Rosalind Evans
There need to be more retirement savings by numerous Americans to impact state and federal budgets in the upcoming decades. However, studies indicate that implementing state-managed programs can mitigate this strain by promoting retirement savings.
If the status quo remains unaltered, the retirement savings deficit could manifest as a $1.3 trillion economic burden by 2040. This crisis can lead to increased social assistance expenses and a decline in tax revenues, among other problems, as per a study unveiled on Thursday by the Pew Charitable Trusts.
Given the current trajectory, it is projected that 61% of senior households will have an annual income of less than $75,000 by 2040, resulting in an average yearly income shortage of $7,050.
“Numerous retired households with insufficient annual income will require some form of social assistance,” remarked John Scott, the director of the retirement-savings project at Pew Charitable Trusts.
The Center for Retirement Research at Boston College released a report this week indicating that approximately half of the working households may find it challenging to sustain their pre-retirement living standards in their later years.
The limited availability of employer-based retirement plans is a significant contributor to this issue. As per March 2022 data from the U.S. Bureau of Labor Statistics, over 30% of private sector employees were devoid of an employer retirement plan.
How ‘Supplemental Savings’ May Mitigate the Deficit While the anticipated $1.3 trillion economic burden poses a substantial challenge to state and federal budgets, Scott believes a practical solution may help bridge the gap.
The study proposes that by saving an additional $1,685 annually, approximately $140 per month, American households can potentially eradicate the retirement savings deficit over three decades.
Scott suggests that these increased savings can be achieved through state-run retirement savings plans. The initial results from states that have implemented such programs are encouraging.
“Participants in these automated savings programs save between $105 and $190 per month,” he mentioned, referring to an average drawn from available state data.
Scott further illustrated that, as a private sector employee without a 401(k), you might be automatically enrolled to allocate a fraction, perhaps 5%, of every paycheck into a state-endorsed account like an individual retirement account, which remains under your ownership.
The popularity of state-managed retirement programs has been on the rise as an increasing number of states pass relevant legislation. In January, the Center for Retirement Initiatives at Georgetown University forecasted that assets in state retirement plans could surpass $1 billion in 2023.
The impending retirement-savings deficit poses a significant challenge that must be addressed urgently. The onus is now on policymakers, private sector entities, and individuals prioritizing solutions such as state-managed retirement plans. These initiatives have demonstrated promising early results and could be a viable strategy to mitigate the anticipated $1.3 trillion burden. By fostering a culture of increased saving, we can work towards a future where most retirees can live comfortably without worrying about financial shortfalls in their golden years.
