Millions of Americans are worrying about the damage to their retirement accounts if the United States (aka Congress) defaults on the country's debt.
But there's another retirement fear that could put federal and state governments on the hook for trillions more dollars.
Many Americans aren't saving enough for retirement, and new research says that if the trend continues unabated, the country could by 2040 face a retirement savings gap and resulting economic burden of almost $1.3 trillion.
The federal government would bear the bulk of the saving shortfall, $964 billion. The remaining $334 billion burden would fall to the states.
Those estimated totals, from findings of economic consulting firm Econsult Solutions commissioned by Pew Charitable Trusts, are based largely on expected increased public assistance costs, coupled with lower tax revenue between 2021 and 2040.
Dollars and demographics: The study, released on May 5, found several reasons for the reduced retirement savings.
One is that as many 56 million private sector workers lack access to a retirement savings plan through their jobs, according to a Wharton/Pension Research Council working paper.
The other major factor is demographics.
According to the analysis, the share of households with people at least age 65 with less than $75,000 in annual income, a level that indicates financial vulnerability, will increase by 43 percent from 22.8 million in 2020 to 32.6 million in 2040.
As these workers age, inadequate retirement savings will likely lead to reduced retirement income and quality of life for many. This shortfall will simultaneously put greater pressure on public spending and increase taxpayer burdens.
The problem is compounded because the older population is growing faster than that of working age households.
A way to slow the trend: But there is some good news. Pew says that even small savings over a worker's career could help offset the effects of retirement funds shortfall. It offered this example —
If households saved an additional $1,685 a year, which is about $140 a month, over a 30-year period, they could erase the retirement savings gap, eliminate the extra taxpayer burden, and help people maintain their lifestyles in retirement. Any amounts saved above the status quo will help reduce the fiscal obligations and improve outcomes.
State plans are key: Pew says states can help by creating programs that help people save for retirement. So far 11 states already have launched automated savings programs to help more private sector workers routinely put money away for retirement.
These automated savings programs, sometimes referred to as Work & Save or Secure Choice, allow people to set up state-sponsored individual retirement accounts (IRAs). Typically, workers at companies without employer-sponsored retirement plans are enrolled automatically, but can opt out.
Such plans currently are available in California, Colorado, Connecticut, Delaware, Illinois, Maryland, Maine, New York, New Jersey, Oregon, and Virginia. More states are exploring such options.
Below is Pew's interactive map where you can see how much increased burden each state — your state — will face over the next 20 years if no action is taken.
If you're reading this on a small screen, you can find the map at the end of the low retirement savings story at the Pew website.
You also might find these items of interest:
- Some thoughts as the debt limit nears
- Three retirement plans that also offer tax savings
- 5 retirement tax moves to make in March…or now, too
- Make retirement plans now to claim the Saver's Credit
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