The challenges that many Americans face saving for retirement not only make it more difficult for them to plan for their post-work lives, but also can strain budgets and taxpayers at the state and federal levels. Fortunately, many states are beginning to examine and address these issues. Take Hawaii, for example, where a rapidly aging population makes insufficient retirement savings a serious concern.
Last year, lawmakers in the state passed S.R. 76, which created the Retirement Savings Program Task Force to examine retirement readiness in Hawaii and recommend approaches to help state residents who do not have access to workplace savings plans. Pew’s retirement savings project provided technical assistance to the task force by partnering with Econsult Solutions (ESI), a consultancy, to produce a report highlighting Hawaii’s changing demographics as well as the population’s savings shortfall and its likely impact on the state’s social services and fiscal health.
Hawaii has the highest life expectancy in the country (currently 82.3 years at birth), which helped drive significant increases from 2000 to 2020 in the 65 and older population. And that demographic is expected to continue to grow rapidly. By 2040, these residents are expected to represent about a quarter (24%) of Hawaii’s population, up from 13% in 2000 and 19% in 2020.
Looking at the population changes another way, Hawaii in 2020 had 48 households aged 65 and up for every 100 working age households. By 2040 that is expected to grow to 63 households aged 65 and up for every 100 working age households. Because working age households are the major drivers of the tax base, this increasing “dependency ratio” creates significant fiscal pressure on the state in terms of reduced revenue and increased safety net spending for those with inadequate retirement savings.
About 60% of Hawaii’s older households are estimated to have incomes below $75,000. The data shows that about 50,000 people aged 65 and older have incomes below $20,000. And this is in a state that consistently ranks among those with the highest cost of living in the country.
Financial advisers often suggest that retirees need 75% of their preretirement income to maintain their quality of life. Relative to this recommended replacement rate, the average income shortfall for residents of Hawaii is $7,500 on an annualized basis. By 2040, that gap will grow to $8,100. However, if these residents set aside approximately $150 a month the gap would close completely, and smaller amounts could shrink it significantly.
In the absence of increased private savings, retirement income shortfalls are covered by various safety net programs. For Hawaii, the state’s share of spending on residents aged 65 and older is projected to grow by $2.3 billion from 2020 to 2040. And the income gaps for retirees can have a significant impact on state health care spending. People 65 and older are the primary recipients of support from these programs and the associated costs are expected to grow sharply over the next 20 years. Pew and ESI estimate that the cost of insufficient retirement savings just for Hawaii’s Med-QUEST program, which provides low-income adults and children health and medical coverage, will be an additional $1.72 billion between 2021 and 2040.
Taking the demographic factors into consideration, Hawaii’s retirement savings task force released a comprehensive report in December that urged lawmakers to explore a state-sponsored individual retirement account program that would apply to employers with five or more employees that do not have their own savings plan. The program, called an auto-IRA because the money is automatically contributed via voluntary payroll deductions, would allow participants to deposit money directly into an account that they then manage. Workers could opt out or change their contributions or investments at any time. Self-employed individuals also would be able to take part. Notably, the report urged lawmakers to explore joining another state auto-IRA program as a way to achieve economies of scale through a larger pool of savers and hence total assets.
Andrew Blevins is a principal associate with The Pew Charitable Trusts’ retirement savings project.