New Report: Today’s Young Workers Expected to Reach Retirement Age with Little 401(k) Savings

Workers Nearing Retirement Also Have Insufficient 401(k) Savings, Says GAO

Tuesday, December 11, 2007

WASHINGTON, DC -- U.S. workers retiring in the 2050’s will have saved only enough money in their 401(k)-style accounts to replace an average of 22 percent of their pre-retirement income, according to a new report released today by U.S. Rep. George Miller (D-CA).

The report, prepared at Miller’s request by the U.S. Government Accountability Office (GAO), paints a bleak picture of U.S. retirement security for current and future workers. It projects retirement savings among workers born in 1990 and finds that 37 percent of them will reach retirement age in the 2050’s with no savings whatsoever in a 401(k)-style account.

“Unless we act now, too many workers just starting their careers today will unfortunately face a less secure retirement than did many of their parents,” said Miller, chairman of the House Education and Labor Committee. “Today’s workers will more likely struggle to make ends meet during retirement than previous generations. While Social Security faces long-term challenges that must be addressed, this GAO report makes it clear that the real retirement security crisis is the lack of savings in private retirement plans.”

The lack of savings in 401(k)-style retirement plans is especially troubling in light of the fact that such plans are fast replacing traditional pension plans, in which employers pay employees a fixed amount at retirement. (The GAO report does not factor savings in traditional pensions or from other sources into its analysis.)

“Today’s GAO report is a clear indication that a large portion of Americans are heading toward retirement insecurity,” said U.S. Rep. Rob Andrews (D-NJ), the chairman of the Health, Employment, Labor, and Pensions Subcommittee. “With projections showing almost 37 percent of workers reaching retirement with zero plan savings, the need for action is imperative.”

Key findings of the GAO report include:

Workers born in 1990 will only have enough savings in their 401(k)-style plans to replace about one-fifth ($18,784) of their annual pre-retirement income. Nearly 40 percent of workers born in 1990 will have no 401(k)-style savings at all.

Among workers born in 1990, the problem will be most acute among the lowest-income workers, who will save only enough to replace an average of 10 percent ($1,850) of their pre-retirement annual income. The highest income workers will save enough to replace 34 percent of their annual income.

Among workers nearing retirement – those aged 55 to 64 – with a current or former 401(k)-style plan, the median account balance in 2004 was $50,000. According to the GAO’s report, that would provide an income of about $4,400 per year, replacing just 9 percent of income, on average, for workers in this group.

Only 8 percent of workers in the lowest income quartile currently participate in a 401(k)-style savings plan, in large part because most low-income workers are not offered a retirement plan of any kind by their employers.

The GAO examined a number of factors that could boost projections for 401(k) savings among young workers. For example, the GAO report found that:

Instant eligibility for and participation in a 401(k) or similar retirement savings plan significantly decreased the number of workers with no 401(k) savings and increased the amount of savings available for retirement at all income levels. The share of workers with no retirement savings decreased from 36.8 percent to 17.7 percent. Among low-income workers, the share decreased from 63.0 percent to 30.0 percent. The average income replacement rate for low-income workers more than doubled, from 10 percent to 25.4 percent, and rose to 35.0 percent for all income groups.

Automatically rolling over retirement savings into a new retirement plan when workers leave a job would increase projected retirement savings by 11 percent on average, with the biggest percentage increases for low-income workers.

According to the GAO report, some economists and financial advisors consider retirement income adequate if it replaces 65 to 85 percent of pre-retirement income. The current median 401(k) account balance is $22,800.

►To read the full GAO report, click here.

►Miller is the author of legislation to ensure that American workers have clear and complete information about fees that could be cutting deeply into their 401(k)-style retirement savings. For more information on this legislation, click here.

►On November 8, the Health, Employment, Labor, and Pensions Subcommittee held a hearing on strategies to increase participation in retirement savings plans. To learn more about the hearing, click here.

 
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FOR IMMEDIATE RELEASE
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