Americans' lack of retirement savings could cost governments $1.3 trillion – Pew

As Americans with insufficient retirement savings leave the workforce over the next 20 years, they will severely strain state and federal budgets to the tune of $1.3 trillion, according to a study released Thursday by the Pew Charitable Trusts.

The study estimates that the federal government will get hit with $964 billion in additional costs to fund public assistance programs for financially vulnerable retiree households. At the state level, the cost over the 20-year window between 2021 and 2040 is projected to be $334 billion.

"Many of these retiree households that will have a shortfall in their annual income will need social assistance in one form or another," said John Scott, director of Pew's retirement savings project, during a media briefing on the study.

The study projects that the share of financially vulnerable elderly households — those with less than $75,000 in annual income — will jump 43% to 32.6 million in 2040 from 22.8 million in 2020.

The greater share of people 65 or older struggling in retirement will put greater pressure on public spending and increase taxpayer burdens as the cost of public assistance rises and tax revenues fall, Pew said in the report.

The report also warned that the growth of the older population is outpacing the working age population, putting even more pressure on taxpayers. In 2020, the ratio of senior households to working-age household was 37 to 100, meaning 100 working-age households supported 37 senior households. By 2040, they'll be supporting 54 senior households, according to the study.

"The same share of working-age households will in effect be supporting a growing share of elderly households in the future," Mr. Scott said during the media briefing.

States can help mitigate the projected cost burden by providing state-facilitated retirement savings programs for workers who lack workplace-sponsored plans, according to the report. Eleven states have adopted automated, payroll-deduction programs, which provide "retirement savings opportunities for workers who currently lack them," Mr. Scott said.

Mr. Scott noted that participants in state automated savings programs save an average of $105 to $190 per month, which he said could help alleviate the retirement savings gap.

If financially vulnerable individuals upped their savings by $140 a month it would close the retirement savings shortfall over 30 years and avoid some of the projected state and federal cost increases, Mr. Scott said.

"State-automated savings programs are leading the way to increasing retirement savings opportunities for workers without workplace plans," Mr. Scott said. "That's the hopeful sign to this story."