Despite reports of increased retirement savings and low overall withdrawals from retirement accounts during the pandemic, many Americans were hit with reductions in income and some are still trying to find new work or remain at a reduced income level. And, on top of that, the pandemic exacerbated income inequities that existed beforehand.
A MagnifyMoney survey of 2,050 U.S. consumers from May 3 through May 6 found 48% of people with a retirement savings account either stopped saving or decreased their contributions amid the crisis. About one in six haven’t started saving again. However, nearly three in 10 survey respondents said they were already behind in saving for retirement before the pandemic hit.
Nearly two-thirds (64%) of Americans surveyed named at least one barrier to saving for retirement, but not making enough money to reach their contribution goals (30%) was the No. 1 barrier “by a landslide,” MagnifyMoney says.
Another study suggests that the income people think they will get from Social Security may be hindering them from saving enough for retirement. Researchers at the Michigan Retirement and Disability Research Center at the University of Michigan found most individuals face significant uncertainty about the amount of Social Security retirement benefits they will receive after retirement and tend to overestimate these amounts.
A survey by the researchers found current workers recognize that they do not have a good idea of what their future retirement benefits will be. Forty-nine percent of survey respondents reported having no knowledge about their benefit amount. “Having more uncertainty about future retirement benefits is positively associated with a higher expectation bias and is associated to an increased probability of overestimating future benefits,” the researchers say.
Their modeling also indicates that when individuals overestimate the Social Security benefits they will receive, “this results in too much consumption during the working years, too little asset accumulation and, therefore, too little consumption in retirement on average with respect to what would be optimal for them.”
In addition to Americans overestimating their Social Security benefits, they may not know that those benefits will not “buy” what they once would. A report from The Senior Citizens League says Social Security benefits have lost 30% of its buying power since 2000. Between January 2000 and this March, Social Security cost-of-living adjustments (COLAs) increased benefits by 55%, but the costs of goods and services purchased by typical retirees rose by 101.7%. The Senior Citizens League says, “If inflation in 2021 continues to climb through the end of the year, this loss of buying power could deepen.”
These findings would suggest that Americans could benefit from more Social Security education; however, according to the Schroders 2021 “US Retirement Survey,” just 10% of non-retired Americans ages 45 and older are planning to wait until age 70—the age at which an individual reaches their maximum monthly benefit—to begin taking their Social Security benefits, and the decision appears to be deliberate. Seventy-four percent of non-retired respondents and 84% of non-retired respondents ages 60 to 67 said they understand that the longer they wait to take Social Security the more they will receive. Joel Schiffman, head of intermediary distribution, North America, Schroders, says, “It might come down to being able to afford to wait. And that’s a function of how much they have saved in order to generate sufficient income in retirement.”
Aside from increasing employee pay and educating employees about Social Security, what can plan sponsors do to improve their own workers’ retirement outlook?
It might seem unhelpful to encourage employees to save when they feel they are living paycheck-to-paycheck, but a study from the Employee Benefit Research Institute (EBRI) and the Investment Company Institute (ICI) found contributions were the top factor increasing retirement savings balances, more so than benefits paid or investment returns.
Plan sponsors can help employees establish savings priorities for their health, emergency and retirement needs. Automatic enrollment in a retirement plan helps employees start to save, but sponsors can also use their plans to help employees build up emergency savings first or help employees save for retirement while paying off their student loan debt.
And, for those employees who were saving before the pandemic but put their savings on pause or took withdrawals, plan sponsors can educate them about what a year without retirement savings can do to their retirement outlook.
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