Obstacles to Saving for Retirement

Presentation by Wilhelmina A. Leigh Joint Center for Political and Economic Studies Program on Retirement Issues National Press Foundation Washington, DC 14 June 2010

Organization Of Presentation
Why Does Saving for Retirement Matter? y How Do We Know There Are Obstacles to Saving for Retirement? y Who Encounters Obstacles to Saving for Retirement? y What Are The Obstacles? y How to Address The Obstacles?
y
2 Joint Center for Political and Economic Studies

Retirement Income Stool

y

The three legs of the metaphorical retirement income stool are:

Social Security Employer-sponsored pensions or retirement plans Private savings and investment

Joint Center for Political and Economic Studies

Expected Sources of Retirement Income (Percent)

African Americans All Races

7.8 26.5

42.7 23.1

2009 Joint Center Poll

Joint Center for Political and Economic Studies

Why Does Saving for Retirement Matter?

y

Two legs of the retirement income stool employer-sponsored pensions or retirement plans, and Social Securityare not as sturdy as in the past.

Joint Center for Political and Economic Studies

Challenges to Social Security Leg of Retirement Income Stool

y

Its pay-as-you-go financing system will be challenged in the future by: Retirement of the Baby Boom cohort Increased life expectancy, especially beyond age 65 Decreasing birth rates

Joint Center for Political and Economic Studies

Challenges to Social Security Leg of Retirement Income Stool (contd)

y

Even without future challenges, Social Security benefits alone are not enough to support a comfortable retirement.
Retired Workers of All Races All Men Women Average Monthly Benefit (12/09) $1,164.30 $1,311.70 $1,011.40

SSA, Annual Statistical Supplement, 2010

7 Joint Center for Political and Economic Studies

Social Security Retirement Benefits by Race and Gender

y

Social Security benefits constitute a floor for financial needs during retirement.
Beneficiary Group African American Males African American Females White Males White Females Other* Males Other* Females Average Monthly Benefit (12/09) $1,120.00 960.50 1,348.00 1,025.40 972.70 836.80
SSA, Annual Statistical Supplement, 2010

* Includes Asians and Pacific Islanders, American Indians and Alaska Natives, and a subset of the total number of beneficiaries of Hispanic origin. Joint Center for Political and Economic Studies

Challenges to Employer Retirement Plans or Pensions

Workers Ages 25-59 Percentage Offered Percentage Participating Percentage Participating Among Workers with Offers 83.8 85.3 79.9 78.6 Percentage Participating Among All Workers 29.3 35.6 24.8 11.6

All White NonHispanic Black NonHispanic Hispanic

59.1 64.6 55.7 38.4

49.5 55.1 44.5 30.2

Current Population Survey (2009) in Butrica and Johnson (2010)

9 Joint Center for Political and Economic Studies

Challenges to Employer Retirement Plans or Pensions (contd)

y

In 2009, among all wage and salary workers ages 25-59,

30.5 % were offered DB pensions 54.8 % were offered DC plans

Survey of Income and Program Participation (2009) in Butrica and Johnson (2010)

10

Joint Center for Political and Economic Studies

Challenges to Employer Retirement Plans or Pensions (contd)

y

In summary,
not all employees today have employer retirement plans, and many retirement plans offered today will not provide a lifetime income stream that can support a comfortable retirement.

11

Joint Center for Political and Economic Studies

Why Does Saving for Retirement Matter?

y

More than one of every four workers (27%) is not at all confident they will have enough money for a comfortable retirement. Worker confidence about their ability to have a comfortable retirement is directly correlated with the amount saved for retirement. In other words, as saving and preparedness for retirement increase, so does confidence about having a comfortable one.
EBRI Retirement Confidence Survey 2011
Joint Center for Political and Economic Studies

12

How Do We Know There Are Obstacles to Saving for Retirement?

100% 90% 80% 48 70% 60% Less Than $25,000 50% 40% 13 30% 20% 10% 0% All Workers (2007) All Workers (2011) 15 14 14 10 10 11 9 $25,000 - $49,999 $50,000 - $99,999 $100,000 - $249,000 $250,000 or more 56

EBRI Retirement Confidence Surveys 2007 and 2011

13 Joint Center for Political and Economic Studies

Who Encounters Obstacles to Saving for Retirement?

People of Color (especially African Americans and Latinos) y Women y Immigrants y Persons ages 50 and over y Unemployed Individuals
y

14

Joint Center for Political and Economic Studies

Who Encounters Obstacles to Saving for Retirement? (contd)

y

All workers (60%) are more likely than either African American workers (45%) or Hispanic workers (34%) to currently save for retirement. Among employees in selected Fortune 500 companies, African Americans (66%) and Hispanics (65%) were less likely than Asians (76%) and whites (77%) to participate in the available 401(k) plans.
2007 EBRI Minority Retirement Confidence Survey Ariel/Hewitt Study 2009

15

Joint Center for Political and Economic Studies

Amount Saved by Workers for Retirement, by Race/Ethnicity, 2007

100 90

80 48% 70 70% 60 72% $250,000 or more $100,000 - $249,999 $50,000 - $99,999 50 10% 40 13% 30 13% 20 15% 7% 10 14% 0 All workers 7% 4% African American workers* 11% 7% 6% 4% Hispanic workers $25,000 - $49,999 Less than $25,000

* Percents do not sum to 100 due to rounding.

2007 EBRI Minority Retirement Confidence Survey Joint Center for Political and Economic Studies

16

What Are Obstacles to Saving for Retirement?

y

Lack of sustained employment and the lack of access to retirement saving vehicles thereby
People of color: chronic unemployment Women: intermittent work histories Immigrants: employability challenges Persons ages 50 and over: unique challenges, if unemployed

17

Joint Center for Political and Economic Studies

Longstanding Obstacles to Saving for Retirement

y

Labor market segmentation

Low-income labor force is disproportionately African American (19.9%) and Latino (28.4%). Workers in the lowest earnings quartile are less likely to work for employers who offer retirement plans (38%) than are workers in the highest earnings quartile (73%). Thus, African American workers and Latino workers are less likely than white workers to have access to retirement plans through their employers.
BLS 2009 data Current Population Survey 2008

18

Joint Center for Political and Economic Studies

Longstanding Obstacles to Saving for Retirement (contd)

y

Low earnings: Many say they want to save every month but dont have enough money to do so.
Adults Age 18 and Over Percent of Each Group by Income All Income Groups Persons with Income $35,000 65 50 52
2009 Joint Center Poll

African Americans Whites All Races

53 35 37

19

Joint Center for Political and Economic Studies

Longstanding Obstacles to Saving for Retirement (contd)

y

Lack of familiarity and comfort with saving and investing

African Americans and Latinos are more likely than other groups to lack familiarity with mainstream financial products and services, and, therefore, less likely to use them. The limited presence of mainstream financial institutions in urban and rural communities of color contributes to these lacks of familiarity.

20

Joint Center for Political and Economic Studies

Longstanding Obstacles to Saving for Retirement (contd)

y

Lack of knowledge about the size of the nest egg needed for retirement
Less than half of workers (42%) report that they and/or their spouse have tried to calculate the amount of savings they would need for a comfortable retirement.
EBRI Retirement Confidence Survey 2011

21

Joint Center for Political and Economic Studies

The Great Recession As An Obstacle to Saving for Retirement

y

The Great Recession has severed access to employment and retirement saving for many.
Some eligible individuals who experience long-term unemployment retire early with reduced Social Security (or other retirement) benefits. Others who currently are or have recently been unemployed meet daily living expenses by taken money out of 401(k) and 403(b) plan holdings they may have (often at a penalty), leaving less for the retirement years.

22

Joint Center for Political and Economic Studies

The Great Recession As An Obstacle to Saving for Retirement (contd)

y

Employers confronting business survival challenges devote fewer resources to providing benefits information and education to their employees.
y

This may translate into employees not enrolling for benefits (such as retirement plans) for which they are eligible.
Prudentials Group Insurance 2011

23

Joint Center for Political and Economic Studies

How to Address Obstacles to Saving for Retirement?

y

Workers are responding to obstacles to retirement saving by

deciding not to retire from full-time work increasing their expected retirement age (33.4% of persons over age 50) planning to work part-time during retirement (44.1% of persons over age 50)
2010 AARP PPI Survey

24

Joint Center for Political and Economic Studies

How to Address Obstacles to Saving for Retirement? (contd)

y

Implement policies to help low-wage workers save for retirement

Mandate provision of employer-based retirement savings plans (to all workers) Mandate automatic employee enrollment (with opt-out) in employer-sponsored retirement plans Modify the Savers Credit (e.g., make refundable, increase AGI limits, provide as government matching funds) Establish viable menu of non-employer-based retirement savings vehicles

25

Joint Center for Political and Economic Studies

How to Address Obstacles to Saving for Retirement? (contd)

y

Enhance knowledge about ways to save, in general, and ways to save for retirement, in particular
Mandate financial education nationwide for grades K-12 Offer incentives for adults to enroll in and complete financial education classes.

26

Joint Center for Political and Economic Studies

Contact Information
Wilhelmina A. Leigh Senior Research Associate Joint Center for Political and Economic Studies 202-789-3529 (phone) 202-789-6369 (FAX) wleigh@jointcenter.org

27

Joint Center for Political and Economic Studies