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Americans Aren’t Saving Enough for Retirement — and All Taxpayers Might End up Paying for It

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Millions of Americans aren’t putting away enough money for retirement, and the colossal shortfall in 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 new research from Pew Charitable Trusts says will cost over $1.3 trillion by 2040.

However, the non-governmental organization suggests that there’s an underutilized solution that could relieve 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.

These programs would allow private employers without the means to create their own retirement savings programs to offer employees an automated IRA. As it stands right now, only eleven states have adopted these programs.

What the data says

The Pew Charitable Trusts’ new study suggests that over the next couple of decades, older Americans are not going to have enough money to last through retirement, and the shortfalls will be a massive burden on the government.

The report finds that over 56 million privately-employed Americans lack access to retirement savings programs through their jobs. “Limited savings could lead to a cumulative additional cost to the federal government of $964 billion between 2021 and 2040,” the report estimates. It adds that state governments will be cumulatively burdened by $334 billion over the same time span.

These sizable costs are what governments would need to pay to properly address a boom in public assistance demand if things continue as they are. Pew says that this demand would also lead to an increased burden on taxpayers due to decreasing revenues and a drop in quality of life for retirees.

What’s more, the Pew Trusts estimate that the ratio of retirement-age households to working-age households will grow by 46% between now and 2040. This means that the burden of this $1.3 trillion shortfall will be borne by a smaller population of working-age taxpayers.

According to Pew, “the study estimated the cumulative additional taxpayer liability because of insufficient retirement savings to be $13,600 per household.”

How auto-IRAs can help

This data may seem bleak, but as the Pew Trusts point out, there is a solution being undertaken by some states: automated savings programs, or automated IRAs.

Some private employers, especially small businesses, are not able to offer employer-based retirement savings options like 401(k)s due to high administrative and financial costs. Auto-IRAs take automatic payroll deductions from employees and roll them into a retirement savings plan that bears no cost on the employer. Employees are typically automatically enrolled in these programs, though they can easily opt out.

The research estimates that the average worker need only put aside an extra $140 per month over a 30-year period to help offset the retirement savings gap and largely erase this $1.3 trillion crisis. As it stands now, eleven states (and the city of Seattle, Washington) have implemented auto-IRAs. Four of these states have already seen average monthly savings grow to or above $140 per month.

If households could save this much in retirement 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 who have an auto-IRA program, though a bi-partisan group of lawmakers is trying to bring one to the Commonwealth.

The new Keystone Saves Program Act would make Pennsylvania the twelfth state to offer an auto-IRA. According to the Keystone Saves Coalition, an interest group trying to bring auto-IRAs to the state, and that also includes the Pew Charitable Trusts as a member, says the proposed auto-IRA program would help the state to reduce an estimated $17.8 billion windfall it will be tasked with paying over the next 17 years.