A shocking 42 percent of those who responded to a recent U.S. Financial Health Pulse survey said that they had no retirement savings. The 55 percent of the population who were classified as “financially coping” had median retirement savings of only $25,000, while the 17 percent who were “financially vulnerable” had a median of only $4,000. For most, this level of savings is not nearly enough to maintain their current standard of living in retirement. Many of those with little or no savings are among the roughly 55 million Americans whose employer doesn’t offer them a retirement savings plan.
In theory, just about everyone could save on their own in an IRA. But, like those of us who made a New Year’s resolution to go to the gym three times a week, virtually no one does. The fact is that if you don’t have a payroll deduction retirement savings plan, you almost certainly don’t save for retirement consistently.
If this continues, millions of Americans will retire with little more than Social Security benefits. Since the average retirement benefit is only $17,000 a year that will be a problem both for individual retirees and for state governments. Retirees without sufficient income not only have restricted lifestyles, they may have a hard time affording essential medicine. They also require more in taxpayer-financed benefits. States already spend a great deal providing services to older people with lower incomes, and are projected to need to spend even more in the future. For instance, Pennsylvania paid more than $4.2 billion in 2015 in assistance for elderly residents. By 2030, that cost will grow by almost 60 percent.
In response, almost 40 states are considering some form of state-facilitated retirement savings program for small business employees. At least six states and the City of Seattle are already implementing a “Secure Choice savings program” that is based on a payroll deduction IRA. These programs are inexpensive and simple for both employers and employees to use. There is little debate that these programs will help middle-income workers to have a better retirement, but some analysts question if they will actually help those with lower incomes.
This assumption is incorrect. Secure Choice programs will help savers at all income levels, including those with low incomes, although how they do may be different. Middle-income savers will benefit because they will have enough savings to supplement their Social Security benefits with additional retirement income. Many lower-income savers will be able to do that too.
But others with lower incomes could benefit by using those savings to delay taking Social Security benefits. A person who is entitled to a $725 monthly Social Security benefit at age 62 would receive $1,000 a month if he or she could wait until age 66 1/2, and $1,280 at age 70. Even a slight delay in taking Social Security increases the monthly benefit, and unlike most other forms of retirement income, Social Security benefits increase with inflation.
Others could benefit because they could use their accounts for emergencies. This is important because 78% of households with incomes under $25,000 have less than $2,000 saved for emergencies. Secure Choice programs use a Roth IRA, so savers can withdraw their contributions when needed without penalty. Both California and Oregon also place the first $1,000 of savings in a liquid investment to make getting access to the money easier and faster.
For many lower-income workers, a financial emergency can blossom into a full-fledged crisis. Car repair that makes it impossible to get to work can lead to a lost job and even greater problems. Even if workers have to tap their retirement accounts early, having access to emergency savings makes state-facilitated retirement savings plans worthwhile.
Critics point out that if low-income workers have significant amounts of retirement savings they may lose access to means tested benefits programs. While this is not true of all benefits programs, including retirement savings in means tests is a mistake that can turn a temporary situation into a permanent dependency. Some means-tested assistance programs, like food stamps, already exempt retirement savings, and other means-tested programs should do the same. Oregon has just exempted most retirement assets from its state means tests. The solution isn’t to tell low-income workers to stop saving for retirement, but to recognize that these savings represent a public good and should be protected.
Other critics suggest that consumers would offset new retirement savings with higher consumer debt. We don’t have much data on this, but a recent study of civilian military personnel found no increase in credit card debt or similar borrowing. The only increase in debt was for loans to purchase a home or a car. A better house could actually improve a family’s net worth.
By making it easier for workers to save for retirement, states are enabling all of their residents – including those with lower incomes – to have better financial security. These include many who will have a more comfortable retirement, others who experience financial emergencies and have savings to meet them, and taxpayers who will benefit from lower financial pressures on government budgets.