4 Big Retirement Savings Problems, and How to Fix Them

Only about a quarter of Americans strongly agree that they are building or have built a large enough retirement nest egg to meet their anticipated spending needs, according to a recent industry poll. In addition, there are various other reasons to worry about the retirement readiness of the U.S. workforce.

Simply put, although Americans at the top of the income distribution are preparing more or less effectively for life after work, a significant majority of those in the middle and lower parts of the income distribution face some grim prospects in retirement. There are also worrying demographic and racial disparities that cut across the income spectrum.

This is according to an in-depth new report published by the Transamerica Center for Retirement Studies in collaboration with the Transamerica Institute. The analysis, now published in its 23rd edition, stretches to nearly 200 pages and includes a wealth of information about the current state of retirement savings in the United States.

Perhaps the most important takeaway, Transamerica’s experts say, is the recognition that strengthening the U.S. retirement system requires recognizing and addressing uncomfortable demographic disparities, as well as the unfortunate truth that a person’s ability to financially prepare for retirement is disproportionately affected by their household income.

Social Security and Medicare provide meaningful support to those who work a lot but earn less, but experts warn that these programs themselves are facing fiscal uncertainty, adding to the overall pressure on workers ahead of retirement.

Fortunately, the authors say, there is reason to believe that recent government actions — especially passage of both the Secure Act and the Secure 2.0 Act — could help to level the playing field. Furthermore, retirement policy seems to remain one of the few areas of (relative) bipartisan consensus in Congress and in the states, and there are some common-sense next steps that policymakers could take to build upon the recent progress.

The following list pulls from the new Transamerica report to highlight four of the big weaknesses of the U.S. retirement system — and how to potentially fix them. Those interested in gleaning more than the highlights can find additional insights in the myriad of charts and graphs offered up by the researchers here.

1. Low-income workers often lack access to savings plans.

According to the report, only 59% of workers with a household income below $50,000 are offered a 401(k) or similar plan by their employer. This is a major issue, the researchers note, given the positive affect that consistent participation in a payroll deferral retirement plan has been shown to have on overall readiness.

In comparison, 74% of those with a household income of $50,000 to $99,999 and 84% of those with a household income of $100,000 and up are offered a plan.

According to the researchers, these figures help to explain the expected reliance on Social Security among middle-income and lower-earning groups. Specifically, some 52% of individuals with a household income of less than $50,000 expect to primarily rely on Social Security in retirement, compared with 34% of those with incomes of $50,000 to $99,000; 20% with incomes between $100,000 and $199,000; and only 9% among those with more than $200,000 in household income.

The good news here, according to the researchers, is that the expanded Saver’s Credit, if effectively promoted and communicated, can help drive greater savings among low- to moderate-income individuals within a 401(k) or similar plan or individual retirement account. Survey data shows that fewer than 4 in 10 Americans who potentially meet the tax credit’s income eligibility requirements are aware of it.

At the same time, this problem may also be helped by the Secure Act and Secure 2.0 Act provisions that are meant to expand plan sponsorship among small businesses, including the creation of a new type of Starter 401(k) plan type tailored for this underserved marketplace.

2. There is a big rural vs. urban savings gap.

A less discussed but also important challenge highlighted by the new report is a significant rural versus urban retirement savings gap.

According to the researchers, rural residents who are not yet retired have saved about $7,000 in total household retirement accounts, while urban area residents have saved $50,000 and suburban residents have saved $67,000 (estimated medians).

Not surprisingly, only 17% of rural residents are very confident they will be able to fully retire with a comfortable lifestyle, compared with 20% of suburban and 27% of urban residents.

According to the report, this problem is related to the deeper issue of income inequality. That is, rural residents have lower household incomes than urban and suburban residents, with rural workers earning about $50,000 at the median, compared with $66,000 and $82,000 for urban and suburban workers, respectively.

More than 4 in 10 (41%) rural residents rely or expect to rely on Social Security as their primary source of income in retirement, compared with 30% of both suburban and urban residents.

Reflecting the income divide, only 67% of employed rural workers are offered a 401(k) or similar plan by their employer, and 72% of them participate. In comparison, 77% of both suburban and urban workers are offered a plan, and about 8 in 10 participate.

Given the similar nature of the challenge, the report suggests, these challenges could be eased by some of the solutions cited above, especially those that drive plan creation in the small-business sector.

3. Racial disparities remain in retirement savings.

As shown in earnings data cited in the report, Americans in different racial groups have very different average earnings at the median.

People who identify as Asian, Asian American or Pacific Islander report the highest household income at $99,000, followed by white households ($77,000), Hispanic households ($56,000) and Black households ($50,000).

This meaningful income inequality is reflected in these groups’ retirement savings. Among those who are not yet retired, AAPI households have saved $74,000 in median household retirement accounts, while white households have saved $60,000, Hispanic households have saved $29,000 and Black households have saved $17,000.

Black (37%) and white people (34%), according to the report, are more likely to rely or expect to rely on Social Security as their primary source of retirement income than Hispanic (28%) and AAPI people (19%).

Among employed workers, Black (78%) and white (76%) workers are generally more likely than Hispanic (72%) and AAPI (71%) workers to be offered a 401(k) or similar plan by their employer. However, among those offered a plan, Black workers (74%) are less likely than white (81%), Hispanic (79%) and AAPI workers (82%) to participate in the plan.

While the issue of race-based income inequality is a deeply rooted problem and one that will require a solution that extends far beyond the reach of the retirement industry alone, there is reason to hope that some of these metrics will soon start to improve. For example, recent legislative changes mean more employers can (and in fact may be required to) automatically enroll workers into savings programs.

Employers are also gaining new tools to help their workers pay down student loan debt and bolster emergency savings while also saving for retirement — a challenge that disproportionally affects workers of color with college degrees.

4. Women face greater retirement-related risks than men.

Another conclusion of the research is that women remain at greater risk than men of not achieving a secure retirement. For women, the results show, the persistency of the gender pay gap, limited access to employer benefits, and time out of the workforce for parenting and caregiving often translates to lower retirement savings and fewer government benefits.

According to the report, women who head households report a total household income of $59,000 — substantially less than the $82,000 reported by men at the median. Similarly, 52% of women are employed or self-employed compared with 67% of men, meaning they have less access to payroll deferral savings that include features like automatic enrollment and employer-matching contributions.

Specifically, among employed workers, women (71%) are less likely than men (79%) to be offered a 401(k) or similar plan by their employers. Among those with access, women are less likely than men to participate, at 76% and 82%, respectively.

Overall, women who are not yet retired have saved $21,000 in total household retirement accounts, an amount that is much less than the $73,000 saved by men at the median.

As before, the issue of gender-based income inequality is a deeply rooted one, and it too will require a solution that extends far beyond the reach of the retirement industry. Still, some of the same aforementioned legislative changes aimed at promoting retirement plan creation in the small business community may help — as will efforts by advocacy groups to close both the race-based and gender-based wage gaps.

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