The Retirement Savings Crisis: Is It Worse Than We Think?
Americans are highly anxious about their retirement security, and for good reason. Private sector employers have shifted away from traditional defined benefit (DB) pensions, which provide a stable source of income that lasts through retirement and are managed by professionals. Instead, most private sector employees with workplace retirement plans must rely upon defined contribution (DC) individual investment accounts, such as 401(k) plan accounts, which were originally designed to supplement—rather than replace—DB pensions. Now, the risk and much of the funding burden falls on individuals, who tend to have difficulty contributing enough on their own and who typically lack investment expertise. This shift from DB
pensions to DC plans has significantly eroded the retirement readiness of Americans.
The financial crisis of 2008 highlighted the vulnerability of household retirement wealth in the new DC-centered system. Financial experts suggest that people need 8-11 times income in retirement assets in order to maintain their standard of living in retirement. In the current economic environment, some have increased the recommended contribution rate from 10 percent of pay to 15 percent in order to reach this target by retirement age. This is a hefty savings burden. The vast majority of households have not been able to accumulate sufficient retirement assets.
This report examines the readiness of working-age households, based primarily on an analysis of the 2010 Survey of Consumer Finances (SCF) from the U.S. Federal Reserve. This study analyzes workplace retirement plan coverage, retirement account ownership, and household retirement savings as a percentage of income, and estimates the shortfall in working families’ savings as compared to financial industry-recommended benchmarks.
The key findings of this report are as follows:
- More than 38 million workingage households (45 percent) do not own any retirement account assets, whether in an employer-sponsored 401(k) type plan or an IRA.
- The average working household has virtually no retirement savings. When all households are included—not just households with retirement accounts—the median retirement account balance is $3,000 for all working-age households and $12,000 for near-retirement households.
- Public policy can play a critical role in putting all Americans on a path toward a secure retirement by strengthening Social Security, expanding access to lowcost, high quality retirement plans, and helping lowincome workers and families save.