Despite the rebound in home prices and new all-time nominal highs in the stock market, many Americans are looking at an unpleasant retirement, if they even make it that far; according to the Employee Benefit Research Institute’s latest survey on retirement confidence, the majority of workers have saved for their golden years, but the piggy bank is quite slim. Excluding the value of a primary home and any defined benefit plans, 57 percent of households say they have less than $25,000 in savings and investments, while twenty-eight percent say they have less than $1,000. Furthermore, the Center for Retirement Research at Boston College has warned that 53 percent of American households are at risk of not having saved enough to maintain their living standards in retirement.
Americans are still planning for retirement, but, as one would expect, how they have saved for retirement depends very heavily on age and on pre-retirement income.
Compared to other countries’ retirement systems, that of the United States doesn’t stand up well. In a recent report, the Mercer consulting firm and the Australian Center for Financial Service, gave the United States a “C” grade, a rating considerably worse than the A received by Denmark and the B-plus given to the Netherlands’ retirement system, which combines a Social Security-like fund with a nearly universal pension system to which employers contribute. The study showed plainly that many other countries are more willing than the United States to mandate unpleasant steps by workers and employers to fund a stable system.
The United States does have some mandates; employers must pay 6.2 percent of each employee’s salary into Social Security, and every employee must also contribute that amount. But the Social Security system faces the threat of a huge shortfall. One-third of America’s retirees get at least 90 percent of their retirement income from the program, with annual benefits averaging a modest $15,000 for an individual.
Another important pillar of America’s retirement system, the 401k, is voluntary and generally not accessible to low-wage workers, who may not have the income necessary to invest. Although some employers have embraced automatic enrollment for their workers, more than 58 percent of American workers are not in a pension or 401k plan. Those employees with such plans, whose payouts are dependent on contributions and investment returns, are exposed to the risks associated with the stock market, which after the financial crisis were quite great.
The problems associated with these two primary means of saving dictate which financial sources fund the retirements of lower-wage workers and higher-wage workers. Gallup’s annual Economy and Personal Finance poll, conducted between April 4 and April 14 of this year, sampled more than 2,000 adults to discover how non-retired Americans expect to fund their retirement. The results show that expectations varied significantly by annual household income. Upper-income retirees primarily said that investments, such as 401ks, or individual stock investments would fund retirement, while lower-income respondents said that Social Security and part-time work would be major sources.
In fact, of those respondents earning $75,000 or more per year, 65 percent said that retirement savings accounts would be the “major source” of retirement funds, and only 17 percent said Social Security. Comparatively, 42 percent of respondents earning less than $30,000 per year said Social Security would be a major source of income, 27 percent said work-sponsored pension plans, and another 27 percent said part-time work.
Younger generations of workers, particularly the 18 to 29 year-old bracket exhibited uncertainty about the future of the Social Security. Gallup found that only about one in five young adults expected to receive a Social Security benefit when they retire. Fifty-three percent of respondents from the youngest age group said that they expected to fund their retirement through 401ks, while 49 percent said savings accounts or CDs and 24 percent said part-time work.
When looking at retirement strictly through the lens of age, the poll’s results show the changing nature of retirement funding. Young respondents are looking to sources outside of Social Security to support them after they stop working, but those nearing retirement age now see Social Security contributing significantly to income — the program is essentially tied with 401k plans as the top source among 50 to 59-year old non-retirees, and it is the number one source among non-retirees aged 60 and older.
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