America’s Looming Retirement Crisis

We need universal access to retirement plans to transform a dysfunctional system into one that empowers more Americans to be financially independent and live a more dignified life in retirement.

Amanda Tidstrand for Noema Magazine
Angela M. Antonelli is a research professor and the executive director of the Center for Retirement Initiatives at Georgetown University’s McCourt School of Public Policy. Ross Berg is a senior research associate with the Center for Retirement Initiatives.

When Ida May Fuller of Ludlow, Vermont received the first-ever monthly Social Security benefit check on January 31, 1940, retirement looked very different for most Americans. Designed to stabilize the financial circumstances of the elderly, the Social Security Act built upon a patchwork of state old-age insurance programs and came into existence amid great economic upheaval.

Just as the Great Depression helped to define the economy of the first half of the 1900s, COVID-19 has left an indelible mark on the early part of the 21st century. The pandemic exacerbated financial fragility and brought to light disparities that have become a systemic feature of the American economy.

Prior to COVID-19, less than four in 10 American workers could afford to cover an unexpected $1,000 expense. Today, that number still stands at 39%, and the economic shock of the pandemic has yet to be fully absorbed. Many Americans continue to live paycheck to paycheck, and a considerable number will be forced to take on additional debt to make ends meet before the pandemic is over.

The crisis has had an uneven impact based on an individual’s income and race. “K shaped” recovery models have featured prominently in the headlines, showing that the richest households have been able to grow their wealth even as the poorest continue to struggle. According to a Pew survey, 61% of Hispanic Americans and 44% of African Americans said their household lost a job or income since the beginning of the pandemic, while 38% of white adults reported such a loss.

The pandemic’s impact on savings rates, income and racial inequalities are relatively well known, but overlooked are the troubling disparities in our retirement system that it has exacerbated. 

“Many older workers who urgently need to contribute additional savings for retirement may never be able to do so.”

For the first time since 1973, unemployment among workers over the age of 55 has remained higher than that of mid-career professionals for more than six months. Nearly 30% of workers now plan to postpone retirement and work longer. Others, frightened by the risk of infection, may instead choose to retire sooner and with less saved. For many, entering retirement early will mean balancing the rising costs of healthcare — estimated at nearly $300,000 for an average 65-year-old couple — with food, housing and expenses related to long-term care.

These effects come at a time when households that are nearing retirement age are still not saving enough. In 2019, the median retirement account balance for households between 55 and 64 years old was $144,000, an amount that would generate approximately $570 per month in income: not much to supplement Social Security or other retirement income. Many older workers who urgently need to contribute additional savings for retirement may never be able to do so. 

Savings rates are even worse for younger workers and those in the lowest-earning households. Among retirement-age workers with the lowest 20% of income, 79% have no retirement assets whatsoever. Two-thirds of working millennials lack any retirement savings, while just 13% of workers in the “gig” economy are saving for retirement. 

This shortfall in retirement savings means that many people will find themselves depending on Social Security — a program that was never designed to be the primary source of retirement income. Already among Social Security beneficiaries, 70% of those who are unmarried receive half or more of their income from the program, and 50% of married couples do. Even more troubling is that some states already today have as many as 1 in 3 elderly households relying on Social Security for 90% or more of their income. 

Adding to this dire picture is the fact that the U.S. population is aging. In 1980, there were 3.9 working-age households for every elderly one. Today, there are only 2.8 — and a projected decline to 2.3 by 2040. That means that soon there will not be enough workers paying for Social Security and other social safety net programs to support the retirees who depend on them.          

At the same time, states will experience a shrinking tax base and a rising demand for public programs. As seniors retire with insufficient savings, the government ends up stepping in. At least 21 states spend $20,000 or more per person per year in combined federal and state Medicaid costs for aged enrollees, with North Dakota topping the list at $59,000 each. One study in Pennsylvania estimated the state’s costs due to this savings gap is $700 million each year, and rising to $1.1 billion by 2030 — a cumulative $14.3 billion over the next decade if nothing is done.

The Origins Of The Crisis

In the past, workers in the U.S. could rely on three separate sources of income to help them retire: Social Security, employer-sponsored pensions or other retirement savings plans, and personal savings. 

In traditional pensions, also known as defined benefit (DB) plans, employees enjoyed a guaranteed income based on their years of work. The size of an employee’s retirement benefit was typically calculated by a team of pension actuaries and investment experts to ensure a lifetime of income in retirement. 

“Workers are 15 times more likely to save for retirement if they have access to a payroll deduction savings plan at work.”

To reduce their own costs, however, employers began replacing DB plans with defined contribution (DC) plans like 401(k)s. This shift transferred the responsibility to workers to figure out how much money they will need to retire securely and take action to begin saving. Faced with the responsibility of taking on a role that was once held by a team of financial professionals, many workers feel overwhelmed or confused, and they do nothing. According to the Bureau of Labor Statistics, nearly 25% of workers in the private sector who had access to employer-provided retirement benefits choose not to participate in those options.

Making this even worse is the fact that more than 57 million private-sector workers — nearly half of the private-sector workforce — do not have an easy way to save for retirement through their employer. For small businesses especially, the costs in time, money and expertise needed to set up a retirement plan for their employees remain too high — even among those that may wish to do so. 

Universal Access: A National Policy Priority

Just as Social Security was part of a national response to an economic crisis, addressing the current shortfall in retirement savings requires a plan to expand access to retirement savings plans universally, so that all workers can begin to quickly and easily save for their future.  

Outside the U.S., efforts to create universal access have proven successful. Launched in 1992, Australia’s superannuation guarantee program has enrolled 16.7 million workers and has assets of $2.9 trillion. Employers are currently required to contribute 9.5% of an employee’s earnings to a superannuation fund (and this rate will rise to 12% by July 2025). Contributions are not required for very low-wage and part-time workers, but any contributions made for such workers are matched by the national government. 

New Zealand created a program called KiwiSaver in 2007. Participation is voluntary, but its auto-enrollment feature requires that workers must opt out if they don’t want to participate. Once an account is created, it requires contributions from both employers and employees. Employees can contribute 3% or more, employers provide a 3% contribution and the government makes an additional “tax credit” contribution. The program has grown to more than 3 million participants and $62 billion in assets. 

The success of these and similar programs abroad has not been lost on policymakers in the U.S. Since 2015, Congressman Richard Neal, the current chair of the House Ways and Means Committee, has championed multiple attempts to expand access at the federal level, including automatic individual retirement accounts. While the passage of the Secure Act of 2019 signaled modest progress to expand retirement access, it will not reduce the access gap by a considerable amount on its own. The state of Texas, for instance, recently estimated that just 64,000 new retirement savers might take advantage of the act’s pooled employer plans — a tiny portion of the roughly 5.7 million Texans that currently lack access. 

“Workers who save more will enjoy higher incomes in retirement — increasing tax receipts, consumer spending and ultimately economic growth.”

In the absence of comprehensive federal action, individual states sought to expand access to retirement savings options in recent years. California, Illinois and Oregon have all created auto-IRA programs in which employers who do not already offer a retirement savings plan must facilitate through payroll deduction the ability of their workers to save using the state program. Workers are automatically enrolled at a default contribution level, typically 5%, with the freedom to adjust that contribution level, but workers also can opt out. For some programs, the amount of the contribution made by the worker will automatically increase by 1% each year — a process known as “auto-escalation.” Many businesses do not offer their workers retirement savings plans because they find them too costly and complex to administer, so the state programs are designed to take the burden and cost off employers. 

Collectively, these early-stage state programs have accumulated more than $188 million in new retirement savings. And businesses have embraced them: Josh Allison of Reach Break Brewing Company in Astoria, Oregon told OregonSaves that the state’s savings program “helps us recruit solid workers and helps us retain those solid workers.” Programs that require employee participation have been far more successful than ones that rely on voluntary participation, like the retirement marketplace in Washington. 

Individuals want to do the right thing. While studies have shown that few will take the initiative to save on their own, workers are 15 times more likely to save for retirement if they have access to a payroll deduction savings plan at work. Denise Geske of Fox & Hounds Salon and Day Spa in Bloomington, Illinois explained it well in an interview with the New York Times: “I’m 51, and before this program came along, I had no retirement savings,” she said. “Now I’ve been checking my account balance, and I see I’m actually making money I don’t even miss, and I’m kicking myself for not starting earlier.” 

Nevertheless, a continued piecemeal approach doesn’t address the crisis on a national scale. There are several options that lawmakers could adopt to finally make universal access a reality for millions of American workers. 

First, it’s important to determine what exactly a “universal” retirement savings model would look like to estimate just how much could be saved. The type of savings account, participation requirements and employer contributions can make a difference. We concluded in a recent report that national universal access could reduce the access gap by 28-40 million workers, depending on design choices, and create an additional $1.89 trillion in retirement savings by 2040. 

Expanding access would enable assets to grow dramatically for workers who begin to save early in their careers. For instance, a young worker earning $35,000 per year who follows the default options of a typical program for 40 years could accumulate more than $260,000 in savings that would generate as much as $14,320 in annual retirement income. Even an older worker who starts saving at 45 could still put away enough over 20 years to generate an additional $4,400 annually in retirement income. 

“The COVID-19 pandemic exposed the vulnerability of workers with far too little saved for retirement.”

Such savings could be boosted even more substantially by modifying current tax laws. For example, individuals today can claim a Saver’s Tax Credit— a benefit that rewards saving in retirement accounts such as IRAs. However, applying for the credit is complex, and it’s “nonrefundable,” meaning that it can only be used to offset taxes owed to the federal government. As a result, it’s vastly underused — only 5% of U.S. taxpayers claimed it in 2013. Making it “refundable” and ensuring that workers can claim it could help some individuals to further increase their retirement income by as much as 50%.

By dramatically expanding access to savings, these policies will also reduce demand for federal and state benefit programs. A national approach to retirement savings similar to the low-cost, easily accessible state programs in California, Illinois, Oregon and other states, that would require some or all employers to simply facilitate the ability of their workers to save using the state program, could accelerate economic growth, increasing national GDP by as much as $96 billion in the year 2040. Workers who save more will enjoy higher incomes in retirement — increasing tax receipts, consumer spending and ultimately economic growth.

The COVID-19 pandemic exacerbated the financial fragility and economic inequality that many Americans experience. It exposed the vulnerability of workers with far too little saved for retirement and underscored the need to close the retirement savings gap. 

When Ida May Fuller received that first Social Security check in 1940, it should have been only the beginning of the creation of a retirement system that empowers all Americans, even the lowest-earning households, to retire securely and with dignity. What we need to advance now is universal access to retirement plans that not only reduces the fiscal pressures on federal and state benefit programs for generations, but also transforms a dysfunctional system into one that empowers more Americans to be financially independent and live a more dignified life in retirement.