By Linda Koco
If the United States were to be given a grade for its retirement readiness today, the grade would be “Needs Improvement,” according to a new report on retirement readiness.
At least one of the recommended solutions is to expand access to employer-based retirement programs that include lifetime payouts. This is an approach that resonates with current thinking in the insurance and annuity community.
First, a look at the nature of the problem: Nearly 40 million working-age households (45 percent) do not own any retirement account assets, whether in an employer-sponsored 401(k) type of plan or an individual retirement account (IRA). This is according to a report published today by the National Institute on Retirement Security (NIRS).
Furthermore, half of households with no retirement savings are headed by someone in the 45-65 age range, which means that they have too few years to catch up, wrote the co-authors, Dr. Nari Rhee and Ilana Boivie.
The findings are based primarily on analysis of the 2013 Survey of Consumer Finances (SCF) from the U.S. Federal Reserve but they also reference data from numerous other recent retirement studies.
A worsening situation
Most insurance and financial professionals are familiar with the retirement savings challenges identified in the report. However, the NIRS report takes that common knowledge one step further: The retirement savings crisis in the U.S. is not only serious, it “continues to worsen,” NIRS said in releasing the study.
For instance, the “share of working-age households in which the head or spouse reported participating in — not just having access to — a workplace retirement plan peaked in the 2001 SCF and has declined since,” the report said. “Consequently, the share of U.S. working families in which either the head of household or the spouse participated in a retirement plan through their job decreased from 57.6 percent in 2001 to 51.3 percent in 2013.”
This seems to fly in the face of reports that the combined value of 401(k) accounts and IRAs increased to a record high of $11.3 trillion at the end of 2013. However, that figure does not include the 40 million Americans who do not have such accounts.
The “typical” American household was actually further behind in retirement readiness in 2013 than in 2010 and 2007, the researchers said.
In addition, 62 percent of working households, ages 55-64, have retirement savings that equal less than one times their annual income, a figure far below projected retirement income need, the report indicated. This assumes replacement of roughly 85 percent of pre-retirement income. Since Social Security currently replaces roughly 35 percent of pre-retirement income for typical households, that leaves a gap of 50 percent to be filled by “other means” such as 401(k)s and IRAs.
The findings also seem to fly in the face of another commonly cited statistic. This is that the average 401(k) balance for households near retirement age is $100,000 or a bit more.
That sum is not only “inadequate to provide meaningful income security for the typical household,” the researchers said. “It also only counts those that own retirement accounts in the first place.” With all households included, not just those with retirement accounts, “the median retirement account balance is $2,500 for all working-age households and $14,500 for near-retirement households.”
The report does not talk specifically about potential ownership of other savings vehicles, such as individual nonqualified annuities, life insurance policies, personal bank accounts, brokerage accounts and real estate investments.
However, the researchers did make the point that, even if looking at households’ entire net worth, 66 percent of working families are falling fall short of conservative retirement savings targets for their age and income based on working until age 67.
A large majority of the bottom half of working households cannot meet even a substantially reduced savings target, the researchers said.
Problems cited as contributing to the continuing crisis include: the decline in availability of defined benefit plans; lack of access to retirement plans in and out of the workplace, particularly among low-income workers and families; and low retirement savings.
What about solutions?
“It is highly unlikely that most individuals and households will be able to fill such a large retirement income gap by themselves,” the authors wrote.
Employers need to become “more engaged” in assuring the retirement readiness of the workforce, they said. “In addition, public policy can play a critical role in putting all Americans on a path toward a secure retirement.”
The recommended public policy actions focus on measures to help improve the retirement picture for many low-and middle-income Americans. These include not only strengthening Social Security and expanding (and making refundable) the Saver’s Credit but also some work on retirement plans.
In particular, the authors suggested expanding “low- and middle-wage workers’ access to high-quality, low-cost retirement plans.” Such plans should include professional investment management, risk pooling and lifetime payouts, the authors wrote. That is a position held by many experts in the retirement and insurance industry.
The researchers also called for policymakers to making it easier for private employers to sponsor DB pensions. In addition, they favored proposals that would ensure “universal retirement plan coverage.”
(The DB idea would essentially reverse the course that DB plans are on today. However, there are factions within the insurance business that periodically bring it up as a possibility worth considering as part of the solution.)
If the retirement plan crisis is left unaddressed, Rhee and Boivie warned, it “will result in grave consequences for the U.S.”
InsuranceNewsNet Editor-at-Large Linda Koco, MBA, specializes in life insurance, annuities and income planning. Linda can be reached at [email protected].
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