapore FinTech Festival
Read Article
Analysis
The Asian Century: What's next?
Read Article
Analysis
Shifting demographics exposes the gap for income products
Read Article
Analysis
Mike Wells - Finding new ways to invest in infrastructure
Read Article

Jackson National Life Insurance Company

Prudential

You are about to enter the website of our US affiliate Jackson National Life Insurance Company, an indirect subsidiary of Prudential plc of the United Kingdom.

Proceed to the site

Prudential

If you are looking for an affiliate of Prudential Financial, Inc, whose principal place of business is in the United States of America.

Proceed to the site

Prudential plc is an international company incorporated in the United Kingdom, and its affiliated companies constitute one of the world’s leading financial services groups. It provides insurance and financial services directly and through its subsidiaries and affiliates throughout the world, and it has been in existence for over 170 years. Prudential plc is not affiliated in any manner with Prudential Financial, Inc, a company whose principal place of business is in the United States of America, or the Prudential Assurance Company, a subsidiary of M&G plc (a company incorporated in the United Kingdom).

PPM America

Prudential

You are about to enter the website of our US affiliate PPM America, an indirect subsidiary of Prudential plc of the United Kingdom.

Proceed to the site

Prudential

If you are looking for an affiliate of Prudential Financial, Inc, whose principal place of business is in the United States of America.

Proceed to the site

Prudential plc is an international company incorporated in the United Kingdom, and its affiliated companies constitute one of the world’s leading financial services groups. It provides insurance and financial services directly and through its subsidiaries and affiliates throughout the world, and it has been in existence for over 170 years. Prudential plc is not affiliated in any manner with Prudential Financial, Inc, a company whose principal place of business is in the United States of America, or the Prudential Assurance Company, a subsidiary of M&G plc (a company incorporated in the United Kingdom).