Americans Don’t Save for Retirement Because They Don’t Earn Enough Money
Too few Americans are saving for retirement. Those who do save are putting away too little. It is only a matter of time before this sparks an economic and political crisis.
Proposals for addressing this looming crisis usually fall into three categories. Some argue for greater personal responsibility, urging consumers to pare back their spending. Others push policy proposals to shore up Social Security and fix underfunded public-pension plans. A third group offers solutions that tinker around the edges of retirement plan policies, like setting higher default contribution amounts.
But America’s retirement crisis wasn’t created because of character flaws or personal irresponsibility. Nor can it realistically be fixed by technocratic fixes.
The ugly, unspoken truth is that many people are just not earning enough money. They barely have enough to cover their daily expenses; they don’t have enough left over to be able to save.
In fact, the Federal Reserve reports that as of 2017, 41% of American households could not easily cover a $400 emergency expense.
Moreover, not enough people have access to retirement plans. As the Center for Retirement Research at Boston College has noted, accumulating retirement savings rests on a chain of questions: Are you working? Does your firm offer a plan? Are you eligible for your firm’s plan? Finally, do you actually participate in that plan? If the answer to any of these questions is “no,” you’re out of luck.
As of 2016, only 30% of American households had access to a defined-benefit plan (a pension) and only 52% participated in a defined-contribution plan (like a 401k). For those who do participate, the median balance is only $60,000, far less than is necessary to last through the typical lifespan of a retiree. Moreover, many of the households participating in a defined-contribution plan also have access to a defined-benefit plan, meaning a large minority of households have neither type of coverage.
The less money you earn, the less likely you are to have access to any kind of retirement plan. Currently, a third of private-sector workers are not offered a retirement savings plan. For part-time workers, 63% have no access to a plan. For firms with fewer than 100 workers, it is 47%. And 58% of bottom-quartile earners have no access to a retirement plan through work.
A third problem is that fewer Americans are working at all. For prime-age males (ages 25-54), the labor-force participation rate has fallen since the 1950s to levels well below those of many other developed economies. Despite a rebound since the global financial crisis, the U.S. is unique among advanced economies in that labor-force participation is lower for prime-age females than it was 20 years ago. Fewer individuals working clearly reduces household income and the ability to save.
Why is this happening? Because the labor force is becoming increasingly barbelled, with middle-skill and middle-wage jobs decreasing as a share of total employment in the U.S. by 6.6 percentage points from 1995-2015; across the OECD, the decline was even steeper, at 9.5 percentage points. As opportunities in the labor market become more polarized, more workers become discouraged and leave the labor force.
As bleak as the outlook appears, it would be even worse if it were not for Social Security. Low savings rates mean most Americans depend heavily on it for retirement income. Researchers at the Social Security Administration have found that half of senior households received over 50% of their income from Social Security in 2012. Those in the bottom third had less than $20,000 in total income, almost entirely from Social Security. Of the changes proposed to date for Social Security, many would weaken this critical safety net.
A comprehensive solution to the retirement crisis should, at minimum:
1. Ensure that every worker earns sufficient income to be able to save. This could be in the form of higher minimum-wage levels, earned-income tax credits, or other new ideas.
2. Broaden participation in defined-contribution savings plans by making them available to everyone and auto-enrolling employees.
3. Secure and enhance Social Security to ensure a minimum income for all seniors.
Mitigating poverty in retirement requires a combination of vital programs like Social Security that ensure a minimum level of income for seniors and well-designed savings vehicles that help Americans supplement that income. But that is not enough. A comprehensive solution has to place more households in a position to save. Doing so means helping more Americans to consistently participate in the labor force and, therefore, to earn more.
If we are to have any hope of succeeding, we need to set partisanship aside and objectively assess the strengths and failings of the current system and inject fresh ideas into the discussion.
Ronald Temple is a managing director and co-head of multiasset and head of U.S. equity at Lazard Asset Management. He is also a portfolio manager/analyst on various U.S. and global equity teams. Call Scott Underwood to find out about equity based retirement solutions at 205-908-2993.