After 15 years working as a UX designer and developer–focused on projects that have a social or environmental impact–Dan Vallentyne has little saved for retirement. “The work I love doesn’t pay and the work that pays I do not love,” he says. Living in the expensive Bay Area, it was difficult to find extra money to invest. When he has worked in-house for companies, they haven’t offered retirement plans; when he freelances, running a firm called Capslock, he’s been focused on designing and building digital products, not figuring out how to invest on his own.
His situation is the norm. A report this year found that 66% of millennials have nothing saved for retirement. Among the working-age families that have retirement savings, the median balance is $5,000, according to the most recent data available from the Economic Policy Institute. For families approaching retirement, the median savings is $21,000–after taxes, on its own, enough to last a couple a little more than a year living at the federal poverty line.
If you turn 65 in 2040 or 2050 or 2060, you may not be able to retire easily. Without changes, Social Security is projected to pay full benefits only until 2035, and then will pay only 75% of the already-low total (the average benefit today is $1,369 a month, only slightly above the poverty line). While your grandparents or great-grandparents might have had pensions–with guaranteed checks paid for life from a company-funded account–if you have access to a retirement plan now, it’s probably a 401(k), and there’s a good chance there isn’t enough money in it.
The 401(k) plan, an employer-sponsored plan that lets workers contribute part of their paycheck to the plan, generally before paying taxes, was never designed to replace pensions. It was originally a loophole meant to help workers defer compensation from bonuses or stock options. But when it was written into the tax code in 1978, a retirement consultant realized that it could be used to let employees create tax-advantaged savings accounts. By 1983, almost half of large companies were offering or considering a 401(k) retirement plan. By the 1990s, most large companies had the plans in place.
Pensions had been common–in the mid-20th century, roughly half of private companies offered pensions. Now, only about 8% do. Companies didn’t want the financial risk, since they had to pay retirees a set amount each month regardless of the market. As people lived longer, companies also wanted to avoid the expense of paying out benefits for a lifetime, so they quickly embraced 401(k) plans. Pensions aren’t perfect for employees either; 100 multiemployer plans are on track to run out of money within two decades–in part because there are more retirees than employees participating in the plans–and the government insurance program designed to bail them out will run out of money sooner than that. But the shift to 401(k) plans hasn’t really helped.
This story is part of our series Why Work Has Failed Us, looking at why employment no longer provides the economic security it used to. You can read more here.
“Basically, 401(k) plans just haven’t worked,” says Monique Morrissey, an economist at the nonprofit think tank Economic Policy Institute. “They’ve worked for some people, but for those people, it’s just a tax break.” The majority of 401(k) savings are held by the wealthy–the richest 20% of households hold about three-quarters of the money invested now. Nearly half of companies that offer 401(k) plans don’t offer employer matches; those that do tend to be the most competitive jobs that already pay employees well.
So many workers struggle to save. “It’s really hard to get people to save more, especially as incomes have been pretty stagnant,” says Matthew Rutledge, a research economist at Boston College’s Center for Retirement Research. “People don’t feel like they have a whole lot of capacity to save.”
By 2016, CEOs of the largest companies were making an average of $15.6 million a year, or around 936% more than they did in 1978. The stock market had grown around 545%. But their employees were only making 11.2% more. The average hourly wage today has roughly the same purchasing power that it did in 1978. A mind-boggling 43% of U.S. families can’t afford to pay for basic expenses like housing, food, transportation, childcare, healthcare, and a monthly phone bill.
For someone living in an expensive city, even a job with a decent salary might not go far beyond rent, student loan payments, and other bills. Many freelancers say they don’t make enough to save for retirement. By necessity, other bills are the priority. Starbucks, unlike most jobs with lower pay, offers a 401(k) plan with a generous 6% match. But a review from a barista on Glassdoor put it simply: “I don’t use it because I’m not paid enough.”
In some cases, workers make enough to save, but still aren’t participating in their company’s 401(k) plan. Increasingly, companies are auto-enrolling employees in plans; just as people are slow to sign up on their own, they’re also slow to opt out if they’re automatically enrolled. As of late 2017, 68% of the largest companies use auto-enrollment. One-third of companies now also start employees at a savings rate of 6% of their pay or more–recognizing that even employees using the plans haven’t been saving enough. (High savings rates are not universal; Morrissey points out that employers who match worker contributions likely aren’t very motivated to increase the company’s own cost.) Auto-escalation, which bumps up the savings rate over time, is also becoming more common. Both are necessary. “Even with a match, you really need to be getting people to around 10% to 15%, and that’s only going to happen with decent matches and this escalation,” says Rutledge.
Many workers don’t save in an employer plan because they don’t have the option–only 53% of small- and medium-sized businesses offer retirement plans. Now, some states are beginning to work to change this with their own IRA plans. Reach Break Brewing, a brewery in Astoria, Oregon, that opened in 2017 and has six employees, is the type of small startup that typically wouldn’t offer workers a retirement plan. But the brewery was part of the first wave of companies to sign up for a new state program that automatically enrolls workers in a Roth IRA, at a 5% savings rate that automatically increases 1% each year, up to 10%. (An IRA, or individual savings account, is not directly sponsored by an employer, unlike a 401(k), but also has tax advantages–in the case of a Roth IRA, workers put in part of their paycheck that has already been taxed, but they won’t be taxed later when they withdraw the money and the interest they’ve earned on it.) In the Oregon program, if someone doesn’t want to participate, they have to opt out.
Called Oregon Saves, the program launched a little over a year ago as the first of its kind. Over two years, every employer in the state will have to either offer a retirement plan or sign up for the state-run IRA. For small companies, 401(k) plans are typically expensive.
“It makes it a little difficult being a small company with only a handful of employees,” says Josh Allison, one of the founders of Reach Break Brewing. “We’re just a startup company with limited funds and resources and time, so we didn’t have something like that implemented. With the Oregon Saves program it’s really easy and streamlined and allows us to operate a retirement program for our employees that we probably wouldn’t have without.”
Someone working at a company without a retirement plan could sign up for an IRA on their own. But with a workplace plan, people are 10 to 15 times more likely to do it. “I hadn’t been saving at all for retirement,” says Chris Smirl, who works in the brewery’s tap room, and who had worked for a series of small businesses in the past without retirement plans.
“I think it was always my focus just to try to save for the near future,” he says. “That was always my concern, so I kind of always put off the distant future, until I was kind of like, well, if they’re already taking it out of my check, and it’s easy to do, and I don’t have to think about it, it doesn’t really affect my pay that much, then it’s something that I would try.”
The IRA won’t make anyone rich. A calculator on the site estimates that if you’re 22 years old and making $14 an hour–saving around $120 a month–you could end up with around $230,000 by the time you’re 65. A 40-year-old starting now might end up with around $86,000. But for someone who might have otherwise made it to 65 with no savings, it makes a difference; if they wait a few years before accessing Social Security, for example, they’ll get larger payments. The nonprofit AARP estimates that if low-income retirees get an extra $1,000 each year, Oregon taxpayers will save $100 million in costs of social services over the next 15 years. Several other states are working on similar programs.
The program can be helpful, says Rutledge. Startups that are working to make 401(k) plans more affordable for small businesses–like ForUsAll or Betterment, which use robo-advisers to keep fees low–can also help. A recent Trump proposal to make it easier for small businesses to join together in 401(k) plans might help. Still, they’re not a full solution. Working longer can also help, for those who are healthy enough to stay in a job past the traditional retirement age; employers may need to be encouraged to hire older workers. One study found that delaying retirement by three to six months is equivalent to saving an extra 1% over three decades. (Working longer also has benefits for health, as it keeps people more social and maintains identity.)
A bigger solution could happen at the national level. In Australia, for example, employers are required to contribute 9.5% of each employee’s salary to a mandatory retirement fund, which retirees can access, along with means-tested government benefits. The U.S. could also expand Social Security. The program already works well–if it didn’t exist, almost half of American retirees would live in poverty. Right now, it’s designed to replace only 35% of someone’s income. But there are ways to increase the program’s funding so that it could both cover the coming gap and offer bigger benefits. Income over $128,400 isn’t taxed for Social Security now; if it were, the program could raise around $220 billion this year, helping cover part of the funding gap. Taxing the investment income of wealthy Americans could raise billions more, as could removing tax loopholes for inherited wealth.
“Expanded Social Security seems like it’s a pretty powerful thing, and it would work with a lot of political constituencies,” says Rutledge. “And we already know that it works.”