A new Government Accountability Office (GAO) report, Older Workers: Retirement Account Disparities Have Increased by Income and Persisted by Race Over Time, is quite unsettling. The analysis finds that many Americans are losing ground when it comes to building retirement savings, despite policy efforts to improve workers’ savings. For households aged 51 to 64, GAO found that the disparities between low- and high-income workers’ retirement accounts were greater in 2019 than in 2007.
More specifically, the analysis reveals that only one in ten low-income households had a retirement account balance in 2019, a drop from one in five in 2007. In sharp contrast, about nine in ten high-income households had a balance during the same time period. And for those households with a retirement savings balance, the median balance had increased during those 12 years for high-income households, while any changes for other income groups were not statistically significant.
Additionally, GAO found that racial disparities persisted from 2007-2019. A higher share of white households had a balance than those of all other races. Also, white households had about double the median balance as households of all other races.
There are so many reasons why the retirement savings gulf is widening – low wages, high inflation, a lack of employer-provided retirement plans, and retirement savings tax incentives that are skewed to high income earners. Eventually, a lack of retirement savings among families will translate to financial hardship for families and big costs for governments. The Pew Charitable Trusts estimates that between 2021 and 2040, states face an estimated $334.3 billion in aggregate increased state spending because of insufficient retirement savings.
States Take Action to Spur Retirement Savings
But amid this retirement doom and gloom there is a bright spot, especially for the 57 million people (about half of the U.S. workforce) who work for an employer that does not offer a retirement plan. Back in 2017, Oregon became the first state to launch a new state-facilitated retirement savings program. Today, 19 states now offer—or soon will offer—retirement plans to private sector workers without a plan at their job. Just this year, three new programs were enacted in Minnesota, Missouri, and Nevada.
While each program is different, the idea is to offer a basic financial service to those who are underserved. The most popular type of program states are enacting automatically enrolls workers in low-cost retirement savings accounts. Broadly, these state-facilitated programs enable private sector employers lacking retirement plans—often small businesses—to provide their employees with access to retirement accounts through payroll deductions. This means workers can systematically and regularly save for retirement each pay period, which leads to better retirement outcomes. While these retirement programs are overseen and administered by the state, investments are managed by private companies. Importantly, the plan costs are negligible for participating employers and are self-funded through retirement account fees.
As detailed in a recent webinar hosted by the Georgetown Center for Retirement Initiatives (CRI), retirement savings have started to improve as the state-facilitated plans have launched. The up-and-running plans in California, Connecticut, Illinois, Maryland, and Oregon have already accumulated $840 million in assets as of May 2023, along with nearly 156,000 registered employers and about 684,000 funded accounts. This is real progress because even a small amount regularly saved throughout a worker’s career can result in substantial savings over time and a better shot at a financially secure retirement.
There’s also hope that more states will follow the lead of these 19 states. According to CRI, some 22 states have introduced bills to establish new retirement savings programs, amend existing programs, or form study groups to explore their options during the 2023 state legislative sessions. And since 2012, at least 47 states have acted to implement a new program or a study or have considered legislation to establish state-facilitated retirement savings programs. Another interesting development is that some states are actively exploring interstate partnerships, which could help to make these state-facilitated retirement programs even more efficient and lower costs.
Policy changes at the federal level also are a step in the right direction. The newly-enacted SECURE 2.0 legislation reformed the federal Saver’s Credit, making it a Saver’s Match beginning in 2027. Many workers saving in these state-facilitated programs will be eligible to claim the Saver’s Match, giving an additional boost to their retirement savings.
Clearly, these state programs are gaining traction among workers, but this shouldn’t be surprising given the high level of retirement anxiety Americans feel. In fact, the National Institute on Retirement Security’s 2021 biennial public opinion polling found 72 percent of Americans agree that state-facilitated retirement programs are a good idea, and 75 percent said they would participate if offered in their state.
During the recent CRI webinar, Nevada State Senator Dallas Harris, who championed the state’s new retirement plan, summed up the situation. “The way our system is currently structured, it’s on us to make sure that we are saving our own dollars. I know that if we did not get people saving, our social programs were going to be in a lot of trouble come 30 or 40 years from now.”
We agree with Senator Harris. And we’re encouraged that 19 states are taking steps in the right direction to ensure Americans can have a secure retirement after a lifetime of work.
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