Many aging households will rely only on social security to fund their retirement as recent research shows only 42% of private sector workers receive pension coverage from their current employer, according to the Center for Retirement Research (CRR) at Boston College.
As a result, 36% of all households end up with no coverage during their work lives, and rely on a dwindling supply of Social Security dollars to fund housing and medical expenses after retirement, according to CRR.
“Low earners’ sole reliance on Social Security would not be a problem if the program provided them with sufficient income to maintain their standard of living. But Social Security replacement rates, benefits as a percent of pre-retirement earnings, fall far below the generally accepted benchmark of 80%,” says the report. Many uncovered households see Social Security benefits that replace only 40% of their pre-retirement earnings, according to CRR.
The CRR cites small companies, consisting of less than 100 employees, as a large contributor to the pension problem as over 60% of those companies do not offer coverage. Pension coverage by employers has shown steady decrease since 1999, and according to the study, the percentage of employees covered has dropped from 50% to 42% since 1979. Coverage shows no signs of improving on its own, reports the CRR.
In addition to lack of coverage, more Americans are going in and out of jobs that provide coverage, and they are unaware of how that affects projections of their total 401(k) accumulations. The typical household that has participated in a pension plan is approaching retirement with $120,000 in 401(k) funds, roughly amounting to $575 in monthly funds, according to CRR.
Continually moving from covered employment to uncovered employment results in actually accumulating less than the projected amount in a 401(k), as projections are for steady, lifetime contributions. The report shows that while the median 401(k) projection for the 55-64 age group in 2010 was $363,000, the actual median amount accumulated was less than a third of that.
“Clearly more retirement saving is needed,” says the report. “Designing simpler plans in the hope that they will appeal to small business has not worked in the past and is unlikely to work in the future. The United States needs a new tier of retirement income.”
Read the full report here.
Written by Erin Hegarty