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If you have access to a retirement plan at work, count yourself lucky. An estimated 56.5 million Americans don’t. But don’t think you’re immune from this unfortunate fact. Those tens of millions of our fellow citizens will likely need financial help in the coming years, and the cost, says a new study, could be as much as $1.3 trillion by 2040.
Who will cough up all that money? Probably you, of course, via higher state and federal taxes. That’s according to a report by the Pew Charitable Trusts, which breaks down the anticipated costs at $964 billion for the federal government and $334 billion for states.
The report notes that insufficient retirement savings by these Americans will result in “increased public assistance costs, reduced tax revenue, decreased household spending and standards of living, and lower employment” over the next 20 years. But this won’t be enough, the report adds, meaning that many people will have to lower their standard of living during retirement—if they retire at all, of course.
Separately, data compiled by the Wharton School at the University of Pennsylvania shows that this problem—lack of access to a retirement plan—is much more acute for younger workers. Nearly 57% of workers between the ages of 18-34 aren’t covered, while 40% to 43% of all other age groups aren’t.
Source: Wharton School
The data also shows that lack of retirement plan coverage falls more heavily upon Hispanics, Blacks, those with lesser educations, women and those working for smaller companies. There is also a correlation between income and access to a retiree plan: about 80% of workers earning $75,000 or more have access to a plan; about 80% at the bottom of the income ladder don’t.
Meanwhile, demographics aren’t helping. Pew commissioned Econsult Solutions, an economic consulting firm, to quantify the fiscal and economic costs of insufficient retirement savings. It determined that the share of households with people at least age 65 who earn less than $75,000 will increase 43% from 22.8 million in 2020 to 32.6 million in 2040. “Among these vulnerable households,” Consult’s report says, “the average annual income shortfall relative to recommended replacement levels is projected to be $7,050 in 2040.”
That’s where the above-mentioned costs to federal and state governments—and thus more fortunate citizens—comes into play.
While gloomy, this is hardly an intractable problem, at least for younger workers starting out. Pew, again citing Econsult’s financial modeling, says if younger workers lacking access to a retirement plan saved a modest sum each month—just $140, or $1,685 annually—over 30 years, it would alleviate any projected retirement savings gap. This is hardly surprising: Time is a long-term investor’s best friend, and over the course of one’s career, even a modest amount of money, invested on a regular basis, can compound into a respectable—if not large—pile of cash. But older workers, who for whatever reason did not begin saving early, will have problems.
Governments are working to address these issues. In the last decade more than a dozen states and cities have passed legislation establishing automated savings programs (usually known as “auto-IRAs”) designed to help workers save for retirement. When a worker is hired, he/she is automatically enrolled into a savings plan, with a modest investment each month. Psychologically, most never even miss the money, and notes Pew, “when workers are more financially secure, they are less reliant on taxpayer-funded government programs, better able to withstand financial shocks, and more likely to save for their future.”
The implication is clear: Help more workers save for retirement now, and the financial burden on Uncle Sam and state governments could be eased in the future. That seems like a win-win.
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