Although most Americans save for retirement through employer-provided plans, 56 million private sector workers lack access to such an opportunity to save at work. Many employers, particularly small businesses, find themselves unable to provide retirement benefits because of high startup costs and limited administrative capacity. And that leaves state governments grappling with a critical question: What happens when their residents don’t have enough money to retire?
The Pew Charitable Trusts worked with Econsult Solutions, an economic consulting firm based in Philadelphia, to conduct a study looking at how such a lack of retirement savings would affect state and federal budgets. That calculation is linked to how much a state’s workers would need in retirement. For households to maintain working-year living standards, financial advisers recommend an “income replacement” target of 75% of the average income between ages 45 to 64; those below this target are considered economically vulnerable.
The analysis shows that, nationally, these vulnerable households are projected to fall short of their income replacement target by an average of $7,050 by 2040. The authors found that this savings shortfall would lead to increased pressure on public assistance programs, reduced tax revenue, and decreased household spending by retirees, while at the same time shifting a growing fiscal burden to a shrinking population of working-age taxpayers.
The demographic analysis projects that between 2021 and 2040:
- States face an estimated $334.3 billion in aggregate increased state spending because of insufficient savings.
- The share of households with people age 65 and older and with less than $75,000 annual income in retirement—which indicates financial vulnerability—is expected to increase by 43%, from 22.8 million to 32.6 million.
- The age dependency ratio—the ratio of households with people age 65 and older to those of working age—is expected to grow by 46% nationally over those years.
But states can help private sector workers save for retirement with programs that can be implemented with minimal startup costs and at no expense to employers.
Notes: The change in dependency ratio measures how households with people at least age 65 compare with those of working age in 2040 relative to 2020. Average income shortfall measures how far households’ current savings fall below an “income replacement” target of 75% of pre-retirement income. The lower boundary of the replacement level is the federal poverty level, while any income above $75,000 is considered sufficient even if it falls short of the 75% target. State costs represent the sum of projected state social assistance spending from 2021 to 2040 attributable to the average income shortfall that would be avoided if workers accumulated sufficient savings.
Source: Study by Econsult Solutions conducted May 2023
In the past decade, California, Colorado, Connecticut, Delaware, Hawaii, Illinois, Maine, Maryland, New Jersey, New York, Oregon, and Virginia have passed legislation establishing such automated savings programs. Known variously as auto-IRAs, work and save, or secure choice, these programs automatically enroll workers who lack access to a savings plan at work in an individual retirement account (IRA). A portion of their wages are then set aside every pay period; employees can choose whether to opt out. Although some of the state programs are still in their infancy, more than 600,000 savers in Oregon, Illinois, California, and Connecticut have already amassed nearly $650 million in assets since 2017.
John Scott is the director of and Andrew Blevins is an officer with The Pew Charitable Trusts’ retirement savings project.