The median retirement account balance for all working-age households is just $3,000, according to a research report from The National Institute for Retirement Security. For households near retirement, the median balance is just $12,000.
That includes all households, including those who haven’t saved anything. The median balance among working-age households who do have a retirement account is $40,000, while those closer to retirement have a median balance of $100,000.
NIRS hosted a webinar on Thursday detailing the results of its report, “The Retirement Savings Crisis: Is It Worse Than We Think?” The report used data from the Federal Reserve’s 2010 Survey of Consumer Finance to determine how well Americans are saving for retirement and what still needs to be done.
“Retirement anxiety is running high and retirement confidence is running low,” Diana Oakley, executive director for NIRS, said on the webinar. According to opinion research gathered this year by NIRS, 85 percent of respondents are concerned about retirement, and 55 percent are very concerned.
Oakley noted that with the defined contribution system, it’s hard for participants to identify how they’re doing in terms of saving for retirement, and few think it will get easier. Only 2 percent of respondents said preparing for retirement would be easier in the future, Oakley said.
Consequently, “there’s been an emphasis on rules of thumb,” she said. “Participants want easy advice.”
Access to workplace retirement plans is at its lowest level since 1979, Oakley said. The report found 48 percent of Americans have no job-based plan. Furthermore, while fewer people have access to a retirement plan, the “retirement income security provided by such plans has also diminished,” according to the report. In 1998, 27 percent of workers had a DC plan only, rising to 58 percent in 2010. In fact, the 55-to-64-year-old cohort is the last to have a defined benefit plan in significant numbers, Oakley noted.
More than 38 million Americans, or 45 percent, have no retirement assets, NIRS found. Among those near retirement, more than 40 percent have saved nothing.
The report found those who do have retirement accounts tend to be better off. Median income for households with retirement accounts was over $76,000, compared to $30,000 for households without accounts. Nine out of 10 households in the top income quartile have retirement accounts, compared with about a quarter of those in the lowest quartile.
About 80 percent of all households have saved a total smaller than their annual income for retirement. More than 60 percent of those near retirement have less than a year’s income, including 31 percent who have saved nothing. Less than 3 percent of all households have saved four times their income or more.
The report referred to benchmarks from Fidelity and Aon Hewitt that recommend Americans save between eight and 11 times their income for retirement. Fidelity recommended workers increase their multiple by one every five years — a 35-year-old should have a year’s income, while a 65-year-old should have saved seven times their income. Aon Hewitt recommended savers reach 11 times their income by age 65.
Many fall short
NIRS studied savings data to find how many households met these benchmarks based on several measures. When looking at just the retirement assets of a household, including workplace plans, IRAs and pensions, 90 percent did not meet the recommended benchmark. Looking at total financial assets, which includes retirement assets as well as checking and savings accounts, stocks and bonds, and life insurance policies, 84 percent of households fall short of the benchmark. Even with the most generous measure of total net worth, which adds home equity to the count, 65 percent of households fall short. Furthermore, the report noted that some factors that contribute to net worth, like college funds or medical savings, aren’t intended to serve as retirement income.
“The current retirement saving system is not working for most households,” Nari Rhee, manager of research for NIRS and author of the report, said on the webinar. “The truth is, many will work longer, but the gap is so big, families won’t be able to fill it on their own.”
To help improve retirement outcomes for Americans, Rhee recommended three strategies: strengthen Social Security; improve access to retirement plans, especially among low- and middle-wage workers; and help low-wage workers save.
“Despite the tenor of policy debates in D.C., surveys have found public support” for protecting Social Security, Rhee said. NIRS referred to a report by the National Academy of Social Insurance found “strong public support” for expanding Social Security benefits and increasing revenues in order to continue the system. Pew Research Center found in April that more than half of Americans said keeping Social Security and Medicare benefits at their current levels was more important than cutting the deficit.
To improve access to retirement plans, especially among low- and middle-wage workers and small business employees where access is lowest, Rhee suggested looking at products like automatic IRAs and hybrid models like those suggested by Sen. Tom Harkin.
With automatic IRAs, employers who do not provide a retirement plan would automatically enroll their workers in an IRA with a default contribution rate. Individuals could opt-out, and investment risk and funding the IRA would be their own responsibility, although some proposals feature risk sharing and other pension-like benefits, according to the report.
The proposal put forth by Sen. Harkin for USA Retirement Funds combines DC and DB features like risk sharing, pooled investments and lifetime income that could bridge the gap in the current workplace retirement saving system.
There’s also some state-level action to increase retirement security, Rhee said, like a bill passed in California last year that would create an automatic IRA with some hybrid features.
Finally, Americans simply need to save more. “The majority of American households will not be able to maintain their standard of income” when they retire, Rhee said. Low-income households are in particular need of help saving. Because they have low marginal income tax rates, they’re less likely to take advantage of tax deductions for contributions to retirement plans, according to the report.
The Saver’s Credit, which was enacted in 2001, reduces the income tax liability on the first $2,000 of contributions to a qualified account by between 10 percent and 50 percent. Those with the lowest incomes can take a higher credit. However, the Saver’s Credit phases out for incomes higher than $29,500. NIRS found the average credit in 2006 was just $172. Rhee suggested expanding the Saver’s Credit to give low-income households more incentive to save.
“You don’t know you’re in a hole until you start to measure,” Oakley concluded. “These are estimates — blunt measurements — but when you look at what we need, we’re about $11 trillion short. Publicly held debt is roughly the same size as what we as individuals need to save for retirement.”
Check out Americans Would Pay Higher Taxes to Preserve Social Security on AdvisorOne.