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 (OASI) that supports retirement benefits is projected to be depleted in 2034, under current law, and continuing payroll taxes will be sufficient to pay only about an estimated 77% of scheduled benefits, according to the 2022 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, and research shows that many households 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).
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.
- Federal retirement programs often have Cost-of-Living-Adjustments (COLAs) to ensure that benefits keep pace with inflation. This includes Social Security for more than 60 million older Americans, and workers with disabilities and their families. These COLAs are typically based on consumer price indexes for certain groups of Americans. The Bureau of Labor Statistics produces these indexes, but it hasn’t evaluated whether its data accurately reflects what these groups pay, where they shop, and what they purchase.
- DOL requires 401(k) retirement plans to provide participants information on plan and investment fees. 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 to divorcing parties.
- 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 as part of its process for evaluating investment options—leaving federal workers potentially vulnerable.
- In 2018, about 106 million people participated in employer-sponsored defined contribution retirement plans, such as 401(k) plans. Assets in these plans were worth about $6.3 trillion. Many plan administrators share the personal information used to administer these plans via the internet, which can lead to significant cybersecurity risks. DOL has stated that plan administrators have a responsibility to mitigate cybersecurity risks in retirement plans, and has announced new guidance to protect the retirement benefits of America's workers. DOL could also identify minimum expectations for mitigating cybersecurity risks for all entities involved in the administration of these plans.
- Executive retirement plans allow some executives to defer their compensation and taxes to future years. There are both benefits and risks to such plans for executives. For instance, there are no limits on how much pay can be deferred. However, if companies go bankrupt, executives may not receive their deferred pay because the money may be subject to the claims of creditors. Additionally, federal oversight agencies don’t have much information about who is participating in such plans, or their effects on federal revenues. DOL could amend its reporting requirements for these plans, explore actions to help prevent rank-and-file employees from participating in them, and provide instructions for companies to follow to correct plan participant eligibility errors.
Defined Contribution Plans: 403(b) Investment Options, Fees, and Other Characteristics Varied
High-Risk Series: Key Practices to Successfully Address High-Risk Areas and Remove Them from the List
401(k) Retirement Plans: Many Participants Do Not Understand Fee Information, but DOL Could Take Additional Steps to Help Them
Retirement Savings: Federal Workers' Portfolios Should Be Evaluated For Possible Financial Risks Related to Climate Change
Employee Benefits Security Administration: Enforcement Efforts to Protect Participants' Rights in Employer-Sponsored Retirement and Health Benefit Plans
Retirement Security: Debt Increased for Older Americans over Time, but the Implications Vary by Debt Type
Defined Contribution Plans: Federal Guidance Could Help Mitigate Cybersecurity Risks in 401(k) and Other Retirement Plans
Retirement Security: Older Women Report Facing a Financially Uncertain Future