There are many indications that Social Security benefits and funding will be major bones of contention between the Republican-dominated U.S. House of Representatives and the Biden Administration in the coming months. 

Without speculating on how that might play out, we think now is a great time to have a full discussion at the highest levels of government of America's real and growing retirement crisis. 

Our recent research shows that because of systemic flaws in our retirement system, the number of poor or near-poor people over the age of 62 will increase by 22.3 percent between 2019 and 2045, rising from 18 million to 21.3 million.

Serious legislative proposals to address this crisis should aim to fix the massive inefficiencies, inequities, and inadequacies embedded in our current retirement system.

Social Security certainly plays a major role in reducing inequality in retirement wealth and wealth in general. It’s the bedrock of the American retirement system. It needs to be strengthened and expanded in ways to protect many retirees from sharp declines in their living standards as they age. 

In addition, our research finds that universal access to retirement savings would complement a reinforced Social Security system by supplementing retirement income. Even under conservative assumptions, it could reduce elder poverty by 26 percent by 2045, while also reducing wealth inequality.

The lack of workplace retirement plan coverage is the main cause of inadequate and massively unequal retirement wealth. Employers are not obligated to sponsor or contribute to their employees’ retirement plans, which means most workers do not accumulate retirement savings. Worse, this voluntary system punishes employers who want to do the right thing, putting them at a disadvantage against those who choose not to support their employees. The current system also hurts self-employed workers and those with longer spells of not working in the formal economy, such as people providing unpaid family care or those who are in gig employment. 

Even the fortunate worker whose employer offers a commercial, self-directed, voluntary plan faces barriers likely to result in inadequate retirement savings. 

The typical older worker in the bottom 50 percent of the income distribution (earning less than $40,000 a year) has nothing saved for retirement. Median savings of workers in the middle 40 percent (earning between $40,000 and $115,000 a year) are only $60,000. Among workers in the top 10 percent of the income distribution (above $115,000 a year), the median amount saved is more than three times higher, at $200,000.

Clearly, for many workers such levels of savings, even combined with Social Security benefits, are not sufficient to maintain their pre-retirement standard of living. They face an unacceptably high risk of downward mobility, or even poverty, in retirement. Public policies must address this.

Using conservative assumptions, we found that if all workers had had access to a workplace retirement plan in 2019, 1.5 million seniors would be diverted from poverty or near-poverty by 2025. By 2035, that would increase to 3.6 million seniors; by 2045, it would hit 7.9 million, a decrease of more than 26 percent. (See chart, below.)

Millions Would Be Saved from Near-Poverty by a Universal Retirement Plan

We simulated the effect of the universal retirement plan with a consistent rate of return, which is typical in a professionally managed account. We also base our model on these features of a universal retirement plan: universal access; better targeted tax expenditures; and the option to use retirement savings to postpone claiming Social Security benefits. 

We assume:

• Workers who did not have access to a workplace retirement plan would contribute three percent of their pay to a universal retirement account; 

• To match those contributions, workers would receive a government match equal to 1.5 percent of their pay in the form of a refundable tax credit; and 

• The plan would provide workers with the option to either annuitize savings at low cost or use savings to postpone claiming Social Security and thus benefit from delayed retirement credits. 

A universal plan would ensure continuous access to retirement plans for all workers throughout their careers. It would make retirement plans easily portable. It would help all workers who change jobs, by eliminating the complications and costs of rolling over one account to another. 

It also would address a less visible hindrance to saving: insufficient job tenure. Many employers require a probationary period – most commonly a year – before employees become eligible to participate in retirement plans. This especially hurts employees in high-turnover industries. 

Various proposals for universal retirement plans have already been advanced. Examples include the Guaranteed Retirement Accounts (GRAs) explained in a joint paper by Kevin Hassett and Teresa Ghilarducci; Senator Marco Rubio’s plan to open the federal Thrift Savings Plan to those without access; the Dignity and Security in Retirement plan proposed by Pete Buttigieg’s 2020 presidential campaign; or the Retirement Savings for Americans Act proposed by Senators John Hickenlooper and Thom Tillis and Representatives Terri Sewell and Lloyd Smucker. While some of these plans may suffer from serious shortcomings, they all have the basic and vital feature of expanding access to retirement accounts.

In addition, solving the retirement crisis requires action to:

Make Retirement Tax Expenditures More Equitable. The current structure of Federal retirement tax benefits (which also affects state-level retirement tax benefits) heavily favors those who have access to retirement accounts, who can afford to save more, and who have higher marginal tax rates. There are currently few tax incentives to save for those who don’t fit those descriptions. Reforming retirement tax expenditures and making a “saver’s credit” refundable would make retirement tax benefits more equitable, effective, and efficient.

Protect Retirement Savings: Early withdrawals from retirement accounts undermine workers' retirement security. Retirement funds must be protected from the urgency of short-term spending needs, whether withdrawals are due to a lack of emergency savings or for everyday consumption. Retirement savings should also be exempted from asset tests that in some cases determine eligibility for public assistance benefits, discouraging saving and fueling a racial wealth gap. 

Strengthen and Expand Social Security: All workers, regardless of income level, rely on Social Security as a source of secure income in retirement. Social Security retirement and disability insurance ensure that workers will have a secure stream of income that keeps them out of poverty, no matter what happens to them. While the progressive design of Social Security keeps many low earners out of poverty at older ages, higher earners with longer life expectancies benefit from the efficient and affordable longevity insurance it provides. Universal retirement plans and private savings would complement Social Security benefits and help workers maintain their standards of living in retirement.

Siavash Radapour and Eva Conway are on the staff of the Schwartz Center for Economic Policy and Analysis (SCEPA) at The New School. Teresa Ghilarducci is a professor of economics at The New School and the director of SCEPA. This Urban Matters is adapted from adapted from their December 2022 report on Universal Retirement Plans.

Photo by: Bob Dass.