Millions of Americans are not investing enough in retirement, and the huge shortfall could wind up costing the nation as a whole.
Even millionaires fear that they will burn through their retirement savings, and most people are creating retirement goals off their top of their heads. A colossal shortfall of retirement savings is shaping up to be a financial burden that will ultimately affect all taxpayers.
Retirees, taxpayers and both the federal and state governments will suffer at the hands of the looming retirement crisis that Pew Charitable Trusts released earlier this year says will cost more than $1.3 trillion by 2040.
The non-governmental organization suggests that there's an underutilized solution that could alleviate much of the burden: state-run individual retirement accounts, or IRAs, which could help workers save for retirement and enable the government to avoid covering the hefty shortfalls.
Private employers without the capacity to create their own retirement savings programs would be able to offer employees an automated IRA. In total, only 11 states have adopted such programs.
The Pew Charitable Trusts study suggests that over the next few decades, older Americans will not have enough money to last through retirement, and the shortfalls will be a significant burden on the government.
The report notes that more than 56 million private-employed Americans lack access to retirement savings programs through their jobs.
Between now and 2040, the ratio of working-age households to retirement-age households will increase by 46%, according to the Pew Trusts. The burden of this $1.3 trillion shortfall will be borne by a smaller population of working-age taxpayers.
However, as the Pew Trusts point out, there is a solution being pursued by some states: automated savings programs, or automated IRAs.
Due to high administrative and financial expenses, some private employers, especially small businesses, are unable to offer employer-based retirement savings options like 401s. Auto-IRAs take automatic payroll deductions from employees and roll them into a retirement savings plan that bears no cost to the employer. Employees are frequently enrolled through these programs, but they can easily opt out if they want to.
The research estimates that the average worker needs to only put aside an extra $140 per month over a 30-year period to decrease the retirement savings gap and largely erase this $1.3 trillion crisis. As of this writing, 11 states have implemented auto-IRAs. Four states have seen average monthly savings growth to or above $140 per month.
If households could save this much in retirement savings accounts, they could erase the retirement savings gap, eliminate the extra taxpayer burden, and help people maintain their lifestyles in retirement, the Pew report states.
Pennsylvania is not among the states with an auto-IRA program, though a bi-partisan group of lawmakers has been trying to bring it to the Commonwealth.
The KeystoneSaves Program Act would make Pennsylvania the twelfth state to offer an auto-IRA. The KeystoneSaves Coalition, an interest group that is trying to bring auto-IRAs to the state, says the proposed auto-IRA program would help the state reduce an estimated $17.8 billion windfall it will be tasked with paying over the next 17 years.
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Information provided here is accurate as of the published date.