Current Thinking

The Retirement Savings Deficit in America

Based upon numerous studies and recounting of personal experiences, the question is not: are people saving enough for retirement? But, how little are they saving, and how big is the deficit between what is being saved and what is required to maintain a reasonable standard of living in one’s retirement years?

Despite the market’s asset growth since the 2008 crash, studies in 2013 and 2015 by the National Institute on Retirement Security1,2 had some sobering findings regarding shortfalls in retirement savings (where “enough” savings is considered as having assets equal to 8 to 11 times annual income). Key findings were: (a) more than 40 million working households (45%) have no retirement assets; (b) 80% of US households have savings less than one times their annual income; (c) only 55% of US private sector employees have access to workplace retirement benefits; and (d) there are significant differences in retirement savings and wealth across demographics (age, sex, ethnicity). Indeed, some commentators are calling these trends a “national crisis”.

To further gauge the impact of the retirement savings deficit, we ask: what is the aggregate dollar savings deficit across the US population? Conservative estimates put the deficit at $4 trillion3. To put this in perspective, the total US nominal Gross Domestic Product (GDP) at the end of 2016 was $18.6 trillion. Therefore, the aggregate retirement savings deficit comprises over 20% of the US economy.

In addition to the adverse impact of the retirement savings deficit on the quality of life and financial viability of older Americans, there are longer term costs to US economic growth as well. The less people save, the less that can be invested in equipment, infrastructure and job growth.

The clarion call to adults of all ages is to “save early, save more”. But addressing this problem takes more than simply individual initiative. Public policy has to play a key role as well. Recommendations which have been made include: improvements in Social Security; auto-enrollment and other automated features in defined contribution plans; cost-efficient investment alternatives; and state and federal proposals to expand savings. It is therefore important to address the collective retirement savings gap on all fronts.

1The National Institute on Retirement Security. “The Retirement Savings Crisis: is it Worse Than We Think?”, by Nari Rhee, PhD, June 2013.

2The National Institute on Retirement Security. “The Continuing Retirement Savings Crisis”, by Nari Rhee, PhD and Ilana Boivie, March 2015.

3Employee Benefit Research Institute, “Retirement Savings Shortfalls: Evidence from EBRI’s Retirement Security Projection Model®”, by Jack VanDerhei, PhD, February 2015.

NOTE: Information presented herein is for discussion and illustrative purposes only and is not a recommendation or an offer or solicitation to buy or sell any securities. Past performance is not a guarantee of future results. 

 

About the Author

Frederic Slade

Frederic Slade is Assistant Vice President and Senior Director, Investments at Pentegra Retirement Services. He joined Pentegra in May 2007 as a Senior Analyst in the Investment Department and became Director-Investments in January 2013. He is responsible for managing over $1 billion in internal bond portfolios and providing asset/liability studies, analytics and product strategy for Pentegra’s Defined Benefit and Defined Contribution Plans. Mr. Slade is also a frequent contributor of economic and financial market blogs to Pentegra’s Talk to a Specialist website and the financial media. Prior to joining Pentegra, Mr. Slade was a Senior Quantitative Analyst at Citigroup Asset Management, providing asset allocation and quantitative stock screening for mutual fund products. Prior to Mr. Slade’s tenure at Citigroup, he was an Investment Manager at NYNEX Asset Management (now Verizon). At Verizon, Mr. Slade was responsible for asset allocation and planning for its $15 billion Defined Benefit pension fund. Mr. Slade holds a Ph.D. in Economics from the University of Pennsylvania and a CFA, and is a frequent presenter at industry seminars and conferences.