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Many Americans aren’t saving enough for retirement — and the shortfall could put pressure on state and federal budgets for decades to come. But research shows that state-run programs could help people save for retirement while reducing that pressure.
Without changes, the retirement savings gap could create a $1.3 trillion economic burden through 2040, with rising public assistance costs, falling tax revenues and more, according to a study published Thursday by the Pew Charitable Trusts.
If current trends continue, 61% of elderly households are should have an annual income of less than $75,000 in 2040, and the annual shortfall is projected to be $7,050 in the same year.
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“Many of these retirement households with insufficient annual income will need social assistance in one form or another,” said John Scott, director of the Pew Charitable Trusts Retirement Savings Project.
About half of working households could struggle to maintain their pre-retirement standard of living during their golden years, according to Boston College’s Center for Retirement Research reported this week.
One of the main problems is the limited access to workplace pension plans. In March 2022, more than 30% of workers in the private sector did not have an employer pension plan, according the US Bureau of Labor Statistics.
How “Enhanced Savings” Can Close the Earnings Gap
As the estimated $1.3 trillion economic burden represents a significant portion of state and federal government budgets, Scott feels encouraged by a possible solution to help close the gap.
The report shows that US households could close the retirement savings gap over a 30-year period by saving an additional $1,685 a year, or about $140 a month.
Scott said the increased savings could be possible through state-run retirement savings plans, noting that initial data from States already offering the program was promising.
“Participants in these automated savings programs save between $105 and $190 per month,” he said, referring to an average based on available state data.
For example, if you are a private sector worker without a 401(k), you may be automatically enrolled to defer a portion of each paycheck, say 5%, to a state-sponsored account, such as a pension fund, which the worker owns, explained Scott.
State-run retirement programs have become increasingly popular as more states pass laws. In January, the Center for Retirement Initiatives at Georgetown University predicted that state retirement plan assets could top $1 billion in 2023.
Correction: The retirement savings gap in the United States through 2040 was estimated at $1.3 trillion in the Pew Charitable Trusts survey. An earlier version distorted this figure.