America’s retirement system is failing, reveals the new Fed Survey of Consumer Finances. True, retirement account balances are up from 2018, but despite the increase, Americans are far behind where they need to be for a secure retirement.
Americans aged 55-64 have a median before tax income of $82k and just $185k in their retirement accounts, which is 2.3 times their income. Aon Consulting Group calculates people nearing retirement need eight times their annual income in their accounts and 11.1 times at age 67, in order to maintain living standards in retirement. This means the median American household needs at least $470K more in their retirement account.
Saving Consistently Boosts Retirement Income Security: But Only Privileged Americans Can Do It
On paper, the solution to retirement shortfalls is easy: Go back in time and save 5% of your paycheck starting in your 20s. Work steadily for 40 years, never stop contributing, don’t get a divorce, don’t get laid off. Easy-peasy, right? Basically, start early, never withdraw, and never take out loans against your retirement accounts. If you start saving at about age 40 you need to save over 26% of your gross income each year until age 67 to achieve an 80% replacement rate in retirement. That’s a much steeper climb. If workers lose all of their retirement accounts and have to start fresh at age 50, they need to contribute half of their earnings toward retirement for the rest of their working days.
Under the current system, doing what you need to save for retirement is nearly impossible. Therefore it is no surprise we are facing a humanitarian and political disaster; many middle class Americans will be downwardly mobile into poverty in old age.
This means after 40 years since the 401(k) plan came on the scene — ushering in an America’s system of voluntary, financialized, and individual-driven retirement system — the American system is failing. The Mercer CFA Institute Global Pension Index Mercer/Melbourne international survey puts the U.S. near the bottom of all rich nations in the OECD (Organisation for Economic Co-operation and Development). The Netherlands, Australia, and Finland get A’s while the US gets a mere C+.
Retirement Account Participation Improved From 2018 to 2022: From Real Bad to Bad
The new Fed report shows that the share of households with retirement accounts increased from 51 percent to 54 percent between 2019 and 2022 — an all-time high for the survey (which dates back to 1989). This means that 46% of families have nothing. They are on a grim path toward depending solely on Social Security. And mere participation, having something, does not mean having enough explained above. For households of all ages, the median value in retirement accounts rose from just $75k in 2019 to $87k in 2022.
Troublingly, the American retirement system still leaves out Black Americans. The median value of retirement accounts for Black Americans fell (the only group that declined) to $39k, or only 39 percent of the median value for whites ($100k). Black participation also fell to 34.8 percent. Though median holdings increased for Hispanic Americans, participation rose only modestly and remains less than half that of whites. Only 13.4 percent of the bottom 20 percent participate in retirement savings; among the next 20 percent in the economy, participation is still only 35.4 percent.
The upshot of the voluntary system is spotty participation and top-heavy tax breaks. The system works best for those at the top. Seventy-seven percent of the over $279 billion in retirement tax breaks, according to an Economic Innovation Group report, go to the wealthiest 20% of Americans.
What is the ultimate failing indicator of the American retirement system. The U.S. elder poverty rate is 23 percent — far higher than our peers and way above Canada’s 12.3 percent and the OECD average of 13 percent. The U.S. is among the few rich nations without a mandatory and universal system providing a flow of consistent retirement savings. We do not have appropriately safe and secure retirement account institutions in place that allow Americans to save enough to achieve adequate retirement income.
A promising new proposal – the Retirement Savings for Americans Act (RSAA) – if passed would raise America’s grade. The Act has a fighting chance since both Republicans and Democrats support the plan to boost retirement security by providing universal pension coverage for low- and moderate-income workers. A bipartisan team — Senators John Hickenlooper (D-CO) and Thom Tillis (R-NC), and Representatives Lloyd Smucker (R-PA-11) and Terri Sewell (D-AL-7) — are leading the way toward a better system.
The RSAA would provide workers who lack access to employer-sponsored retirement with access to portable plans modeled after the plan federal employees have, the Thrift Savings Plan.
The legislation builds on recommendations of a 2021 white paper I wrote with Kevin Hassett, former Council of Economic Advisers chair under President Trump. The plan would put eligible full, part-time, and gig workers who don’t have an employer-sponsored retirement plan – that’s most workers in the bottom 80 percent— in an account to contribute three percent of income (they can opt out). Most would get up to a five percent matching contribution through a refundable federal tax credit, making it attractive to participate, and the distribution of federal subsidies to retirement accounts more fair.
The RSAA accounts are portable and the investment options sensible — much like what federal employees have now.
The vast majority of households — whether Republican, Democrat, or Independent —worry about retirement. And increasingly so are elected officials. In 2023, the U.S. Conference of Mayors adopted a bipartisan resolution calling on federal policymakers to help private sector workers without a retirement plan – knowing their cities will face more and more poor elders if nothing is done.
America can do better for its workers and elders by boldly reforming the current retirement system, a system that serves the wealthiest of Americans best.
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