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Insufficient Retirement Savings Could Sap Federal and State Coffers

Industry Trends and Research

A new study that quantifies the potential magnitude of retirement savings shortfalls finds that, if current trends continue, federal and state governments could be hit with a combined $1.3 trillion burden over the next 20 years; efforts at the state level, however, could help reduce that burden.

The study by ESI conducted on behalf of The Pew Charitable Trusts finds that—with as many as 56 million private sectors workers lacking access to a retirement savings plan through their employer— such limited access and savings could lead to cumulative additional costs to the federal government of $964 billion between 2021 and 2040, while state costs could reach another $334 billion over that period.

According to the study, these costs would be a result of increased public assistance costs, reduced tax revenue, decreased household spending and standards of living, and lower employment.

Shifting Demographics

The compositional shift between elderly and non-elderly households will also create significant fiscal pressure, since working age households form the core of the federal tax base. Data from the Census Bureau shows that the elderly population of the United States is projected to increase by 50%, rising from 54.1 million in 2020 to 81.5 million in 2040. Additionally, there are projected to be 54 elderly households for every 100 working age households by 2040, up from 37 elderly households for each 100 working age household in 2020.

Moreover, under a continuation of current trends, the share of households with people at least age 65 with less than $75,000 in annual retirement income—a level the research suggests indicates financial vulnerability—will increase by 43% from 22.8 million in 2020 to 32.6 million in 2040. Among these vulnerable households, the average annual income shortfall relative to recommended replacement levels is projected to be $7,050 in 2040. As these workers age, inadequate retirement savings will likely lead to reduced retirement income and quality of life for many.

At the same time, this shortfall will put greater pressure on public spending and increase taxpayer burdens. To that end, the research shows that the average income shortfall in retirement among vulnerable older households in 2020 was $6,740, which will increase state spending for Medicaid and other assistance programs. The study estimated the cumulative additional taxpayer liability because of insufficient retirement savings to be $13,600 per household.

Addressing the Gap

But there’s good news, according to John Scott and Andrew Blevins of Pew’s retirement savings project, who note that “even small savings over a worker’s career could help offset the effects of these shortfalls.”

Based on the mid-point of standardized financial assumptions, addressing the projected income gap of around $7,050 cited above requires a lump sum savings of around $117,500 available at retirement. If households saved an additional $1,685 a year—about $140 a month—over a 30-year period, they could erase the retirement savings gap, eliminate the extra taxpayer burden, and help people maintain their lifestyles in retirement, the pair note. What’s more, any savings above the status quo would help to reduce the fiscal obligations and improve retirement outcomes. And with access to the enhanced Saver’s Match, the annual savings required would fall to $1,120, or about $95 per month.

One way to help is through the creation of state-savings programs for those employees whose employers do not offer a retirement savings plan, they contend. Amid the absence of federal legislation to close access gaps, Scott and Blevins note that 11 states have already launched automated savings programs and lawmakers in more states are introducing measures to expand those opportunities.

“The automated savings programs provide a way to steadily boost worker savings and help avoid some of the projected state and federal cost increases,” the Pew researchers note. “Workers can opt out; no one would be required to participate. And those who stay in can change their contributions at regular intervals.”

In fact, early evidence from the longest operating programs in Oregon, Illinois and California shows that these plans have received participant contribution levels similar to the level that would be needed to close the gap. Program data from December 2022 indicates that contribution levels range from around $130 to $170 per month, an annualized amount of around $1,500 to $2,000, the ESI study shows. 

“All 50 states face the fiscal strain of an increasingly older population. But making it easier for people to set aside even modest levels of savings during their working years will pay dividends for both individuals and state taxpayers in the long run,” Scott and Blevins further emphasize.