Although cracks have been forming in the foundation of American retirement security for decades, the COVID-19 pandemic has only made them worse.
Even before the worldwide health crisis, many workers were recovering financially from previous economic downturns–along with facing the crumbling three-legged stool of retirement.
Now, according to a June 2021 survey, 15% of Americans say they’re postponing retirement because of the pandemic.
Let’s unpack how the “three-legged stool” of retirement—Social Security, employer pensions, and personal savings—has been slowly coming apart for decades–and what we can do to stop it.
Deconstructing the three-legged stool of retirement savings
The three-legged stool is a metaphor for how many retirement experts traditionally looked at planning for retirement. It was expected that the trio of Social Security, pensions, and savings together would provide a financial foundation for Americans’ golden years. None of these three were supposed to support retirees on its own–you need each one to build a strong retirement foundation.
As times have changed, so must retirement planning strategies. For many workers today, a nest egg built on the three-legged stool is no longer possible.
You may have heard that Social Security, the program created by FDR to prevent aging Americans from falling into poverty, is projected to be depleted by 2033.
How did this happen? Quite simply, there are fewer workers funding the program compared to the number of retirees benefiting from it. In 1950, there were 16.5 workers for every Social Security beneficiary. Today, there are less than 3 workers paying in for each recipient.
This ration shift is due to several factors including:
- Increasing lifespans in the population
- Decreases in fertility rates.
- No change in average retirement age
This doesn’t mean Social Security will disappear completely in 20 years. As of 2019, projections indicate that taxes still being paid by younger workers will be enough to fund about 79% of scheduled benefits.
If you’re a Gen X or Millenial worker, chances are you’ve never been offered a retirement benefit that doesn’t involve you contributing a portion of your paycheck.
Defined benefit plans–such as company-sponsored pensions–once guaranteed workers a steady stream of income after their working years. Throughout the 1980s and 1990s, pensions began rapidly disappearing and being replaced by workplace savings vehicles like 401(k) plans. Today less than 1 in 5 workers have access to a pension, shifting the primary responsibility for retirement security toward the individual.
As the Social Security well dries up and pensions disappear, the third leg of the retirement stool–personal savings––is more important than ever before. According to 2020 data from the Bureau of Labor and Statistics, while 71% of the American workforce has access to a 401(k), only about 55% participate. When you look at small business retirement statistics, the number of access and participation shrinks even smaller.
To help ensure you have a large enough nest egg, it’s wise to create a plan early in life—or right now if you haven’t already done so. It’s also extremely important to take advantage of workplace savings plans like 401(k) (if you have one available) along with personal tax-advantaged retirement accounts such as an IRA.
Using tools like a retirement calculator can help you figure out if you’re saving enough for the future–or if you’ll need to increase your contributions to achieve financial security in your golden years.
What is being done to address the looming retirement crisis?
We know that no single program can address the challenges facing our current retirement system—it will take several programs and solutions to make progress.
In 2019, the Setting Every Community Up for Retirement Enhancement (SECURE) Act was passed as the first major step toward enhancing American’s retirement security. Key changes from the bipartisan legislation included:
- Increased tax credits – when small business owners set up and run retirement plans.
- New incentives – for new plans with auto-enrollment.
- Greater scope – long-term, part-time workers can now participate in 401(k) plans.
- Expanded options – multiple, unrelated businesses can now partner under a SINGLE PLAN.
This congressional offering is an encouraging sign that politicians are realizing the gravity of the looming retirement crisis and are hopeful it will have a positive impact on the overall financial security of working Americans.
While the Federal government has enacted some measures toward addressing the retirement crisis, many states have taken the lack of workplace access to savings into their own hands. As of August 2021, over 30 states have introduced some form of retirement legislation–and twelve states are implementing them.
These plans tend to target small to midsize businesses in the private sector, along with low-to-moderate income households. While the rules of these programs vary greatly from state to state, all attempt to bridge the retirement gap for American workers who otherwise would not have access to an employer-sponsored plan.
Want to learn more?
The 2013 documentary Broken Eggs: The Looming Retirement Crisis In America, looks at the financial insecurity today’s retirees and pre-retirees are finding. The film focuses on why Americans are failing to adequately save for the future and the deteriorating “3-legged stool” model of retirement.
Watch below as the film profiles a diverse group of everyday Americans confronting significant retirement planning challenges alongside interviews with economists, policymakers, and financial experts.