Are Retirement Savers Really Facing a Crisis?

Much has been made of an alleged retirement savings crisis confronting the country, with near-daily gloom-and-doom reports. But a new study says, “not so fast.” 

In "The Over-Stated Retirement Crisis," the Empower Institute challenges the view that the 40-year-old DC system is overly deficient in providing adequate retirement security for American workers.

Based upon publicly available research and data, the analysis finds that American workers have greater access to workplace retirement plans than previous generations, they are saving more and are expected to have more money in retirement – all factors that run counter to the perception of a crisis. To that end, the report emphasizes that it’s important to consider in whole rather than as single silos of data the evolving workplace retirement savings system, workers’ total assets and savings rates.  

Citing research by Andrew Biggs of the American Enterprise Institute, the report observes that total employee and employer contributions have increased from an average of 9.9% of employee salaries in 1984 to 12.8% of employee salaries in 2017. 

What’s more, it notes that the amount of money saved in retirement savings accounts is at near-record levels. Consider for example that, according to Federal Reserve Board data, total retirement savings in 1975 were equal to 48% of total employee wages, but by 2017 – with the DC system fully established – retirement assets exceeded 337% of employee wages.

The research further shows that nearly $7.5 trillion is held in DC plans, with access to workplace plans increasing over time. Citing data by the Social Security Administration and Congressional Research Service, the authors explain that, while 71% of civilian employees have access to either a DB or a DC plan, in 80% of married couples at least one spouse has access to a retirement plan. In comparison, data from 1980 shows that only 38% of private sector workers participated in a pension plan. 

Five-layer Pyramid

Moreover, the Empower Institute suggests that looking at retirement accounts alone provides an incomplete picture of how much money is actually available to people once they retire. The authors explain that instead of using the three-legged stool model of Social Security, employee pensions and personal savings, a more accurate view is a five-layer retirement resource pyramid. 

The report shows that under this metric Social Security and homeownership consist of the base, making up the largest retirement resources for many, followed by employer-sponsored plans, IRAs and other assets. Citing data by the Investment Company Institute, the report notes that DC plans and IRAs accounted for nearly 40% of all retirement assets at the end of 2018, while the remaining 60% of retirement assets existed outside these accounts. 

Room to Improve  

The Empower Institute’s analysis of the research says that improvements to the retirement system are offering better levels of protection for retirement savers now than in the past, with portability and ownership, regulatory oversight and advice seen as key areas of focus. 

That said, the report also acknowledges that some improvements could be made and lays out areas of focus for enhancing the retirement system. “We believe each generation of savers is better off than the one that preceded it. While the current system is not broken, we can continue to work to improve it,” the authors emphasizes. Among the recommended paths: 

• Increasing plan access: The retirement system works best for those who have access to workplace retirement plans and can take advantage of the whole system beyond those plans.
• Improving plan features: Employers can choose options, such as automatic features, company-matching contributions, financial wellness plug-ins and advice solutions that can help their employees save more. 
• Public policy advocacy: Stakeholders can advocate for opportunities to increase coverage and portability, including efforts to reform Social Security and allow for open multi-employer plans. 

“We’ve seen public policy improve the system in the past. Consider that under the Pension Protection Act, U.S. retirement assets in defined contribution plans increased from $4.6 trillion in 2007 to $8.1 trillion in the third quarter of 2018,” the authors state, pointing to ICI research. Moreover, they note that Millennials who were entering the workforce around the time the PPA was enacted have taken advantage of provisions allowing automatic enrollment and automatic escalation.