The chronic problem of Americans insufficiently saving for retirement has repercussions far beyond individual situations and could cost state and federal governments trillions of dollars in public assistance costs, reduced tax revenue, decreased household spending and standards of living, and lower employment.
A new study shows that every state in the country will be impacted over the next 20 years, with a combined $1.3 trillion extra burden for state governments. Populous states with aging populations are the most vulnerable, according to the study by Pew Charitable Trusts, with California leading the way with an estimated near $200 billion burden, followed by New York ($103 billion), Texas ($99 billion), and Pennsylvania ($56 billion).
“The big gorilla in the room is Medicaid,” said John C. Scott, project director for retirement savings at Pew. “That’s really what drives a lot of this. There’s other programs and some states have their own programs for elderly. But Medicaid is the big one.”
As many as 56 million private sector workers lack access to a retirement savings plan through their jobs, according to a University of Pennsylvania report. An employee who makes the median 2020 salary of $35,800 and plans to spend 20 years in retirement will need about $572,800 in total retirement savings. Yet the median amount Americans have saved for retirement is just $71,500. More than 1 in 4 people (27%) have less than $50,000 in retirement savings, and 16% have nothing saved, according to an Anytime Estimate Retirement Finances survey last year.
Estimates vary but whatever the shortfall, Scott says the problem could be relatively easy to solve and the gap between need and savings could be narrowed with just small regular savings contributions.
Retirement savings average annual shortfall $7,050
Pew found that the average annual shortfall in the U.S. was $7,050.
“So, what do you have to save to generate income a little over $7,000 a year,” Scott asked. “And that comes out to just $140 a month. Over 30 years that roughly $120,000, amortized over that time would make up the shortfall.”
Scott says Pew works to encourage state mandated employee savings plans. He said 14 states have passed legislation to create automatic savings plans and six are up and running today.
“So, we’re trying to educate lawmakers who might think this is an individual problem and letting them know it’s really a problem for all taxpayers and you may want to consider a policy solution like, like a statewide savings,” he said.
Ideally, Scott said, Congress would create a national savings program but for now Pew is concentrating at the state level. The state bills to create savings options – sometimes referred to as Work & Save or Secure Choice – allow people to set up state-sponsored individual retirement accounts (IRAs). Typically, workers at companies without employer-based benefits are enrolled automatically but can opt out. In the states that have implemented such programs and started regular paycheck withdrawals, average savings rates are about $140 a month per worker, the Pew report said.
According to an analysis conducted for Pew, 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. And 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.
“Making matters worse, the growth in the older population will not be matched by comparable growth in working age households,” the Pew report said. “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, according to the analysis. 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.
“All 50 states face the fiscal strain of an increasingly older population,” the Pew report said. “But making it easier for people to set aside even modest levels of savings during their working years will pay dividends for both individuals and state taxpayers in the long run.”
Scott believes the state automatic savings plan idea is making progress.
We’re up to 14 – two states, Vermont and Minnesota, passed legislation last week,” he said. “So, it’s only 14 out of 50 but this is how we get states interested in the issue. Reports like this show that it is not a costless problem. We make it real for them by showing them what the burden is.”
Doug Bailey is a journalist and freelance writer who lives outside of Boston. He can be reached at firstname.lastname@example.org.
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