Examining Retirement: Abandoned and Underfunded Savings Accounts Prompt Calls for Change
Americans are failing to claim tens of millions of dollars held in Individual Retirement Accounts (IRAs), one reason why experts are calling for changes in a system that is not providing retirement security for a significant number of households. Also contributing to the challenges facing retirees: 401(k) plans–which have replaced pensions for much of the nation’s workforce–often are not being funded sufficiently, and financial literacy lags well behind where it needs to be.
Those were among the key takeaways from “Retirement in America: Underfunded 401(k)s and Forgotten IRAs,” an October 18, 2022, Federal Reserve Bank of Chicago Economic Mobility Project virtual event exploring the growing difficulties facing Americans who wish to retire with a semblance of fiscal security. The problem is especially acute, panelists said, for lower-income workers, who tend to change jobs more frequently and have less capacity to contribute to self-funded retirement plans.
“The (retirement) industry tends to cater to the clients who are affluent and leave behind the lower-wage, as well as, unfortunately, people who are of color and women,” said J. Mark Iwry, a nonresident senior fellow in economic studies at the Brookings Institution and one of the event’s expert panelists.
Aiming to connect the economic research the Chicago Fed produces with policymakers, the Economic Mobility Project was founded at the Bank in 2022. Previous events examined redlining and blockbusting as contributors to the racial wealth gap and the question of what is meant by inclusive full employment.
The 65-minute retirement event, which can be seen on replay here, featured Federal Reserve Bank of Chicago economists and a range of other experts on the topic. They shared not only their analysis of what has gone wrong, but some of their best ideas for improving things going forward, including legislatively.
“I think in terms of policy space, it's likely to be sort of small changes at a time to strengthen the existing system,” said Shanthi Ramnath, a senior economist at the Chicago Fed, who earlier in the event shared findings from the recent paper she co-authored, “Set It and Forget It? Financing Retirement in an Age of Defaults.”
Ramnath told attendees that people abandoning or losing track of IRAs is of increasing concern in this era of workers being enrolled in such plans by default. According to the research, tax data showed that 0.4% of one cohort of retirement-age people appeared to have abandoned some $66 million held in IRAs. While these numbers are small, there is a concern about people increasingly losing track.
That’s just one facet of the new research, prompted, Ramnath said, by the intuitive sense that people who work multiple jobs over a lifetime may well forget about or be unable to locate some of the employer-mandated retirement accounts they accumulate. “There’s even been in the past some policy proposals that sort of address this,” she said. “But to date there hasn't really been that much empirical work to get a sense of the scope of this issue.”
To combat the problem, she suggested several policy changes that are worth examining. They include increased education and some form of easy consolidation of workers’ multiple accounts, such as a “retirement dashboard” to keep tabs on their savings. (Ramnath elaborated on those thoughts in the policy brief, “Americans Are Abandoning Their IRAs. What Can Be Done?”)
While knowing where your retirement dollars are is important, so, too, is having enough of them to keep you secure.
To that end, Chicago Fed senior economist Enrichetta Ravina presented a summary of her joint research paper, “Retirement Savings Adequacy in U.S. Defined Contribution Plans.”
The study’s headline finding is that three in four workers are not saving enough to be able to maintain a standard of living comparable to the one they had while working, a threshold defined at 80% of their work-life earnings. To reach that conclusion, Ravina and her co-authors studied more than 350,000 U.S. workers enrolled in 401(k) plans and developed “a new methodology to evaluate retirement savings adequacy,” she said, simulating 10,000 scenarios for each worker to predict the wealth they will have at age 65.
Savings inadequacy is acute for a significant proportion of workers. “We also find that one in three workers will have to decrease their standard of living once they reach retirement by more than 10% per year,” Ravina said.
A potential bright spot was the finding that workers under age 40 are more likely than their elders to be on track to meet that retirement adequacy threshold.
To address the problem of insufficient retirement savings, Ravina suggested policymakers consider ways to encourage workers to boost savings rates, currently at 6.3% in the sample, up to 10%. Another possibility: Limit withdrawals people are able to take beginning at age 59. (Ravina’s policy brief on the topic is entitled “In the Future, Americans’ 401(k)s May Be Underfunded—Here Are Some Suggested Solutions.”)
The panel discussion that followed brought in Iwry, who is also a visiting scholar at UPenn’s Wharton School; Annamaria Lusardi, a professor of economics and accountancy at the George Washington University School of Business; and Sita Nataraj Slavov, professor of public policy at George Mason University and a nonresident senior fellow at the American Enterprise Institute. Journalist Kristin Myers (The Balance) moderated.
The findings presented are “quite somber,” Lusardi said. Not only are people not saving enough, but “some workers are simply forgetting or not using their retirement accounts, and the money forgone, as Shanthi has shown us, is not always small.”
The current system can be too much “one size fits all,” she said. Against such a backdrop, financial literacy, a core understanding of how retirement plans can be made to work best for individuals, is paramount: “We need a system that makes it easy for people to save for retirement, but also that they know what they are doing,” said Lusardi.
Iwry outlined three important proposed policy changes he said he has had a hand in developing:
- Automatic enrollment in plans such as 401(k)s, including automatic increases in contribution levels over time.
- As is starting to happen at the state level, automatic enrollment into such plans for the 55 to 60 million workers who don’t have access to them through their employer. “We need to get them into the system, at least give them a realistic chance,” he said.
- And a “savers tax credit to make saving more remunerative for people who are in the lowest tax brackets.”
Slavov, meanwhile, cautioned people not to forget about Social Security in these discussions. Automatic enrollment in retirement plans can be “a powerful tool,” she said.
“But… understanding Social Security is hugely important because for most people, especially people with lower incomes, that's their biggest retirement asset,” said Slavov. “So it is very important to understand what you're going to get from Social Security and then how you need to optimize your own retirement saving around that.”
