New Statistics on the American Retirement Savings Crisis

Couple planning financesAre you confident about your retirement? According to the latest retirement confidence survey, 28% of Americans are not at all confident, and 21% are not too confident that they will have enough money saved for a comfortable retirement. These views are essentially unchanged from the record low levels of retirement confidence seen in the 2011 survey. The sad part is that, for most Americans, these retirement fears are well-grounded.

Nearly half (48%) of all elderly Americans are “economically vulnerable,” meaning that they have income that is less than two times the supplemental poverty threshold. People who are aged 80 and older are particularly prone to economic vulnerability (58.1% are economically vulnerable versus 44.4% for people aged 65 to 79), as are women (52.6% versus 41.9%) and minorities (63.5% African Americans and 70.1% Hispanics versus 43.8% whites).

These figures, which are derived from a new report by the Economic Policy Institute (EPI), use the Supplemental Poverty Measure (SPM) to measure the financial security or insecurity of elderly Americans.      

The SPM, which was released in 2011, is an attempt to update the current federal poverty measure that, it is generally agreed, is outdated and therefore underestimates the level of poverty in the U.S. The SPM takes into account household expenses such as taxes, housing, utilities, health care costs, child support payments, and work-related expenses (i.e., travel and child care). This is offset by including the value of government income supplements, such as subsidized school lunch programs, energy assistance programs, housing subsidies, and the Supplemental Nutrition Assistance Program (previously food stamps), which are not accounted for in the official poverty measure. The resulting new calculation more accurately reflects how low-income Americans are actually getting by. Thus, when examining poverty using the official measure, non-elderly people (ages 19-64) have a higher rate of poverty compared to seniors (13.4% vs. 8.9%), however, when using the supplemental poverty measure, seniors have a higher rate of poverty than non-elderly adults (15.5% vs. 15.1%).

These data on the financial vulnerability of elderly Americans were released at the same time that the National Institute on Retirement Security released a new report on the current state of retirement savings in America. The study confirms the need for greater retirement savings access, particularly, the need for an Automatic IRA program. According to the report, there is a widespread lack retirement savings in the U.S. Specifically, 38 million working-age households (45%) do not own any retirement account assets. While experts estimate that, in order to replace 85% of pre-retirement income, families must save 8 to 11 times their annual income, 80% of all working people ages 25-64 have less than 1 times their annual income in retirement savings. For all households, those who do and do not have retirement accounts, the median retirement account balance is $3,000, and just $12,000 for those nearing retirement. Americans need to save an additional estimated $6.8 to $14 trillion in order to be financially secure in retirement.

One of the reasons for this dramatic shortfall is that many employees lack access to employer-based retirement savings accounts, which is the primary way that people begin saving for retirement.  In 2011, 52% of employees had access to employer-sponsored retirement savings, a 20% drop is just a decade.

Moreover, retirement accounts are concentrated among the wealthy. Eighty-nine percent of households in the top income quartile and 72% of households in the second highest income quartile have retirement accounts, while just 51.1% of households in the second lowest quartile and a mere 26% of households in the lowest income quartile have retirement savings accounts. The median income of families with retirement accounts is $76,238, whereas the median income for families without retirement accounts is $30,495.

These studies further demonstrate that there is a great need for broader access to retirement savings for workers. One policy proposal that is gaining traction is the Automatic IRA. In 2012, the California state legislature passed the California Choice Retirement Savings Trust Act, which lays the initial groundwork for creating a statewide retirement plan for private sector workers who do not have access to an employer-sponsored savings plan. In 2013, the Illinois Asset Building Group (IABG) is promoting S.B. 2400, which would create an automatic IRA program in Illinois

Under the bill all employers with more than 10 employees that have been in business at least two years and have not offered a qualifying retirement plan for the past two years would be required to automatically enroll their employees in an automatic payroll deduction. The employer would, on behalf of the employee, deposit this deduction into an Individual Retirement Account (IRA) that is held by the state. Employees would have the ability to select their contribution rates and investment option or opt-out of the deduction entirely. If an employee did not make any selection, then she or he would be automatically enrolled in a default target-date lifecycle investment option with a 3% income contribution rate.   

All investments would be overseen by the Automatic IRA Program Board established by the bill. This board would consist of seven members: The State Treasurer (serving as chair), the State Comptroller, and the Director of the Governor’s Office of Management and Budget, as well as two public representatives with retirement savings and or investment expertise, a representative of employers, and a representative of enrollees, each of whom would be appointed by the Governor. The board would contract with third-party investment firms to invest and administer the fund. All interest and income earned from the investment fund would remain in the fund. Administrative fees charged on the interest on the fund would pay for initial startup costs and ongoing administration. The program would add minimal cost to employers, and employees would have the option to opt-out. 

We are building a strong campaign to move the legislation forward next year. Join the campaign today, and help us build financially secure retirements for all workers in Illinois.

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