In a divided nation, Americans can still find points of agreement. Large majorities of Americans agree that teachers are underpaid, government benefit programs are necessary, and a second civil war would be bad for the nation.
A September 2024 survey discovered that a substantial majority of Americans agree on another fact: the United States faces a retirement savings crisis. The opinion transcends politics. The survey found that 94% of independents, 93% of Republicans, and 86% of Democrats agree that retirement savings represent a national crisis.
According to the survey, the average Republican plans to retire at 63 while the average Democrat expects to retire at 64. Republicans and Democrats alike said they were concerned about “not being able to maintain their standard of living” in retirement.
Retirement Security
Most retirees depend on Social Security to help them meet their living expenses. Yet Social Security was not intended to be a retiree’s sole source of income. The program is meant to keep older adults out of poverty, a goal it largely achieves. About 40% of adults aged 65 and older would have incomes below the poverty level if they did not receive Social Security.
Still, avoiding poverty is a low bar for a retirement income. Most seniors hope to have a retirement lifestyle that is comparable to the lifestyle they enjoyed before they retired. Since Social Security benefits tend to be modest, that goal eludes retirees who depend on Social Security as their only source of income.
Social Security is designed to replace about 40% of a retiree’s pre-retirement income. Even if retirees reduce their expenses after they stop working, most will still need additional income to maintain their pre-retirement lifestyle. Financial planners recommend a retirement income of at least 70% of pre-retirement earnings. Middle class retirees will be in an ideal situation if they have two additional sources of income: an employer-provided defined benefit plan and a defined contribution plan, such as a 401(k) plan or an IRA.
The Disconnect Between Goals and Actual Savings
The survey participants agreed that they would need at least $2 million in savings to retire. Yet roughly two-thirds of the participants had saved less than $150,000. About a quarter had no emergency savings. Those statistics were consistent across party lines.
Unfortunately, many American workers — particularly those who are self-employed in the gig economy — do not have employer-provided retirement benefit plans. And many workers who are struggling to meet their expenses every month are not in a position to invest in retirement savings plans.
Perhaps because they have not saved as much as they had hoped, Americans often postpone their retirement as they approach their sixties. While younger workers expect to retire before they turn 65, workers who are over the age of 50 typically expect to retire when they turn 67.
Can a Crisis Be Averted?
Inadequate retirement savings can be addressed in different ways. One is to boost Social Security payments, a solution that is opposed by politicians who repeat worrisome projections of the date on which the Social Security Trust Fund will “run out of money.”
The Social Security Trust Fund can easily be made solvent by raising the payroll tax cap. The current cap assures that Americans don’t pay Social Security taxes on earnings above $168,600. Raising the cap would assure that higher income workers pay the same share of their income into Social Security that middle class workers pay. Unfortunately, politicians rarely unite around the concept of raising taxes on the people who can most afford to pay them. Politicians who privately support plans to “save Social Security” by raising the retirement age to 70 rarely have the courage to express those ideas publicly, at least during an election year.
The second approach is to encourage Americans to save more for retirement. The Secure Act 2.0, enacted in 2022, includes several measures that are designed to promote retirement savings. The Act requires employers that offer 401(k) plans to enroll employees automatically.
The Act also raises the age at which retirees must begin to withdraw funds from tax-deferred plans (such as IRAs and 401(k) plans). It also eliminates the minimum distribution requirement entirely for some plans. The longer a retiree can wait before taking required minimum distributions, the longer the investment can continue to grow.
The Act allows people over the age of 50 to make “catch-up” contributions to their retirement plans. Those contributions can help older workers make greater contributions while their earnings are higher to offset contributions they failed to make when they were younger and had less disposable income.
In addition, the Act replaces a “saver’s” tax credit for mid- and low-income taxpayers who contribute to a retirement account with a “saver’s match” that allows those same taxpayers to receive a “matching” contribution equal to 50% of their contributions (up to $2,000). Beginning in 2027, the government will deposit the “matching” funds directly into the taxpayer’s retirement plan.
Retirees who spend much of their income on Medicare co-payments or prescription drugs might gain additional assistance from reforms that would require less out-of-pocket spending on healthcare. While some prescription drug reforms have been narrowly passed into law, whether broader reforms are politically viable remains to be seen.
In the end, while the government can promote private retirement savings and strengthen Social Security, it is up to individuals to make wise decisions about saving for retirement. Unfortunately, those decisions can be difficult to implement when workers do not have an employer that offers a retirement plan.