Fundamental changes have occurred over the past 40 years to the nation’s retirement system. These changes have made it increasingly difficult for people to plan and save effectively for a financially secure retirement.
The U.S. retirement system, and the workers and retirees it was designed to help, face major challenges. About a third of private-sector workers in the United States do not have access to a retirement plan through their employers. In addition, for those who do have access, traditional defined benefit pensions have become much less common. Since 1975, there has been a marked shift to defined contribution plans, such as 401(k)s, as the primary type of retirement plan. Combined with increases in longevity, 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.
Figure 1: 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 (IRA).
- The financial shortfall facing Social Security. The Social Security Old-Age and Survivors Insurance Trust Fund that supports retirement benefits is projected to be depleted in 2031, under current law, according to the Congressional Budget Office’s estimates. At that point continuing payroll taxes will be sufficient to pay only about three-quarters of scheduled benefits.
- The declining security of employer-provided pension plans. Participation in employer-sponsored pension plans hovers at about half of the total private-sector labor force, despite tax incentives and initiatives such as automatic enrollment. 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.
- The growing responsibility for individuals to plan and manage their retirement. Ensuring the financial literacy of older people has become particularly important given the transition to a financial account-based retirement system, the increasing responsibility of individuals to manage their assets in retirement and understand key factors that can affect their retirement income. Policymakers will need to examine the effectiveness of services and protections provided to individuals at older ages.