America's Coming Retirement Crisis

Most retirements won't look like this.

Photographer: Brendon Thorne/Bloomberg

America's middle-class workers have plenty to worry about -- but for many, the biggest anxiety is what happens when they are workers no longer. Many will reach retirement only to find they have saved too little to live comfortably. Some will choose to postpone their retirement; others may not have that option.

The rapid and near-total disappearance of defined-benefit pensions has left many U.S. workers unprepared. Almost one-third of all workers have no savings at all. Those who do save don't save much. Median household retirement savings for people aged 55 to 64 in 2013 amounted to $14,500. Consider that the average 65-year-old in the U.S. can expect to live almost 20 more years.

QuickTake America's Retirement Gap

What about Social Security? For many retirees, it isn't enough to rely on. The average monthly payment is only about $1,300. Beefing up those benefits won't be easy. Fiscal pressure, if anything, pushes the other way. There's a good case for reforming the system, to make the taxes that pay for it less regressive and to tilt its benefits more in the direction of the less well-off. But politically, that's a tall order. What else can be done?

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Obamacare 3.0

Encourage people of ordinary means to save more. Promoting employer-based retirement-saving plans would be a good place to start. Almost 50 percent of workers enrolled in such plans have saved $50,000 or more. Only 1 in 20 workers not enrolled in a savings plan have saved that much -- and about half the workforce isn't in a job-based plan.

At the moment, access to retirement-saving plans varies from job to job. Fewer than 1 in 5 part-time or low-wage workers take part in a plan through their employer. In small companies (those with fewer than 50 workers) the participation rate is 32 percent. To improve these numbers, workers in firms without a plan should be offered a public alternative. And all workers not in a plan -- the roughly 41 million private-sector workers who currently lack access, and the 20 million who have it but don't use it -- need a gentle push to enroll.

Congress or the states should set up tax-favored individual retirement accounts for workers without access to a job-based plan and tell companies to enroll employees automatically. Workers could still decide not to enroll, but they would have to deliberately opt out. Illinois is setting up a program like this, to start in 2017. President Barack Obama has proposed a similar approach. Under the president's plan, the cost of the tax relief for saving by people on low incomes would be financed by limiting tax preferences for saving by the better off.

The Illinois policy isn't perfect. It exempts companies with fewer than 25 workers -- the ones least likely to offer retirement plans in the first place. And it sets the default contribution rate at just 3 percent of earnings, perhaps half what the average 40-year-old male worker should be saving.

Still, it's a simple step in the right direction -- and simplicity, in fact, may be its greatest virtue. The kaleidoscope of existing individual tax-preferred retirement plans is too complex for many to understand, let alone take advantage of, and the tax benefits are tilted toward the people who need the help least.  

Auto-enrollment works, by the way. The Employee Benefit Research Institute asked workers how they would react if an employer automatically enrolled them in a plan that set aside 6 percent of their paycheck. Just 3 percent of respondents said they would opt out, and another 20 percent said they would reduce their contributions; 44 percent said they would accept the automatic rate, and another 30 percent said they would raise it.

There's a good case for going further and requiring employers to auto-enroll in their own plans, where they exist. This would reach the 25 percent of workers who don't use the plan they already have access to.

Granted, it would also raise costs for the roughly two-thirds of companies that offer a matching contribution, maybe causing some to reduce the match or withdraw it altogether. This concern, though, shouldn't be overblown. Companies offer retirement contributions not to be kind but to attract the workers they need. The government could start by requiring auto-enrollment at the largest companies, then track the response. If that didn’t lead to lower benefits, the mandate could be expanded.

Yes, mandate. The word is toxic -- but for many of tomorrow's elderly, the alternatives to auto-enrollment in a retirement plan are an expansion in Social Security funded by higher taxes or falling living standards. The first is much harder politically than nudging people to save more. The second is, or ought to be, unacceptable.

To contact the senior editor responsible for Bloomberg View’s editorials: David Shipley at davidshipley@bloomberg.net.