Retirement is supposed to be a time of leisure, comfort and security for older Americans. However, for many people, achieving a financially secure retirement is becoming increasingly difficult. According to a recent survey by the National Institute on Retirement Security (NIRS), 70% of Americans across party lines agree that the nation faces a retirement crisis . Moreover, the COVID-19 pandemic has worsened the situation, as more than half of Americans (51%) say that the pandemic has increased their concerns about achieving financial security in retirement .
What are the main causes of retirement insecurity in America? And what can be done to address this challenge? In this blog post, we will explore some of the factors that contribute to retirement insecurity, and some of the potential solutions that could help improve the retirement prospects of millions of Americans.
Factors Contributing to Retirement Insecurity
One of the major factors that contributes to retirement insecurity is the lack of adequate savings among American workers. According to a report by the Joint Economic Committee, approximately half of all households are at risk of not being able to maintain their standard of living in retirement . The report also finds that the median retirement account balance for working-age households was only $12,000 in 2019, far below the recommended amount for a comfortable retirement .
Another factor that contributes to retirement insecurity is the decline of traditional pension plans, which provide guaranteed income for life. According to NIRS, only 23% of private sector workers had access to a defined benefit pension plan in 2018, down from 38% in 1998. By contrast, 401(k) plans and other defined contribution plans have become more prevalent, but they shift the risks and responsibilities of saving and investing for retirement to individual workers. Moreover, these plans often have high fees, low returns, and limited access and participation .
A third factor that contributes to retirement insecurity is the uncertainty and inadequacy of Social Security benefits. Social Security is the main source of income for most retirees, but it only replaces about 40% of pre-retirement earnings on average . Moreover, Social Security faces a long-term funding shortfall that could result in benefit cuts or tax increases in the future. According to NIRS, 74% of Americans are concerned that Social Security will not be there for them when they retire .
A fourth factor that contributes to retirement insecurity is the rising cost of healthcare and long-term care in retirement. According to a report by Fidelity Investments, a 65-year-old couple retiring in 2020 would need an estimated $295,000 to cover health care expenses in retirement, not including long-term care costs . However, many retirees do not have enough savings or insurance to cover these expenses, which can quickly deplete their retirement income and assets.
Potential Solutions for Retirement Insecurity
Given the magnitude and complexity of the retirement insecurity challenge, there is no single or simple solution that can address it. However, there are some potential solutions that could help improve the retirement security of Americans, such as:
- Expanding access and participation in workplace retirement plans. According to NIRS, 57% of private sector workers do not have access to a retirement plan at work . Expanding access and participation in workplace retirement plans could help workers save more and benefit from employer contributions and tax incentives. Moreover, providing more access to traditional pension plans or hybrid plans that combine guaranteed income with individual accounts could help workers reduce their exposure to market risks and longevity risks.
- Enhancing and protecting Social Security benefits. Social Security is a vital lifeline for millions of retirees, but it needs reforms to ensure its long-term sustainability and adequacy. Enhancing and protecting Social Security benefits could involve increasing revenues by raising or eliminating the payroll tax cap, increasing benefits for low-income and vulnerable groups, adjusting the benefit formula or the cost-of-living adjustment, or creating a minimum benefit or a longevity benefit.
- Promoting financial literacy and education. Many Americans lack the knowledge and skills to plan and manage their finances for retirement. Promoting financial literacy and education could help workers make informed decisions about saving, investing, budgeting, spending, and claiming Social Security benefits. Moreover, providing more access to financial advice and guidance could help workers optimize their retirement strategies and avoid costly mistakes.
- Supporting health care and long-term care reforms. Health care and long-term care costs are major drivers of retirement insecurity, as they can erode retirees' income and assets. Supporting health care and long-term care reforms could involve expanding Medicare coverage and benefits, reducing health care costs and inefficiencies, increasing access and affordability of long-term care insurance, or creating public options or programs for long-term care.
Retirement insecurity is a growing challenge for Americans, as many workers face the risk of not having enough income and assets to maintain their standard of living in retirement. The COVID-19 pandemic has exacerbated this challenge, as it has disrupted the economy, the labor market, and the health system. To address this challenge, policymakers, employers, and individuals need to work together to implement solutions that can help improve the retirement security of millions of Americans.
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