Half of all workers don’t have access to 401(k): It's a 'retirement savings crisis'

Many Americans are speeding down the road to retirement insecurity, and they may crash sooner than they realize.

“Last year, we released a report on Generation X and retirement security in which we found that the median Gen X household has only $40,000 saved in private retirement accounts,” said Tyler Bond, research director for the National Institute on Retirement Security. “So the time to act is now. The retirement savings crisis that many experts and advocates had been predicting for decades is here. We know that these conversations are only going to increase in importance in coming years.”

Bond participated in “Ever Want to Ask an Economist About Retirement?”, an April 3 webinar sponsored by the institute. Economist Kathryn Anne Edwards shared her definition of retirement security before discussing why it has become elusive for so many people.

“Economic security in retirement is the report card,” she said. “It is a cumulative and comprehensive performance measure of an individual’s economic experience over their lifetime. If the economy is doing well over the majority of years of a person’s life, then they should be ready for retirement. That reflects both the economy over their working life and also public policy.”

Edwards painted a bleak picture of the current retirement landscape:

• Just 31% of Americans believe they are on track with retirement savings, and this only increases to 40% for those who are 60 or older.
• Half of U.S. workers do not have access to a retirement plan at work.
• Half of Americans do not have a retirement account.
• Subsidization of retirement contributions to qualified plans costs the government the equivalent of 1.3% of GDP each year.
• Only 15% of this subsidy goes to the bottom 60% of Americans by income, while nearly two-thirds goes to the top 20%.

Despite the dire warnings, older Americans are more secure now than in previous generations.

“Many people who are retiring today were born in a world in which poverty and being elderly went hand in hand,” she said. “Over a third of elderly Americans were poor, and they were regarded by age as the poorest part of society. You could think of this as moving through your lifecycle, the older you got, the poorer you got.

“We have fundamentally changed in the United States what retirement means, from a pretty high guarantee of poverty to something like a guarantee that you wouldn’t be as poor. Whatever lies before us, it pays to remember how much we have accomplished and that we absolutely can bend the curve when we marshal policy effectively.”

However, if current trends continue, Social Security soon will face a day of reckoning.

“The most succinct version is that it faces a 75-year shortfall,” Edwards said. “This means that if you add up the revenue that Social Security is expected to receive over the next 75 years and you subtract benefits that it expects to pay, there is a gap. We have seen this gap coming for three decades. The point at which we switch from having enough revenue to when we don’t should happen in about 10 years. Every year that Social Security doesn’t fix this problem, it gets more expensive.”

Although there is a widespread misperception that slower population growth is to blame, the real culprit is slow wage growth.

“Wages should always be rising in the U.S. economy,” she said. “But we have hit some very large road bumps when it comes to wages. The number of workers times the amount they are earning are two sides of an equation, and it’s the second part, the amount they are earning, that is deteriorating Social Security more.”

Legislators who reformed Social Security four decades ago didn’t foresee this trend.

“Social Security’s biggest problem is that its revenue base is eroding,” Edwards said. No one in 1983 would have predicted that there would be a solid 13 years in which the median wage earner would not see a real wage increase. But that is exactly what happened. It was extraordinary wage stagnation. This is affecting Social Security’s bottom line more than anything else. You can’t spend more money if you take in less money.”

Although Congress continues to kick the can down the road, she believes necessity eventually will force reforms.

“When the trust fund is depleted, benefits will automatically be cut by around 20% to ensure 75-year stability,” Edwards said. “I don’t have a ton of faith in Congress, but they will not let this happen. Not only would it put between one-fourth to one-third of elderly Americans into poverty, but it likely would cause a recession. Congress may not win a lot of awards for being effective, but this this is a low bar and I think they are going to clear it.”

Moving forward, stakeholders must decide what they expect from Social Security and how to protect it for coming generations.

Related: SECURE 2.0: A year in review (and a look at what the retirement system still needs)

“Social Security discussion often misses the beat of how we want this program to look,” she said. “The most important question about Social Security for me is how do Americans want Social Security to look? What do they want to get out of it? It should reflect that it’s an insurance benefit for which people in a democratic system have expressed their preferences.

“For the most part, we consider Social Security to be wildly popular, and people want it to be secure.”