A lack of retirement savings among the U.S. workforce could cost the federal government nearly $1 trillion before 2040 while simultaneously putting significant strain on the budget of every state.
In fact, state spending on programs that support older Americans in financial need could total another $334 billion over the same time period, putting the cumulative government cost of the nation's looming retirement crisis around $1.3 trillion.
These sobering statistics are among the headline findings of a new analysis published by The Pew Charitable Trusts. According to the analysis, this massive amount of social spending does not fill the retirement income gap facing the American workforce, and short of a major course correction, many households will be forced to reduce their standard of living in retirement.
Pew's researchers say there is some good news, too, coming in the form of more state-run retirement savings programs and the expansion of state-based mandates for the creation of private-sector workplace retirement savings plans, particularly among small businesses.
Crucially, many of these programs include automatic enrollment provisions that allow workers to start accumulating modest retirement-oriented savings without having to make investment or contribution decisions. The idea is to put "retirement planning inertia" to work for Americans rather than against them.
John Scott, director of Pew's retirement savings project, and Andrew Blevins, an officer working on the research project, say the creation and maintenance of auto-enrollment savings at both the state and the employer level could go a long way to shore up the aforementioned income gap.
According to the duo, even a small amount of regular contributions to retirement savings, if allowed to compound over the course of a typical working career, can close much of a given individual's projected income shortfall, thereby reducing the burden on government safety net programs.
A Big Problem
At the heart of Pew's new report is an analysis conducted by Econsult Solutions, an economic consulting firm.
According to the analysis, the share of households with people at least age 65 with less than $75,000 in annual income will increase by 43% by 2040, growing from 22.8 million in 2020 to 32.6 million in 2040.
Making matters worse, the growth in the older population will not be matched by comparable growth in working-age households. The analysis suggests the age dependency ratio — the ratio of households with people at least age 65 to those of working age — is expected to grow by 46% over that time period.
Specifically, in 2020, there were 37 households ages 65 and older for every 100 working-age households. That ratio is set to jump to 54 older households for every 100 working-age households by 2040.
As a result, the additional spending needed on programs such as Social Security and Medicaid will be borne by a smaller portion of the working-age population.
"And as these workers age, inadequate retirement savings will likely force reductions in retirement income, and therefore the quality of life, for many," the analysis warns. "The average income shortfall in retirement among vulnerable older households in 2020 was $6,740, which will increase state spending for Medicaid and other assistance programs."
