Is there a Retirement-Saving Crisis?
Saving is one of the key factors in shaping the well-being of individuals, as well as the nation. People save money for precautionary purposes, in addition to preparation for retirement. Many people have come to accept that Americans are not saving enough for retirement. A recent survey has discovered that 49 out of 50 states have inadequate retirement income; thus, creating confusion as to how financially prepared Americans are toward their retirement. This is indeed a crisis, as more than 50% of Americans may not sustain their current living standards once they stop working. According to a study by Interest.com, the retirement income in the US is only ample in one state (Karaim). Americans are apprehensive about their retirement outlook, that is why they are sensing a crisis in the retirement savings.
The retirement-saving crisis puzzle is critical because it demonstrates how the life of the retirees will be after they leave their jobs. Although older Americans are moving towards a steady gain in income when compared to the younger people, they are yet to attain the required levels of healthy retirement. The correct percentage of pre-retirement income that an individual in the US requires is 70, although some individuals are bound to spend more than this percentage once they stop working. So far, it is only in Washington, D.C and Nevada that seniors are capable of meeting the threshold. According to Webb, a senior economist, the median amount of money that is held in the retirement accounts for Americans that have attained ten years of retirement is below $120,000, meaning, their monthly income is around $400 (Karaim). Thus, it is obvious to conclude that a large number of America senior citizens are struggling to meet their needs.
Public pension schemes are fundamental in the accumulation of retirement income. America’s retirement incomes are higher than the average retirement income of the OECD. However, this income does not satisfy the retirees, due to the income levels of each individual before retirement. Higher government pension is not a guarantee for high living standards among retirees. Replacement income ratio in all states in 2013 stood at 59.6% for all individuals aged 65 years and above (Kraim). This is less than the mandatory ratio of 70%. The US Social Security can enhance saving for the retirement, but an increase in the US Social Security benefits is likely to create unemployment and, consequently, low savings.
The predisposition to save among the low-income households is extremely low, as compared to the high-income households. Recession, such as the one that occurred in 2008, influences the ability for medium and low-income families to save. This is because some individuals in these groups may have lost their jobs; hence, saving would become much expensive to bear. Most families end up spending all their income, leaving nothing to save. Low-income households perceive precautionary savings as optional, hence, explaining why they do not mind about saving for the retirement.
The old generation will continue to encounter low levels of living as long as the replacement ration for retirement income is below 70%. The crisis of retirement saving has been narrowed by decision of baby boomers to extend their retirement age to above 65 years, so that they can contribute more to their retirement savings. Experts are proposing for policies to encourage low-income workers to save for their retirement, although the policies are likely to create additional cost to the government. According to Jeszeck, the federal government should offer low-income and middle-income workers a tax credit to enhance their retirement savings (26). The crisis can also be eliminated through strengthening social security and encouraging low-income households to join retirement plans.
Jeszeck Charles A. Private Pensions: Some Key Features Lead to an Uneven Distribution of Benefits. Collingdale, PA: Diane Publishing, 2011. Print
Karaim, Reed. “Interest.com Study: Retirement income ample in just one state.” Interest.com. Pursuing Financial Security together, Octobr 9, 2014. Web. 6 Dec. 2014 http://www.interest.com/retirement-planning/news/retirement-income-ample-in-one-state/