August 1, 2018

A Secure Retirement for Only 50%

8 out of 10 households could be fine—if costs could be reduced

Reported by Lee Barney

Just over half, 57.4%, of U.S. households headed by individuals 35 through 64 years old are on track to cover 100% of the average costs that peer retirees—according to age, income and family status—will have, and not run out of money, writes Jack VanDerhei, Ph.D., in a recent Employee Benefit Research Institute (EBRI) Issue Brief. This finding puts the retirement deficit for households at $4.13 trillion in 2014 dollars.

However, writes VanDerhei, if expenditures are reduced 10%, to 90% of the average costs for retirees, 68.1% of households will be on track for sufficient savings, reducing the retirement savings shortfall by nearly half to $2.09 trillion; if expenditures are cut to 80%, 82.1% of retirees will retain sufficient money, and the deficit will decline to $70 billion.

If long-term care costs are removed from the equation, 75.5% of U.S. households will be on track to cover 100% of expenses.

According to the report, EBRI made these projections to help policymakers comprehend the size of the retirement deficit. At various times, the paper says, policymakers have sought ways to increase access to defined contribution (DC) plans and to keep money in the system until workers retire. Conversely, they have also considered reducing pretax contributions. “Such policymaking can lead to unintended and undesirable consequences if not informed by sound research,” VanDerhei writes.

If all employers that do not provide a defined benefit (DB) or defined contribution plan were required to provide an automatic individual retirement account (IRA) with an initial deferral of 3%, the retirement deficit would decline by 6.5% or $268 billion, the paper says. If the Automatic Retirement Plan Act of 2017 were passed, whereby all but the smallest employers were required to offer plans and automatically enroll workers, including part-time workers, at 6%, the retirement deficit would decline by 15.6%, or $645 billion.

According to the brief, if all employers, regardless of size, had to offer a DC plan, the retirement deficit would decline by 19.4%, or $802 billion. “Such initiatives would have correspondingly much greater impact on younger age cohorts,” VanDerhei writes.

If all leakage were removed, 27.3% more participants in the lowest income quartile could achieve retirement success; for those in the highest income quartile, 15.2% more participants could be successful.