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Americans’ Retirement Savings Fall Short By Nearly $500,000 - Forbes

Author: Forbes

Source: https://www.forbes.com/sites/teresaghilarducci/2023/10/27/americans-retirement-savings-fall-short-by-nearly-500000/

Image of Americans’ Retirement Savings Fall Short By Nearly $500,000 - Forbes

Facade of the Marriner S Eccles building of the United States Federal Reserve, on a bright and sunny ...[+] day in Washington, DC, United States, July 24, 2017.(Photo by Smith Collection/Gado/Getty Images)Getty Images America’s retirement system is failing reveals the new Fed Survey of Consumer Finances.True, retirement account balances are up from 2018, but despite the increase, Americans are far behind where they need to be on track for a secure retirement.Americans aged 55-64 have a median before-tax income of $82k and $185k in their retirement accounts, which is 2.3 times their income.Aon Consulting Group calculates people nearing retirement need eight times their annual income in their accounts and by age 67 that rises to 11.1 times in order to maintain living standards in retirement. This means the median American household needs at least $470K more in their retirement account.Saving Consistently Boosts Retirement Income Security: But Only Privileged Americans Can Do ItOn paper, the solution to retirement shortfalls is “easy”: Go back in time and save five percent of your paycheck starting in your 20s.Work steadily for 40 years, never stop contributing, don’t get a divorce, don’t get laid off.Easy-peasy, right?Basically, start early, never withdraw, and never take out loans against your retirement accounts.If you start saving at about age 40 you need to save over 26 percent of your gross income each year until age 67 to achieve an 80 percent replacement rate in retirement. That’s a much steeper climb.If workers lose all of their retirement savings and have to start fresh at age 50, they need to contribute half of their earnings toward retirement for the rest of their working days.Under the current system, doing what you need to save for retirement is nearly impossible, and it is no surprise that we are facing a humanitarian and political disaster; many middle class Americans will be downwardly mobile into poverty in old age.This means that after 40 years since the 401(k) plan came on the scene — ushering in an era of voluntary, financialized, and individual-driven retirement — the American system is failing.The Mercer CFA Institute Global Pension Index Mercer/Melbourne international survey puts the U.S.near the bottom of all rich nations in the OECD (Organisation for Economic Co-operation and Development).The Netherlands, Australia, and Finland get A’s while the US gets a mere C+.Retirement Account Participation Improved From 2018 to 2022: From Real Bad to BadThe new Fed report shows that the share of households with retirement accounts increased from 51 percent to 54 percent between 2019 and 2022 — an all-time high for the survey (which dates back to 1989). This means that 46 percent of families have nothing.They are on a grim path toward depending solely on Social Security.And mere participation, having something, does not mean having enough.For households of all ages, the median value in retirement accounts rose from $75k in 2019 to $87k in 2022.Troublingly, the American retirement system still leaves out Black Americans.The median value of retirement accounts for Black Americans fell (the only group that declined) to $39k, or only 39 percent of the median value for whites ($100k). Black participation also fell to 34.8 percent.Though median holdings increased for Hispanic Americans, participation rose only modestly and remains less than half that of whites.When considering participation by level of income, only 13.4 percent of the bottom 20 percent of participate in retirement savings; among the next 20 percent, participation is still only 35.4 percent.The upshot of the voluntary system is spotty participation and tax breaks that mainly benefit those at the top.Seventy-seven percent of the over $279 billion in retirement tax breaks, according to an Economic Innovation Group report, go to the wealthiest 20 percent of Americans.What is the main indicator that the American retirement system is failing?The elder poverty rate is 23 percent — far higher than our peers and way above Canada’s 12.3 percent and the OECD average of 13 percent. The U.S.is among the few rich nations without a mandatory and universal system providing a flow of consistent retirement savings.We do not have appropriately safe and secure retirement account institutions in place that allow Americans to save enough to achieve adequate retirement income.The Proposed Retirement Savings for Americans Act (RSAA Is A Bold FixIf passed, a promising new proposal – the Retirement Savings for Americans Act (RSAA) – would raise America’s grade.The Act has a fighting chance since both Republicans and Democrats support the plan to boost retirement security by providing universal pension coverage for low- and moderate-income workers.A bipartisan team — Senators John Hickenlooper (D-CO) and Thom Tillis (R-NC), and Representatives Lloyd Smucker (R-PA-11) and Terri Sewell (D-AL-7) — are leading the way toward a better system.The RSAA would provide workers who lack access to employer-sponsored retirement with access to portable plans modeled the Thrift Savings Plan, the plan federal employees have.The legislation builds on recommendations of a 2021 white paper I wrote with Kevin Hassett, the former Council of Economic Advisers chair under President Trump. The Act would put eligible full, part-time, and gig workers who don’t have an employer-sponsored retirement plan — that’s most workers in the bottom 80 percent of the income distribution — in an account to contribute three percent of income (they can opt out).Most would get a matching contribution of up to a five percent through a refundable federal tax credit, making it attractive to participate in the plan and making the distribution of federal subsidies for retirement more fair.The RSAA accounts are portable and the investment options sensible — much like the plan federal employees benefit from now.The vast majority of households — whether Republican, Democrat, or Independent —worry about retirement.And increasingly, so are elected officials.In 2023, the U.S.Conference of Mayors adopted a bipartisan resolution calling on federal policymakers to help private-sector workers without a retirement plan — knowing their cities will face more and more poor elders if nothing is done.America can do better for its workers and elders by boldly reforming the current retirement system, a system that serves the wealthiest of Americans best.But, you may ask, what about home equity, doesn’t that help? Yes, but not nearly enough: median home equity is just $191k for households approaching retirement.

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