New Workers Must Save 20% of Income to Match Baby Boomers’ Retirement
Report finds new workers face “hostile economic environment.”
A new report from UK-based International Longevity Centre says that young people new to the workforce in both the US and UK will have to save 20% of their annual salary each year to afford the same kind of retirement as current retirees.
“Low investment returns and interest rates, sluggish economic and wage growth, and the gradual decline of defined benefit schemes means those entering the workforce today will face a hostile economic environment in which to build their pension pots,” the report said.
The Global Savings Gap report, supported by insurance company Prudential, looks at the pension systems of 30 high-income countries and regions, and measures performance based on affordability, adequacy, and intergenerational fairness.
The report said that although pension auto-enrollment in the UK has led to more people saving toward a private pension, many people are still failing to save sufficiently. Also, many who are self-employed or in part-time work are neglected by such initiatives.
“The government must do more to extend pension coverage and ensure that contributions toward private schemes are sufficient,” said Dean Hochlaf , assistant economist at International Longevity Centre. “Especially among overlooked groups such as the self-employed and those on low incomes who have yet to benefit from initiatives designed to improve private savings.”
According to the report, young workers in the US face more of a challenge than their peers in other developed countries because of less generous publicly provided pensioner benefits.
“This puts the onus on people to save privately in order to secure an adequate retirement income,” said the report.
The report also said that pensioner spending in the US is not expected to become any more generous over the coming decades.
“Current workers will have to save substantial amounts to secure the same level of retirement income adequacy as current retirees,” said the report. “Our modeling implies that people entering the workforce today will need to save in excess of 20% of earnings, or $6,575 a year.”
But based on the International Longevity Centre’s findings, a lot of workers won’t be able to reach these goals.
“While just over half of the working population are currently saving into a private pension (54%),” said the report, “that still leaves a sizeable proportion and number of people who are not saving into a pension and are therefore likely to face a significant retirement income shortfall.”
Although more than 50% of the working population in the US are members of a private pension plan, the proportion making active contributions to these plans across the entire US adult population is far lower, said the report.
There are also significant differences by income level and type of work. Only 23% of US adults are saving toward a private pension, and there is a large discrepancy in pension saving across the earnings distribution. Among those earning above $75,000 a year, 28% are saving toward a private pension, while only 3% of those earning less than $25,000 make private pension contributions.
While the situation in the UK differs somewhat from that in the US, young workers face similar challenges when it comes to saving for retirement.
The report said that while the UK has a relatively affordable state pension, it is also one of the least generous. Britons entering the workforce today will have to save an average of just more than 18% of their annual earnings to secure a merely adequate income during their retirement. And for them to experience the same level of retirement income as current retirees, the report estimates that they need to save as much as 20% of their earnings each year.
“Anticipated savings behavior through auto-enrollment will not be sufficient to close the intergenerational savings gap,” said the report. “Even after accounting for expected private savings, average earners entering the workforce face a savings gap of around 6.4% of average earnings.”