Approximately 57 million U.S. private sector workers lack access to a retirement savings plan through their employer, which could result in more than $1.3 trillion federal and state governments costs for assistance to the elderly between 2021 and 2040 as the elderly share of the population grows, according to a new study.
The study, conducted by consultant Econsult Solutions for Pew Charitable Trusts, reported that an overall lack of retirement savings could end up costing the federal government $990 billion over the 20-year period, with an additional $334 billion in costs expected to be shouldered by state governments during the same time period.
The estimates are based on estimated 2020 federal and state expenditures for selected benefit programs, including Medicaid, Medicare Part D, Supplemental Security Income, food stamps and more.
Pew Charitable Trusts hired ESI to investigate the potential economic and fiscal costs of existing trends in retirement savings. According to the study, as the elderly share of the total population of the U.S. continues to grow, it is increasingly important for households to plan ahead to maintain their standard of living in retirement. The study aimed to quantify the potential magnitude of national and state retirement savings shortfalls from 2020 through 2040 if current trends continue. The report also defined the costs of the potential shortfalls to the U.S. and each state.
According to the report, based on population projections from the U.S. Census Bureau, the population of people aged 65 and older in the U.S. is expected to increase 50% to 81.5 million in 2040 from 54.1 million in 2020. The increase is expected to be about 10 times as fast as the non-elderly rate of growth and to account for almost two-thirds of the total population growth. Elderly Americans are expected to make up 22% of the population in 2040, up from 16% in 2020.
“As the population changes, so too will the relative composition of elderly and non-elderly households,” the report stated, projecting there will be 54 elderly households for every 100 working-age households by 2040, up from 37 in 2020. “This compositional shift will create significant fiscal pressure, since working age households form the core of the federal tax base.”
The report also said that if current trends continue, 61% of elderly households are projected to have an annual income below $75,000 in 2040, with the average annual income shortfall among the households relative to recommended replacement levels projected to be $7,050 in 2040.
According to the report, the average elderly household would need to contribute approximately $140 per month, or $1,685 per year over a 30-year period, to close the projected retirement income gap.
“As the elderly population of the United States continues to grow, it becomes increasingly important that households plan appropriately to maintain their living standards in their retirement years,” the report stated. “The retirement readiness of households also has significant implications for the trajectory of government expenditures on benefit programs.”