The Cost of Doing Nothing: Federal and State Impacts of Insufficient Retirement Savings

ESI was engaged by the Pew Charitable Trusts to explore the potential economic and fiscal costs of existing trends in retirement savings. As the elderly population of the United States continues to grow, it becomes increasingly important that households plan appropriately to maintain their living standards in their retirement years. This study quantifies the potential magnitude of national and state retirement savings shortfalls from 2020-2040 if current trends continue, defines the costs of these potential shortfalls to the U.S. and each state and its residents, and addresses the potential benefits of addressing the savings gap and helping future retirees enhance their financial resiliency. 

National population projections from the Census Bureau show that the nation’s elderly (65+) population is expected to increase by 50% from 2020-2040. As the population changes, so too will the relative composition of elderly and non-elderly households. There are projected to be 54 elderly households for every 100 working age households by 2040, up from 37 elderly households for each 100 working age household in 2020. This compositional shift will create significant fiscal pressure, since working age households form the core of the federal tax base. 

Under the continuation of current trends, 61% of elderly households are projected to have an annual income below $75,000 in 2040. Among these vulnerable households, the average annual income shortfall relative to recommended replacement levels is projected to be $7,050 in 2040.  

Financial modeling is used to put this income gap in context. Under standard financial assumptions, the average vulnerable household would need to contribute approximately $140 per month, or $1,685 annually, over a thirty-year period to close the projected retirement income gap. Additional modeling shows the potential impact of the enhanced Saver’s Credit and the importance of early savings in helping households to achieve income targets and maintain their established standard of living, and to illustrate how even modest levels of accumulated saving can help vulnerable households to manage their finances more effectively, improving financial outcomes and their quality of life.  

The retirement readiness of households also has significant implications for the trajectory of government expenditures on benefit programs. Program expenditures for senior supporting programs are expected to grow materially in the coming years due to the growing senior population and increasing medical costs. Based on analysis of the existing relationship between income levels and benefit received for elderly households, the study projects that achieving recommended income replacement levels for new retirees would reduce federal expenditures federal expenditures by an estimated $61 billion in 2040, and by $990 billion over the 20-year period from 2021-2040. Additional calculations are presented for demographic changes, potential income gaps, and program expenditures for each state.  

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