With the stock market up, the housing market largely recovered, and
unemployment down, you'd think Americans would be in better shape to
retire than they were in 2007. The opposite is true, according to a study
released today by the National Institute on Retirement Security. While the
value of 401(k) retirement savings accounts and IRAs hit a record high of $11.3
trillion at the end of 2013, the average American household isn't sharing in
that wealth. The following three charts sum up the problem nicely.
Half of households haven't saved anything
While those of us lucky enough to have workplace retirement plans have
benefited from the long bull market, a huge swath of America doesn't have
retirement accounts such as 401(k)s or IRAs. Nearly 40 million working-age
households don't have any retirement accounts, the report says. Whether someone
has an account is closely tied to his or her income and wealth. Households
with accounts have annual income that's 2.4 times higher than those that
don't. The median retirement account balance when you look across all
households? $2,500.
Even saver households haven't saved enough
For savers closest to retirement (from age 55 to 64), those with
retirement accounts had a median balance of $100,000 in 2010. That's up to
$104,000 today. Households that don't have retirement-specific accounts, though,
are doing far worse in overall savings: They have about $14,500 today, up from
$12,000.
We're in trouble
How bad is it? Fidelity Investments recommends that by age 55, a worker needs
to have saved five times his current income to be on track for retirement.
Others estimate far more, but even by that conservative standard, most people
are falling short.
Lest we all now crawl under a rock, the authors highlight reforms that could
brighten the retirement outlook. (Not included in the report: the political
feasibility of any of the reforms.) One basic suggestion is to strengthen
Social Security, since it and Supplemental Security Income make up more than 90
percent of income for the bottom 25 percent of retirees, according to the
report. That number falls to a still-hefty 70 percent for the middle 50 percent.
Ways to do that include increasing benefits for low-wage workers, getting rid of
the payroll tax cap, and adjusting the benefit formula so it keeps pace with the
living costs faced by seniors.
The authors also note that making it easier for private employers to
offer defined benefit pensions, as part of a national and state push to ensure
that everyone has a retirement plan, would help. The trend toward automatically
enrolling employees in 401(k)s has helped broaden the universe of workers
who are saving for retirement, but few small employers offer such plans,
and that's where you find many low-wage workers.
Finally, with real wages stagnant for low-income workers, government
could help such workers save by expanding the Saver's Credit and
making it refundable. With the Saver's Credit, income tax liability on the first
$2,000 in contributions to a qualified retirement account is reduced 10 percent
to 50 percent. The money could go toward retirement savings. Right now, the
report says, "70 percent of the tax subsidies for contributions to 401(k)-type
accounts and IRS are claimed by the top one-fifth of households by
income."
