America’s $1.3 Trillion Retirement Crisis

America’s retirement crisis could cost federal and state governments an estimated $1.3 trillion by 2040, according to recently released analysis by Pew Charitable Trusts.

The World Economic Forum has noted, “For the first time in human history, people aged 65 and over outnumber children aged 5 or younger.” Much of the retirement funding shortfall is driven by demographics. And although the US is faring better than many countries due to immigration, demographics remains an overwhelming factor in the US as well. According to Pew, the US households including someone 65 or older that have less than $75000 in annual income—a level the report said indicated financial vulnerability—is expected to jump 43 percent to 33 million by 2040.

How does the US retirement system rank globally? Mercer CFA
CFA
Institute released this year’s stats in their Global Pension Index 2023. The primary objective of the index is to benchmark each global retirement income system using more than 50 indications. The study ranks the Netherlands, Iceland, Denmark, and Israel as having the best systems, receiving an A grade in 2023. The United States, ranking 22^nd out of 47 countries, received a C+ grade along with Spain and Kazakhstan.

Back to the United States. According to the US Federal Reserve “Report on Economic Well-Being of US Households” in 2020, only a third of the US workforce think their retirement savings plan is on track. See PwC
PWC
chart below on retirement saving by age in the US.

Why the crisis now? In addition to demographics, the US market is more dependent than ever on defined contribution “DC” plans. According to PWC in their recent 2023 report “Retirement in American: Time to Rethink and Retool,” over 60 percent of total US retirement assets are now held in such plans, representing a wide scale shift in investment risk from the corporate sector (the legacy defined benefit “DB” plans). Retirees generally had more generous benefits in the DB plans. And as we start to see the first generation retire solely on an employee managed DC plans, the need for higher levels of supplemental retirement income is on the rise. PWC research shows the median retirement account balance for those approaching retirement would likely generate less than $1,000 per month over a 15-year retirement span. That’s hardly enough for individuals whose financial security is dependent on these savings, not to mention a participant base that is living longer.

In this environment, individual savings have thus become more important. And today about 60 million private-sector employees do not have employer-sponsored retirement savings plans. In this environment, one avenue to improve retirement saving that is gaining support is state-sponsored automated retirement savings accounts plans such as CalSavers and New Jersey Secure Choice, which have already been adopted in 12 states.