A recent study highlights the significant impact of insufficient retirement savings on both state governments and the federal government over the next two decades. This shortfall will result in increased public assistance costs, reduced tax revenue, diminished household spending and living standards, and lower employment rates.
Currently, approximately 56 million private sector workers lack access to a retirement savings plan through their employers. Researchers estimate that this limited savings scenario could lead to an additional cost of $964 billion for the federal government between 2021 and 2040. Moreover, states will spend an additional $334 billion over the same period due to administrative costs, mandatory state match formulas, and supplementary state benefits (refer to Table 1). Social spending alone cannot bridge the entire gap, leaving many households with reduced standards of living during retirement.
However, there is encouraging news. Even small savings accumulated over a worker’s career can help mitigate the impact of this savings shortfall. For instance, if households save an extra $1,685 per year (approximately $140 per month) over a 30-year period, they can eliminate the retirement savings gap, alleviate the burden on taxpayers, and enable individuals to maintain their desired lifestyles in retirement. Additionally, any savings beyond the current status quo would contribute to reducing fiscal obligations and improving overall outcomes.
To address this issue, eleven states, including California, Colorado, Connecticut, Delaware, Illinois, Maryland, Maine, New York, New Jersey, Oregon, and Virginia, have already implemented automated savings programs. These initiatives aim to help more private sector workers consistently set aside funds for retirement. This year, lawmakers in several other states are introducing measures to expand similar opportunities. These legislative proposals establish savings options, often known as Work & Save or Secure Choice, which allow individuals to create state-sponsored individual retirement accounts (IRAs). Typically, workers at companies without employer-based benefits are automatically enrolled but retain the option to opt out.
To better understand the potential impact of these programs, an economic consulting firm was commissioned to a consulting solution, to quantify the fiscal and economic costs arising from insufficient retirement savings. The research and findings are based on population demographics. According to the analysis, the number of households with individuals aged 65 or older, earning less than $75,000 in annual income (indicating financial vulnerability), is projected to increase by 43%, from 22.8 million in 2020 to 32.6 million in 2040. As these workers age, inadequate retirement savings will likely lead to reduced retirement income and a diminished quality of life. This shortfall will also exert additional pressure on public spending and increase the burden on taxpayers.
Compounding the issue, the growth in the older population will not be matched by a proportional increase in working-age households. The age dependency ratio, which measures the ratio of households with individuals aged 65 or older to those of working age, is expected to grow by 46% during the same period, further straining the tax base. In 2020, there were 37 households aged 65 or older for every 100 working-age households. By 2040, this ratio is projected to increase to 54 older households for every 100 working-age households. Consequently, the smaller working-age population will bear the additional expenses required for programs like Medicaid and other forms of assistance.
Inadequate retirement savings will likely lead to reduced retirement income and diminished quality of life for many individuals as they age. In 2020, vulnerable older households experienced an average income shortfall of $6,740, which will necessitate increased state spending on Medicaid and other assistance programs. The study estimates that the cumulative additional taxpayer liability due to inadequate retirement savings amounts to $13,600 per household.
It is important to note that vulnerable older households are defined as those with individuals aged 65 or older earning less than $75,000 in annual retirement income. The federal costs have been adjusted to exclude the state-funded portion of Medicare Part D to prevent potential double counting of impacts.
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Automated savings programs present a viable solution to bolster worker savings and mitigate projected cost increases for state and federal governments. These programs operate on an opt-out basis, allowing workers to choose their participation level, and offer flexibility to adjust contributions regularly. Currently, the four states that have implemented such programs and initiated regular paycheck withdrawals observe an average savings rate of approximately $140 per month per worker.
The fiscal strain caused by an aging population affects all 50 states. However, by facilitating the establishment of even modest levels of savings during individuals’ working years, we can yield long-term benefits for both individuals and state taxpayers.
