One way or another, the federal government, and ultimately U.S. taxpayers, will foot an enormous retirement bill. According to a new study, "The Retirement Savings Crisis: Is It Worse Than We Think?" the nation is dangerously unprepared for retirement. The financial shortfall threatens to be so great, in fact, that we either need to beef up Social Security and other public and private retirement programs, or get ready for an enormous surge in demand for Medicaid and other government safety-net programs.
The research was released Thursday by the National Institute on Retirement Security, a nonpartisan Washington D.C., nonprofit with heavy representation among state employee groups. NIRS joins a growing list of think tanks that say the nation's retirement outlook has been devastated by the decline of traditional defined-benefit pensions, low private savings and the inadequate availability and employee participation in 401(k) plans and similar defined-contribution programs. The steep recession and slow recovery have further deepened our retirement hole.
"The average working household has virtually no retirement savings," the report says. Its findings, and those of many similar studies, rely heavily on the Federal Reserve Board's 2010 Survey of Consumer Finances.
"When all households are included – not just households with retirement accounts – the median retirement account balance is $3,000 for all working-age households and $12,000 for near-retirement households," the NIRS study says. Looking only at households made up of people ages 55 to 64 – whose members are nearing retirement – the study says less than 5 percent had retirement account balances that were on target to meet broadly accepted retirement savings targets.
(Two common yardsticks for measuring retirement adequacy are in broad use. One defines adequacy as being able to generate incomes in retirement that are 75 to 85 percent of working-age incomes. The second looks at retirement savings as a multiple of pre-retirement annual incomes. Fidelity Investments has recommended, for example, that people have nest eggs at the age of 65 that equal eight years of their annual incomes prior to retirement.)
"What actually surprised me the most was that $3,000 figure," says Nari Rhee, author of the report and NIRS manager of research. "I didn't expect that figure to be so low." While financial markets have made huge gains since the 2010 Federal Reserve data, Rhee says the negative state of Americans' retirement has not changed much. "It's a really, really, really deep hole," she says, "and people have been so deep in this hole that you could throw trillions and trillions of dollars in, and it would barely make a dent."
"The median balance of $100,000 for those nearing retirement will only provide a few hundred dollars per month in income if the full account balance is annuitized," the report says. "Among working households age 55-64, nearly 32 percent have no retirement savings, and another 32 percent have retirement savings less than 100 percent of their income."
"Most people do not have a clear idea of how much they need to save to have enough income,'" it added. "For instance, a $200,000 retirement account balance may seem high, but is less than half of the minimum amount that a couple with $60,000 in combined annual income will need."
Looking at the collective retirement shortfall of all working Americans, NIRS generated four estimates of the gap pegged to different measures of financial worth:
1. $14 trillion measured only by retirement account balances.
2. $11.6 trillion measured by total retirement assets once defined-benefit pensions are included.
3. $11.1 trillion measured by total financial assets that include holdings outside of retirement accounts.
4. $6.8 trillion using the broad net worth measure, which includes homes and other non-financial assets.
"Clearly, more households need to increase their retirement contributions, to the extent that they are able to do so," the study concludes. "Even so, the magnitude of the retirement savings gap is such that most people will have to work longer if they are able to stay employed, or experience a significant decline in their standard of living when they retire."
One of the conclusions NIRS reached is that current debates about cutting Social Security benefits are misguided. The program should, if anything, be strengthened to reflect the lack of resources in other consumer retirement accounts.
NIRS Executive Director Diane Oakley told U.S. News that opinion research done earlier by the group found a disconnect between the severity of the retirement challenge as seen by Americans and by their elected leaders in Washington. "People want Washington to help them, but there is strong sentiment that Washington just doesn't understand," she says.
Oakley says one possible way of "getting through" to government leaders might be to compare the rising federal debt – now approaching $17 trillion – with the equally enormous retirement deficits facing the nation. "No one has started to look at this [retirement] debt as something that we are going to have to repay ourselves," she says. "Maybe this $11 trillion [the midpoint of the study's retirement shortfall] will help everyone understand that we need to do something."