Retirement Gaps Will Create a $1.3 Trillion Economic Burden By 2040 — Here’s How State-Run Programs Can Help
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Vance Cariaga
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It’s no secret that most Americans are not saving enough for retirement, but a new study from the Pew Charitable Trusts puts the problem in stark detail. According to the study, released last week, the country’s retirement-savings gap could create a $1.3 trillion economic burden over the next 20 years.
That burden will result in “increased public assistance costs, reduced tax revenue, decreased household spending and standards of living, and lower employment,” Pew said in a report.
The study estimates that as many as 56 million private-sector workers lack access to a retirement savings plan through their jobs. This alone could lead to a cumulative additional cost to the U.S. government of $964 billion between 2021 and 2040. Another $334 billion in state costs could be accumulated tied to administrative expenses, required state match formulas, and supplemental state benefits.
Spending on social programs won’t fill the gap, either, which means many households will be forced to reduce their standard of living in retirement. If current trends continue, 61% of elderly households are expected to have an annual income below $75,000 in 2040, CNBC reported. The annual income shortfall is projected to be $7,050 by the same year.
“Many of these retiree households with a shortfall in annual income will need social assistance in some form or another,” John Scott, director of the Pew Charitable Trusts’ retirement-savings project, told CNBC.
There is a solution to the problem — but it requires people to set aside a bit more for retirement. The study found that even moderate savings over a worker’s career can help offset the effects of the gap. By saving an extra $1,685 annually over a 30-year period, or roughly $140 a month, households could erase the retirement savings gap and additional taxpayer burden, while also allowing seniors to maintain their lifestyles in retirement.
This is where individual states can play a major role. As Pew noted, 11 states have already launched automated savings programs to help more private-sector workers build nest eggs. Even more states have introduced measures this year to expand savings opportunities that will allow residents to open state-sponsored individual retirement accounts.
The way it usually works is that employees at companies without employer-based benefits are automatically enrolled in state-run savings plans, although they can also opt out. States with approved programs include California, Colorado, Connecticut, Delaware, Illinois, Maryland, Maine, New York, New Jersey, Oregon and Virginia.
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“Participants in these automated savings programs are saving anywhere from $105 to $190 per month,” Scott told CNBC, citing an average based on available state data.
As CNBC noted, state-run retirement programs have grown in popularity as more state legislators adopt the model. Earlier this year, Georgetown University’s Center for Retirement Initiatives projected that state retirement-plan assets could exceed $1 billion in 2023.
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