SAN FRANCISCO (MarketWatch) -- The The gap between what Americans need for retirement and the amount they have saved is a staggering $6.6 trillion, Retirement USA, a coalition of workers groups, said in a study published Wednesday.
The retirement income deficit is the gap between the pensions and retirement savings that American households have today and what they should have today to be on track to maintain their living standard in retirement, said Karen Friedman, executive vice president and policy director of the Pension Rights Center, in a conference call with reporters.
The retirement income deficit shows just how bad the crisis has become, she said. The Pension Rights Center, a nonprofit consumer advocacy group, is working with the AFL-CIO, Economic Policy Institute, Service Employees International Union and National Committee to Preserve Social Security and Medicare to promote, among other things, a new retirement security system for all workers. See their 12 principles for a retirement system.
Only about half of full-time workers in the private sector have access to a retirement plan at work, and that drops to 44% when you include part-time workers, Friedman said.
Meanwhile, most of those who have a retirement plan are relying on their own investing expertise to fund their retirement, and the market crash of 2008-09 took a heavy toll on savings that, for many, were paltry already. The median defined-contribution account balance, including IRAs, in 2007 -- before the downturn -- for public- and private-sector workers was just $45,000, according to Retirement USA.
The $6.6 trillion retirement income deficit amounts to about $90,000 per household if you count all 72 million households ages 32 to 64, though that figure includes even those who have enough saved for retirement, said Anthony Webb, a research economist at Boston College s Center for Retirement Research. The retirement income deficit figure is based on the same methodology behind the Center s National Retirement Risk Index, and does not count workers younger than 32 years old.
The $6.6 trillion is a call to action for us as a country, Webb said. It s telling us that the system as a whole isn t working. Read more on eight ways to fix the U.S. retirement crisis.
One reason for the system s failure, he said: Whereas 401(k) plans can work perfectly well in theory, they tend not to work terribly well in practice. People make mistakes all along the way.
If you participate, if you contribute a sizable chunk of your income, if you invest sensibly, if you don t cash out when you change jobs, then the 401(k) plans can deliver a perfectly adequate pension, he said. The problem is a lot of people make one or more of these mistakes.
The deficit is probably worse
The retirement deficit methodology is conservative on a variety of measures, Webb said. It ignores the health-care and nursing-home costs people may face in retirement; it assumes people will tap all available assets at their disposal, including taking out a reverse mortgage on their home; and it assumes retirees use all of their assets to buy an inflation-protected annuity. (That last provision helps the study authors avoid the tricky problem of making assumptions about how long people will live.)
The conservative nature of those assumptions means the true deficit may well be worse.
The $6.6 trillion figure is based also on assumptions about the amount of income people need in retirement, including detailed modeling of tax scenarios, plus separate income-replacement targets for high-, middle- and low-income Americans, single or married couples, and one- and two-earner couples, Webb said.
Where does this leave you and me? Each individual household has to work with what they ve got, Webb said.
It comes back to the old message: you have to save more, he said.
If you re an individual household, you cannot reinvent the country s retirement system, he said. The levers you ve got, the three choices [are] to save more, to work longer and to accept that you ll have a drastic fall in your standard of living in retirement.
Andrea Coombes is an assistant personal finance editor for MarketWatch, based in San Francisco.>