The average savings target for retirement in the US is about $1.8 million, but most Americans are falling woefully short. Across the economy, this translates to about a $1.3 trillion retirement shortfall by 2040. But as it turns out, everyone isn’t falling short equally.
In July, the Government Accountability Office issued a report to Congress outlining disparities in retirement account savings. The disparities found fell along racial, income, education, and family size lines.
Unfortunately, when inequities permeate the policy and cultural landscape, it can be easy for individual issues to get lost in the shuffle. Legislation designed to expand access to retirement accounts, implement automatic enrollment, expand financial literacy, and enhance tax incentives for low-income savers can address systemic inequalities in retirement savings while simultaneously encouraging retirement savings overall.
Broad Policy Interventions
In terms of addressing these disparities, it may make sense to approach the lowest-hanging fruit first—financial education and literacy. The report didn’t specifically investigate the correlation between financial literacy and retirement account balances, but it’s safe to assume that more information on retirement options correlates to higher account balances.
After all, you must know the given retirement tax benefits or tax preferred accounts exist to pursue them. Leaving awareness to the whims of the advertising industry and market forces seems like a win for predatory actors.
These education and literacy initiatives should be targeted toward underserved communities because the relatively straightforward policy may help offset other intangible inequities that are more difficult to address, such as historic unemployment rates or residing in a banking desert.
These initiatives may take the form of school-based education, with financial literacy programs being integrated into school curriculums. That said, informal curriculums have been demonstrated to provide little in terms of long term retention—such programs must start early and continue throughout a student’s school career.
Beyond school, online learning platforms should be marshaled by the IRS to encourage financial literacy among individuals already in the workforce. These programs can be tailored toward marginalized groups and regions as the data suggests.
A requirement to retirement savings that is second only to financial literacy is access. Policies must be implemented to incentivize, and in some cases mandate, employers to offer retirement accounts to all employees, including part-time and temporary workers.
These can take the form of tax breaks and the support of state-run automatic enrollment individual retirement accounts, so-called auto IRAs, such as those offered in California, Illinois, and Oregon. To fully implement such programs, changes to existing legislation such as the Employee Retirement Income Security Act may be required.
Specific GAO Findings
The GAO report found that households of all other races had around 28% smaller retirement account balances than did similarly situated White households, which was comparable to the retirement balance for those with about 40% lower income. Put differently, even where income was lower, White households had higher retirement account balances.
The disparities weren’t only along racial lines. Though higher income correlating with higher retirement account balances is expected, the level of correlation was surprising—a 10% increase in household income was found to be associated with a nearly 7% higher retirement account balance.
At the same time, a family with two children (regardless of whether those children lived at home) was associated with about a 40% lower retirement balance. That number is comparable to the retirement account savings of a household with about 58% less income. In other words, a household with $150,000 in income and two children would have the retirement savings expected of a household with $63,000 in income.
Enhancing Equity Through Policy
As we’ve outlined, the simple question of whether a credit is refundable provides the answer to the degree to which the policy is progressive. The Retirement Savings Contribution Credit, or “saver’s tax credit,” is a $2,000 credit for married joint filers that contribute to an IRA, employer-sponsored retirement plan, or tax-advantaged savings account for individuals with disabilities.
It also isn’t refundable. This means you must owe $2,000 in tax to benefit fully from the credit, which cuts off the lowest earners that are most in need of subsidized retirement savings.
There also are income limits and contribution limits: $73,000 and $4,000 for married filers, respectively. Properly calibrated income limits are powerful tools to target a given tax policy to those most in need. But when a limit is placed too low, it can have the opposite effect.
Considering the aforementioned impact of a family with two children on retirement savings balances, one can expect that a family making $73,000 with two children might have a balance comparable to that of a family making about $30,000. These ceilings need to be lifted to account for inflation and the cost of raising a family—$73,000 for a family of four isn’t enough to render unsubsidized retirements savings a foregone conclusion.
Stemming from changes made in the SECURE 2.0 Act of 2022, beginning in 2025, new 401(k) and 403(b) plans will be required to automatically enroll those workers who are eligible at a rate of at least 3% annually. The act further requires employers escalate contributions by 1 percentage point per year to a threshold of 10%.
Among older workers, automatic enrollment has the potential to improve retirement savings most for those earners in the lowest third of incomes, at a rate of about a 34% increase. However, automatic enrollment can only benefit those workers that have access to a retirement account, so these policies must be pursued simultaneously, with the issue of retirement savings shortfalls and inequities being viewed holistically.
Enhancing both retirement savings and retirement savings equity requires the elevation of these sorts of disparities in the public discourse. We need to implement policies and then get our politicians to ensure they’re working as intended and mandate tweaks when necessary.
Look for Leahey’s column on Bloomberg Tax, and follow him on Mastodon at @andrew@esq.social.
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