Editor’s note: The map tool was revised on June 2, 2023, to correct the cumulative cost due to insufficient savings. The previous cumulative totals had used preliminary data.
A new study finds that Americans’ insufficient retirement savings will significantly affect every state and the federal government over the next 20 years, resulting in increased public assistance costs, reduced tax revenue, decreased household spending and standards of living, and lower employment.
Today, as many as 56 million private sector workers lack access to a retirement savings plan through their jobs. The analysts who conducted the study for The Pew Charitable Trusts estimate that such limited savings could lead to a cumulative additional cost to the federal government of $964 billion between 2021 and 2040. State spending on these programs, stemming from administrative costs, required state match formulas, and supplemental state benefits, totals another $334 billion over that period. (See Table 1.) And social spending does not replace the entirety of the gap, requiring many households to reduce their standard of living in retirement.
But there’s good news too: Even small savings over a worker’s career could help offset the effects of this shortfall. For example, if households saved an additional $1,685 a year—about $140 a month—over a 30-year period, they could erase the retirement savings gap, eliminate the extra taxpayer burden, and help people maintain their lifestyles in retirement. In addition, any savings above the status quo help to reduce the fiscal obligations and improve outcomes.
Eleven states have already launched automated savings programs to help more private sector workers routinely put money away for retirement. This year, lawmakers in more states are introducing measures to expand those opportunities. These bills create savings options—sometimes referred to as Work & Save or Secure Choice—that allow people to set up state-sponsored individual retirement accounts (IRAs). Typically, workers at companies without employer-based benefits are enrolled automatically but can opt out. The states that already approved programs are California, Colorado, Connecticut, Delaware, Illinois, Maryland, Maine, New York, New Jersey, Oregon, and Virginia.
To get a better sense of the hole these programs can help fill, Pew commissioned Econsult Solutions, an economic consulting firm, to quantify the fiscal and economic costs of insufficient retirement savings. The research and findings are grounded in population demographics. According to the analysis, the share of households with people at least age 65 with less than $75,000 in annual income—a level that indicates financial vulnerability—will increase by 43% from 22.8 million in 2020 to 32.6 million in 2040. And as these workers age, inadequate retirement savings will likely lead to reduced retirement income and quality of life for many. At the same time, this shortfall will put greater pressure on public spending and increase taxpayer burdens.
Making matters worse, the growth in the older population will not be matched by comparable growth in working age households. The age dependency ratio—the ratio of households with people at least age 65 to those of working age—is expected to grow by 46% over that time period, increasing the strain on the tax base. In 2020, there were 37 households ages 65 and older for every 100 working age households. That ratio will increase to 54 older households for every 100 working-age households by 2040. As a result, the additional spending needed, for example on Medicaid and other assistance programs, would be borne by a smaller portion of the working-age population.
And as these workers age, inadequate retirement savings will likely force reductions in retirement income, and therefore the quality of life, for many. The average income shortfall in retirement among vulnerable older households in 2020 was $6,740, which will increase state spending for Medicaid and other assistance programs. The study estimated the cumulative additional taxpayer liability because of insufficient retirement savings to be $13,600 per household.
The automated savings programs provide a way to steadily boost worker savings and help avoid some of the projected state and federal cost increases. Workers can opt out; no one would be required to participate. And those who stay in can change their contributions at regular intervals. In the four states that have implemented such programs and started regular paycheck withdrawals, average savings rates are about $140 a month per worker.
All 50 states face the fiscal strain of an increasingly older population. But making it easier for people to set aside even modest levels of savings during their working years will pay dividends for both individuals and state taxpayers in the long run.
John Scott is the director of and Andrew Blevins is an officer with The Pew Charitable Trusts’ retirement savings project.