Social Security, 401(k) Savings Work Together

New analysis concludes that Social Security benefits, along with 401(k) savings, can provide workers with an annual income level representing more than half of preretirement pay.

The analysis from the Washington, D.C.-based Employee Benefit Research Institute (EBRI) finds that, assuming current Social Security benefits are not reduced, 83% to 86% of employees with more than 30 years of eligibility in a 401(k) retirement plan could have sufficient funds to replace at least 60% of their age-64 wages and salary.

When the threshold for a financially successful retirement is increased to 70% replacement of age-64 income, the analysis finds that 73% to 76% of the employee set will still meet that threshold through 401(k) assets and Social Security payments combined. At an 80% replacement rate, the analysis finds that 67% of the lowest income quartile will still meet the threshold if they have had 30 years of access to a 401(k).

Automatic enrollment in 401(k) plans can also play a role in successful saving for retirement. The EBRI analysis examines auto-enrollment with an annual 1% automatic escalation provision and empirically derived opt-outs, and finds that the probability of success increases substantially for employees in those plans, as follows:

  • Between 88% and 94% could potentially achieve 60% threshold;
  • Between 81% and 90% could achieve a 70% replacement threshold; and
  • Between 73% and 85% could achieve an 80% threshold.
EBRI notes that the use of auto-enrollment as a plan feature has grown significantly since the enactment of the Pension Protection Act of 2006.

With regard to Social Security benefits, Jack VanDerhei, EBRI research director, says that such benefits are an integral component of retirement income security, particularly for lower income workers.

VanDerhei, who is also the author of the analysis, explains, “If we assume, as an example, that a proportional 24% reduction would be applied to Social Security retirement benefits for all simulated workers, the percentage of the lowest-income quartile under voluntary enrollment 401(k) plans with an 80% replacement threshold drops 17 percentage points, from 67% to 50%, while the highest-income quartile—which receives less proportionate benefits from Social Security—drops by only 9 percentage points, from 59% to 50%.”

EBRI research from 2010 indicates that the accumulated retirement savings deficit of American workers, assuming current Social Security retirement benefits, stands around $4.6 trillion, with an individual average of approximately $48,000. The newer analysis finds that if Social Security benefits were to be eliminated, the aggregate deficit would jump to $8.5 trillion and the average would increase to approximately $89,000.

VanDerhei explains that these numbers are present values at retirement age, and represent the additional amount each person in that group would need at age 65 to eliminate their expected deficits in retirement. The analysis also notes that the presence of a defined benefit accrual at age 65 increases the probability of not running short of money in retirement by 11.6 percentage points, and is particularly valuable for the lowest-income quartile but also has a strong impact on the middle class.

More details about the EBRI analysis are discussed under the title, “The Role of Social Security, Defined Benefits, and Private Retirement Accounts in the Face of the Retirement Crisis,” which can be found in the January issue of EBRI Notes.