Since voluntary savings plans led by 401(k)s have largely replaced traditional pensions, it is no surprise that this is the “best of times” for many highly paid America workers.
It is the “worst of times” for almost everyone else in the nation, especially the 42% of workers who do not have access to a work-sponsored plan. The stunner is just how much the have’s will outpace the have not’s on retirement day, 11X as much.
A new report from the US Government Accountability Office (GAO) describes this “Tale of 2 Americas”.
It calculates the effect that unequal pay and limited access to retirement plans will have on today’s workers decades from now. It also offers a some suggestions for how Americans might boost their retirement income.
About 60% of all US households have no savings in an individual retirement account (IRA) or in a 401(k)-style account, the report found.
In working households some 56% have at least a little money set aside in a plan or IRA. For those in the 2nd-lowest quartile of workers, only 50% have savings in an IRA or 401(k). Among the lowest earners, that number is just 25%.
The Big Q: How will this kind of inequality play out in future decades, when workers retire?
The GAO looked at current trends and simulated how they would affect young workers just starting out. The report calculates that these 19-year-olds will eventually take in a monthly average income of $2,970 from IRAs and 401(k)-type plans.
Note: retirement plan income is skewed toward the wealthiest, and $600 month is a different than $6,000.
Almost 20% of all US households will not have any retirement savings account to rely on, including 35% of the lowest-earning Americans.
Workers in the highest-earning Quartile are 4X more likely to work for an employer offering retirement plans than those in the lowest. And these higher-paid workers are also 4X more likely to participate in plans when they are offered.
What can be done?
The Big A: The GAO came up with several scenarios to see how they might boost retirement savings, particularly for low and middle-income groups.
If everyone signed up for every retirement plan offered them, for example, monthly income for retirees would go up 19% overall and by 35% for those in the lowest Quartile.
The Big If’s
- If every employer offered a retirement plan income for the lowest Quartile would go up 18%.
- If it were easier to roll over retirement plans, savings for the lowest-paid among us could go up by 27%.
- If every employer automatically enrolled workers, monthly income for the lowest-earning retirees might go up 10%.
None of these things will be easy to achieve.
Neither companies nor workers have extra money to plow into savings. For the poorest workers, saving for retirement is naturally a lower priority than paying rent or saving for more immediate emergencies, the GAO notes.
Forcing people to save might just result in them taking on additional debt, or skipping such important expenses as preventative medical care.
There is no easy answer to this Big Q.
Have a terrific weekend.
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