Lower-Income Workers May Be More Retirement Ready Than They Think

Social Security benefits may be the majority of income replacement available during their retirement years for lower-income workers with little savings, and a study suggests that may be enough for them.

A research study published by The Wharton School, University of Pennsylvania, explores how much low-earning households need to save considering Social Security’s progressive benefits. Researcher Andrew G. Biggs, from the American Enterprise Institute, points out that while low-earning households save little, their retirement incomes have risen steadily over the past few decades and their poverty rates dropped significantly, seemingly as a result of rising Social Security benefits. He says low-income retirees express less satisfaction with the adequacy of their retirement incomes than other retirees, but their self-assessed retirement income adequacy has increased in recent years.

The Social Security 2100 Act, which would raise benefits for all retirees and especially those with low earnings, and automatic individual retirement account (IRA) plans, which would automatically enroll employees without a workplace retirement account into an IRA, have been proposed to help low-wage earners and those who lack a workplace retirement plan. According to the Bureau of Labor Statistics (BLS), only 34% of the lowest decile of wage earners are offered a workplace retirement plan, versus 91% of the highest decile, cites the study.

Biggs contends that because low earners are a target population for these initiatives, and “given the costs of expanding Social Security and of establishing state- or city-run auto-IRA plans, saving requirements for low earners are a relevant topic for policymakers at all levels of government.”

Figures from the Social Security Administration—as well as Congressional Budget Office (CBO) calculations that retirees in the bottom quintile of earnings have income replacement rates between 84% and 96% of real average pre-retirement earnings—“do not express a pressing need for additional retirement savings by the poorest fifth of the population,” Biggs says. “Even in the second quintile, only modest additional retirement savings would be needed to maintain pre-retirement levels of expenditures.”

Other data he cites suggests low-earners have income replacement rates greater than 100% of pre-retirement earnings.

For his analysis, Biggs selected a target replacement rate of 90% for the very-low-wage earner, 83% for the low-wage worker, 75% for the medium wage earner, 67% for the high-wage worker, and 60% for the maximum wage earner. Calculations using certain assumptions about longevity and rates of return on investments, with a starting age for savings of 30, suggest that a savings rate of only 0.4% of earnings from age 30 to 65 is needed for the very-low-wage worker and 2.6% of earnings for the low-wage worker. “These required rates of retirement saving seem readily accomplishable without creating undue stress on household finances,” Biggs says.

Biggs adjusted calculations for different assumed rates of return on investments, but found generally well below 1% of earnings needs to be saved by the lowest wage workers and around 3% for the second earnings quintile. “Such a saving rate is likely achievable for most low-earning households, but only if they are offered a retirement plan and participate in it,” he says.

Biggs concludes that his analysis suggests that “to the degree that U.S. households are undersaving for retirement, this undersaving is not focused among low earners.” Yet, he says, initiatives to expand access to retirement savings plans have merit since many low earners currently lack access to one.

However, he notes that by the age at which many households begin saving for retirement in earnest, most Americans are married, and if both spouses are working, the chances that the household will have access to a workplace retirement plan are higher than those of either spouse alone.

Biggs adds that a 2004 study found a boost in savings by low-income working-age households can trigger punitive reductions in certain Social Security benefits. And a 2017 study found federal employees with less than a high school education who were automatically enrolled in a defined contribution (DC) retirement plan increased borrowing for mortgage, auto and revolving credit loans by substantially more than the amount by which their retirement plan contributions increased in order to maintain their standard of living.

“This implies that hasty efforts to expand retirement savings among low-income households may be counterproductive. Given that it does not appear that low-earners need to save substantially more in order to maintain their pre-retirement standards of living once they cease working, promoting such savings through either a hard or soft mandate might cause unnecessary hardship to working-age households,” Biggs concludes.

The research report, “How Much Should the Poor Save for Retirement? Data and Simulations on Retirement Income Adequacy Among Low-Earning Households,” may be downloaded from here.