The projected retirement deficit for US households has improved somewhat, though some remain at greater risk than others, according to new data from the Employee Benefit Research Institute (EBRI).
The EBRI Retirement Security Projection Model found that for 2019, 40.6% of all US households where the head of the household is between ages 35 and 64 are projected to run short of money in retirement, down slightly from 42.3% in 2014. In line with this, the aggregate retirement deficit of American households in this age cohort, including Social Security benefits, is estimated to be $3.83 trillion, down nearly 14% from $4.44 trillion (in current dollars) in 2014.
The largest improvement was found among younger workers, with those aged 35—39 projected to face a 22% decrease in their average deficits. However, the average projected shortfall within that age group varies dramatically with income level. For workers aged 35 to 39 in the highest income quartile, the average savings shortfall is nearly $14,000; for those in the lowest quartile, it is about $105,000, according to EBRI.
Which factors can affect retirement deficits?
Defined contribution (DC) plan eligibility has a significant impact on retirement deficits, illustrating the importance of expanding coverage to those not currently eligible to participate in an employer-sponsored retirement plan. Individuals between the ages of 35 and 39 who have no future years of eligibility in a DC plan (as if they were not employed in the future by an organization that provides access to a DC plan) have an average retirement deficit of $78,000 per individual. This is more than five times the approximate $14,600 individual retirement deficit of those who have at least 20 years of future eligibility in a DC plan.
Women on average face larger savings deficits than men, due to differences in longevity and wage growth. Among people aged 60 to 64, the average savings shortfalls are $25,000 for single men and $62,000 for single women. For households in that age group in which a spouse has died, the average deficit is nearly $13,000 for a widower and about $16,000 for a widow.
Longevity risk was also found to be a critical factor in increasing retirement savings shortfalls. The EBRI study shows that the retirement deficit for those in the longest relative longevity quartile averages slightly more than 10 times those in the shortest relative longevity quartile.
For public policy purposes, the EBRI has long defined adequate retirement income as having the financial resources to cover basic expenses plus uninsured medical costs in retirement, which makes the projection that about 60% of households won’t run short of money in retirement somewhat of a positive, considering many models ignore these costs.
The EBRI model can project retirement deficits by age, income, gender and marital status cohorts, with flexibility to examine potential changes to the system, such as the impact of policy proposals. To this end, the study found that a 23% pro rata reduction in Social Security benefits starting in 2034 (as suggested by current projections, if no legislative fix emerges) would increase deficits by an average of 17% for those currently ages 35 – 39.
Stay tuned for more information around retirement news, findings and insights.
NAPA Net, “America’s retirement deficit drops,” Ted Godbout, March 11, 2019
PlanSponsor, “Fewer households expected to face retirement savings shortfall,” Lee Barney, March 11, 2019
Ignites, “Retirement savings shortfall improves by 14%: EBRI,” Emile Hallez, March 12, 2019
NAPA Net, “Comings and goings in retirement,” Nevin E. Adams, March 12, 2019
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