Pandemic Puts Secure Retirement at Greater Risk for Many Older Americans

The retirement gap

Traditionally, retirement preparedness consisted of three parts: savings, employer-paid pension income and Social Security. But traditional pensions, also known as “defined benefit plans,” are vanishing for many workers. In 1983, roughly 60 percent of workers with an employer-sponsored retirement plan had a traditional pension plan; by 2020, just 18 percent of full-time private-sector workers had access to a traditional pension.

Employers have largely replaced traditional pension plans with what are called “defined contribution plans,” such as 401(k) plans, whose value at retirement depends on the amount the employee and employer contribute, as well as investment returns and the employee's skill at managing money. In 1983, among workers who were offered a retirement plan, just 12 percent were offered only a defined contribution plan. By 2020, 73 percent of those workers who were offered a workplace retirement plan were offered only a defined contribution plan.

Over half of all workers don't have access to any retirement plan at work. Most workers who do have access to a workplace savings plan are not saving enough to adequately fund a secure retirement. For middle-income households ages 55 to 64 with a defined contribution plan or IRA, the median balance is roughly $144,000, not nearly enough to ensure a secure retirement, especially given that the average number of retirement years has increased markedly, from 12 in the 1960s to almost 20 today.

Retirement solutions for workers

Because so many workers don't have a retirement plan available to them, AARP is a strong supporter of state-backed “work and save” programs, which are state-facilitated payroll deduction programs for those whose employers don't offer a retirement plan. “Workers are 15 times more likely to save for retirement simply by having access to payroll deduction at work,” Certner said. “Work and save” programs require employers to facilitate payroll deductions for workers, but the programs operate like 529 college savings plans and are operated through public-private partnerships. Worker participation is optional, and investment decisions are left to the worker.

Ultimately, state “work and save” programs could save the government billions of dollars in costs related to those with little or no savings. “The U.S. could save an estimated $33 billion on public assistance programs between 2018 and 2032 if lower-income retirees save enough to increase their retirement income by just $1,000 more per year,” Certner said.

AARP also supports federal legislation that would encourage automatic payroll deduction savings for all workers who lack coverage. In addition, AARP supports improvements to the Savers’ Tax Credit — which acts as a matching contribution — to encourage greater retirement savings, especially among more modest-income workers. AARP also supports improving retirement plan coverage for the 27 million part-time workers who typically aren't covered by retirement plans, as well as a national lost-and-found office to help workers locate retirement benefits from previous employers. In 2018 — the latest Department of Labor data available — there were 21.3 million inactive 401(k) accounts. AARP also strongly supports adequate plan disclosures, including an annual paper benefit statement, to help workers better understand and manage their retirement plans.

Finally, AARP is also a strong supporter of Social Security, whose modest benefits — an average $1,555 per month for all retired workers — keep approximately 15 million older Americans out of poverty and allow millions more to live their retirement years independently and without fear of outliving their income. “We are trying every day in all of our advocacy work to make sure that Congress and the White House understand how important Social Security is to our future security,” Jenkins said.

John Waggoner covers all things financial for AARP, from budgeting and taxes to retirement planning and Social Security. Previously he was a reporter for Kiplinger's Personal Finance and  USA Today and has written books on investing and the 2008 financial crisis. Waggoner's  USA Today investing column ran in dozens of newspapers for 25 years.