Individuals in the United States face pressing challenges when it comes to saving for retirement, according to a study by the International Longevity Centre-UK (ILC), supported by UK-based Prudential plc.
The research found that in order to secure a comfortable retirement, Americans now must save between 11% and 18% of their annual income. If individuals today fail to save, they would face a projected intergenerational gap of $10,000 a year or 20% of earnings.
However, the ILC says several changes can be made to reverse this trend. These include increasing private pension coverage and contributions. While the former would rely on a political victory, the latter may depend on how effective those in the retirement services industry are in helping participants manage their finances in order to save more for retirement. Another task would be encouraging participants, especially younger ones, to start saving as soon as possible.
The ILC notes that “With increasing emphasis on personal responsibility for retirement planning, people will need to be able to understand the benefits of deferring consumption for a later date, the value of investing in assets other than cash, the importance of asset diversification, and the virtues of buying some form of longevity insurance at the point of retirement.”
These efforts can be facilitated through sound financial wellness programs. Considering the national student loan debt is at a record high, participants young and old can benefit from student loan repayment assistance. And while products such as annuities are gaining considerable notice in the industry, they remain complex contracts for many Americans. Thus, robust and targeted education is also an essential piece to closing the intergenerational savings gap.
These tasks are ever more important as the firm points out that public expenditures on Social Security in the U.S. is relatively low as a proportion to Global Domestic Product (GDP). Moreover, the pension system itself seems to be diminishing in the U.S. The report found that only 28% of those earning at least $75,000 a year are saving in a pension, and that figure drops to 3% when it comes to those making $25,000 a year or less.
Getting people to save more in their pensions can also be assisted by plan design tweaks. Much research in the defined contribution space points to the benefits of automatic features like auto enrollment and auto escalation.
The ILC states “Two public policy options look to be particularly successful in this regard, one which compels people to save as per the Singaporean, Hong Kong and French systems and another which ‘nudges’ people to save as per the UK’s auto-enrolment system. Simply hoping that people will save is unlikely to be sufficient.” Furthermore, an opt-out option to automatic features can prevent significant backlash from employees not interested in saving. But with that regard, education and financial wellness can come into play in order to spread awareness of the importance of saving, while boosting participation.
The ILC concludes that “Raising capability does not just happen overnight. This must be supported by a financial advice market that works for the many and not the few, in conjunction with new advice models that utilize technological advancements such as robo advice to make advice more accessible, understandable and cost effective. Finally, there will always be people who are inert and do nothing in the face of complex decisions. Good product defaults that avoid the worst outcomes will be important in this regard.”
“The Global Savings Gap” by ILC- UK can be downloaded at ilcuk.org.