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Few Americans are saving enough for retirement, suggesting many workers may face a retirement with a lower standard of living, according to a recent study released by the Schwartz Center for Economic Policy Analysis at the New School.
Since Social Security cannot fully replace income in retirement, other savings is needed, and that usually comes in the form of funds accumulated in employer-sponsored retirement plans such as 401(k)s.
However, in 2011, almost half of working Americans were not offered a retirement account by their employer — the result of a longer trend in which, from 1999 to 2011, the percentage of workers being offered such plans declined from 61% to 53%. The report, “Are U.S. Workers Ready for Retirement?” authored by the New School’s Joelle Saad-Lessler, Teresa Ghilarducci and Kate Bahn, used the United States Census Current Population Survey to find out retirement plan coverage and participate rates.
When you add in people who did not participate in a plan offered to them or who were not working, a staggering 68% of working-age people (25-64) did not participate in an employer-sponsored plan.
Ghilarducci gives a few reasons why employer-sponsored accounts are on the decline. “More and more people are working for small employers, so people are working for employers who are less likely to have a 401(k) or defined benefit plan,” she said. Additionally, the decline in unionization and the increase in contingent workers, such as independent contractors, have decreased workers’ bargaining power.
“If employers would really calculate in a systematic way how much turnover costs to them, they would pay more attention to clever ways of compensating workers, like adding a 401(k) account to their benefits,” Ghilarducci says. “It doesn’t really cost that much, because the 401(k) contributions are flexible, employers can stop them whenever they want, most of the contribution can come from their employees, and employees really like them.”
But even those fortunate enough to have a plan and the means to participate in it are not guaranteed a similar standard of living in retirement. People in certain types of retirement plans, such as pensions, are more likely to be able to keep up their lifestyle than those in 401(k)s.
(In pensions, classified as “defined benefit” plans, the employer invests the assets and guarantees the pension, while the worker takes home reduced earnings. In retirement, the pension delivers a certain percentage of pay based on years of service until the worker dies. In contrast, “defined contribution” plans, such as 401(k)s, have the worker volunteer to participate, decide the contribution amount themselves, and during retirement, manage the nest egg to provide enough income every year without depleting the funds before death.)
Sponsorship Rates by Demographic
The decline in employer sponsorship rates didn’t affect all groups equally. Some of the groups hit the hardest include the self-employed (28% drop in sponsorship), non-citizens (22%), workers in personal services (20%) and Hispanics (19%). (Read here for more on the racial wealth gap.)
The self-employed can establish retirement plans for themselves, such as the solo 401(k), the simplified employee pension plan, or SEP, IRA, and the SIMPLE-IRA. But in 2011, this group had the lowest participation rates — 13%, compared to 83% of workers in public administration. (Freelancers, here's how to save for retirement.)
Other groups with especially low participation rates include those who work at firms with only 1-24 employees (23% participation), workers in the personal services industry (24%), non-citizens (28%), Hispanics (34%) and those working in construction (35%).
Other groups with high participation rates include those covered by a union contract (82%, as opposed to 56% of those without a union contract), public sector employees (82%) and those at firms of 1,000+ employees (74%).
Employee Participation Rates
Some workers offered retirement plans do not or cannot participate, since employers are permitted to exclude employees from participating in their retirement plan if they have less than one year of service, work part-time or are younger than 25. But participation rates also are lower than sponsorship rates because most workers have the choice of participating or not participating in the plan. While 85% do, the 15% that opt not to lead to an overall rate of non-participation in a retirement plan of 68% among all working-age adults.
Another factor affecting participation is the fact that defined benefit plans like pensions are rarely available. To study this impact, the authors turned to the Survey of Income and Program Participation (SIPP), by the Census and the Bureau of Labor Statistics. Of working-age Americans with an employer-sponsored retirement plan available to them, 16% had a defined benefit plan, and 63% had a defined contribution plan such as a 401(k). (Twenty percent did not participate.)
Both older workers and people employed by the government were found to be more likely to have access to a defined benefit plan.
Readiness Among Those Nearing Retirement
Employer-sponsored accounts make up only one of several potential income streams in retirement. Using SIPP data, the authors looked at the comprehensive financial assets of respondents, which include the value of their bank accounts, bonds and securities, savings bonds, stocks and mutual funds, life insurance policies, IRAs and KEOGH accounts, defined contribution accounts, real estate holdings, and home and business equity. They also accounted for debt owed.
The median net worth among households near retirement (ages 55 to 64) show that only about a quarter can expect an adequate cash income stream from their retirement savings.
When looking only at liquid assets that can be easily converted to an annualized income stream (and excluding home equity since it is unrealistic to expect homeowners to sell their homes upon retirement), 30% of U.S. households at or near retirement age have less than $10,000 in assets. Twenty-four percent have only between $10,000 and $99,999. That means 54% of American have too little saved to produce an income stream in retirement. Annualizing $50,000 for a single male turning 65 in 2014 yields only $70 a week. A married couple in which both members turn 65 in 2014 would receive only $58 per week.
The 26% of Americans who have liquid assets of $300,000 are the only group who will be able to rely on their savings to produce an income stream in retirement. (Read here for more on why Gen X and Late Boomers are unprepared for retirement.)
By plan type, the households who are enrolled in a defined benefit plan like a pension fare the best, with a median net worth of $116,973, compared to $107,250 for those in a defined contribution plan, and $4,450 for those without an employer-sponsored plan.
This translates into the finding that workers with a defined contribution plan are most likely to be able to maintain their standard of living upon retirement. They are expected, in retirement, to produce an income stream equivalent to 75% of their pre-retirement income. (Many retirement experts and financial advisors recommend saving enough to replace at least 70% of one’s pre-retirement income to maintain one’s standard of living.)
Workers with defined contribution plans such as 401(k)s are expected to be able to replace only 62% of their pre-retirement income, which indicates they will not be able to retire comfortably. And those with no retirement plan will be able to replace only 57% of their income.
Projected Poverty Rates For Those Near Retirement Age
The authors use the threshold of twice the federal poverty line to demarcate those who are likely to be poor or near-poor in retirement and conclude: 9% of near-retirement workers (ages 55- to 64) will face extreme poverty, earning less than the poverty threshold. Another 24% will live in near-poverty, with income below twice the federal poverty line.
Finally, poverty and near-poverty rates vary greatly by state, with states like Massachusetts and Virginia having a low percentage of near-retirement residents at risk (22%), and states like Florida, North Carolina and Texas having a high percentage of those 55-64 at risk (41%, 41% and 39%, respectively).
