A new report by the National Institute on Retirement Security (NIRS) entitled “The Retirement Savings Crisis: Is It Worse Than We Think?” finds the state of retirement savings is looking pretty grim for many Americans. The researchers found that, “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.” On a webinar earlier today (slides from which you can view here), Nari Rhee and Diane Oakley of NIRS walked through the key findings and identified several salient policy implications of the report.
Americans are understandably anxious about their level of financial stability in retirement. While Americans hold a collective 19.5 trillion dollars in retirement savings accounts, 85 say they are concerned about retirement and 38 million working-age households have no dedicated savings for retirement. By looking at the Federal Reserve’s 2010 Survey of Consumer Finances, NIRS was able to compare the retirement prospects of “near-retirement” households (those ages 55 to 64) with all working-age households (ages 25 to 64). In this Baby Boomer cohort of people ages 55 to 64, roughly a third have nothing saved at all for retirement, while another third have roughly the equivalent of one times their income level.
NIRS report is able to draw out several of the key reasons why retirement savings levels are so dismal, many of which are consistent with our findings as illustrated in our Assets Report infographic. Access to workplace retirement plans in 2011 was at the lowest level since 1979, with just slightly over half (52 percent) of workers able to access a retirement plan at work. There are also “marked disparities in retirement account ownership” by income level: nine out of ten households in the top income quartile have retirement accounts while just one out of every four does in the lowest income quartile.
The NIRS researchers used financial industry benchmarks to evaluate how well Americans are meeting established age- and income-specific retirement savings targets. The simple answer is: not very well. When you evaluate retirement account balances, 92 percent of Americans are not meeting retirement savings targets, resulting in a “savings shortfall” of roughly 14 trillion dollars. If you look at net worth (all assets minus all debts, a measure which includes home equity), about 65 percent of Americans are not meeting these targets.
The key takeaway, the researchers explained, is that our current retirement savings system is not working for most households, and is especially failing low and middle income people. The staggering size of the savings shortfall demonstrates that individuals alone are not going to make up the difference; we need policy solutions to help bridge the gap. NIRS identified three important policy areas to support retirement security. These include a robust Social Security system, improvements to workers’ access to workplace retirement plans, and more and better infrastructure to help low-wage workers save.
Several of the possibilities are consistent with ideas we’ve supported previously. For example, the NIRS report points to California as a possible model of how to make retirement savings more universal and automatic for all. Read our brief about the California plan for more. The Saver’s Credit is another tax-based way of encouraging savings that is currently not having the impact it could. While the credit is designed to target low-income households, its effectiveness is limited both due its non-refundable status and its low rate coupled with a rapid phase-out at even modest income levels. Expanding the credit and making it refundable would dramatically improve its ability to support the savings goals of low-income families.
The NIRS report does a great job of laying out the essential flaws of our current retirement system and identifying strategies to improve matters. One area that is not fully explored in this report is the relationship between the lack of flexible savings vehicles and the widespread struggle to accumulate adequate retirement savings. Families have diverse short- and long-term savings needs, but retirement accounts are designed for the long haul. Those who find themselves in a financial quagmire will pay significant penalties if they liquidate retirement accounts before retirement age. Thus, in order to fully support a broader range of savings needs, we’ve advocated for a more flexible and accessible tax credit (called the Financial Security Credit) that promotes both short- and long-term savings goals for low- to moderate-income families. You can read the entire NIRS report and view its accompanying charts and data here.