The U.S. retirement system, and the workers and retirees it was designed to help, face major challenges. The Social Security Old-Age and Survivors Insurance Trust Fund that supports retirement benefits is projected to be depleted in 2033, under current law, and continuing payroll taxes will be sufficient to pay only about an estimated 77% of scheduled benefits, according to the 2023 Social Security Trustees Report. Participation in employer-sponsored retirement plans hovers at about half of the total private-sector labor force, despite tax incentives and initiatives like automatic enrollment.
Even for those who do have access, traditional defined benefit pensions have become much less common as defined contribution plans, such as 401(k)s, have become the primary type of retirement plan. This shift has increased the risks and responsibilities for individuals in planning and managing their retirement. Yet research shows that many households are ill-equipped for this task and have little or no retirement savings. As of 2016, about half of households with a worker age 55 and older had no retirement savings, and 29% had no retirement savings or a defined benefit plan. Policymakers will need to consider how to best encourage expanded pension coverage, adequate and secure pension benefits, and more effective use of tax preferences to foster workers’ retirement security.
Retirement Resources for All Households Age 55 and Older
Note: Retirement savings include assets accrued in defined contribution plans, such as 401(k) plans, as well as individual retirement accounts (IRAs).
Policymakers and federal agencies—such as the Department of Labor (DOL)—can better help individuals ensure financial security for themselves and their families as they enter their retirement years.
- Social Security is a major source of income for millions of retirees and other Americans. As program costs continue to exceed revenues, the fund that supports payments for retirees and their families is projected to be unable to pay full benefits in 10 years. The sooner policymakers address the financial challenges, the more gradually changes can be phased in. This would give workers more time to adjust to any changes and factor them into retirement plans.
- Millions of teachers and employees of tax-exempt organizations invest in 403(b) retirement plans. DOL provides educational materials to 403(b) plan sponsors and participants. However, the agency's website does not provide the same level of detailed information regarding 403(b) plans as it does for 401(k) plans. For example, the website does not contain targeted educational materials that could help participants understand 403(b) plan fees. Updated DOL information on 403(b) plans could help participants make more informed decisions.
- Differences in income and wealth can affect older populations’ financial security in retirement. In recent decades, income and wealth disparities have been increasing among older Americans and exceed those in other countries. Several factors contribute to disparities in income and wealth distributions for older households, including the cost of long-term care, which can quickly deplete the wealth of older households. When considering options to improve retirement security, research indicates that Germany mitigates the high costs of long-term care through nationwide long-term care insurance.
- Ensuring retirement income security for the aging U.S. workforce presents many challenges. People are increasingly responsible for their retirement planning, and as they live longer, they may outlive their savings. The U.S. is not alone in this problem and other countries have taken steps to promote retirement plan savings. Some retirement plans in other countries have established default contribution rates and investment options to facilitate employee participation and remove potential barriers to entry. In examining options to improve retirement security, other countries have found default investments can be particularly important for workers with lower levels of financial literacy.
- DOL requires 401(k) retirement plans to provide information on plan and investment fees to participants. Even small fees can significantly reduce retirement savings. But almost 40% of participants do not fully understand fee information, and 41% incorrectly believe that they pay no fees. DOL could help participants better understand and use fee information by, for example, requiring plans' fee disclosures to include fee benchmarks (an average fee among comparable funds) for comparing investment options. DOL could also take steps to provide information about fees' cumulative effects over time.
- Divorce can be a financial shock that affects retirement security, especially for women. While a divorcing spouse can take steps to establish a claim to a portion of their former spouse’s retirement benefits, few do so. A legal tool called a Qualified Domestic Relations Order can be used to establish such a claim. However, getting an order can be complex and costly, and many aren't approved—largely because the submitted orders lack required information. DOL provides some information to help divorcing parties pursue these orders but could do more to make resources available.
- Climate change is expected to have widespread economic impacts and pose risks to investments held by retirement plans, including the federal government's Thrift Savings Plan (TSP). For example, certain sectors that are dependent on fossil fuels could be significantly affected by a transition to a lower-carbon economy. Additionally, some sectors could suffer large financial losses from direct physical effects of climate change, such as droughts or flooding. This could pose risks for retirement plans holding investments in such sectors. Some retirement plans in other countries have either incorporated climate-change-related risks or disclosed these risks. However, the Federal Retirement Thrift Investment Board, which oversees the TSP, hasn't assessed climate-change-related investment risks.