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.
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.