Two of Three Legs May Be Off Retirement Income Stool

December 12, 2003 ( - If Social Security, employer retirement plans and personal savings indeed represent a "three-legged stool" of retirement income, many Americans risk going into their golden years missing at least one of those legs.

According to a Congressional Research Service (CRS) analysis of US Census Bureau data and a Federal Research Board 2001 Survey of Consumer Finance, significant numbers of Americans aren’t saving enough for retirement – and many aren’t in a workplace retirement plan.

The Federal Reserve Board’s 2001 data showed that only 58% of families with an employed family head or spouse between the ages of 21 and 64 included at least one worker who participated in an employer-sponsored retirement savings plan, while only a quarter of families had at least one worker in a defined benefit pension plan. An estimated 27.8 million families (37%) did not own a retirement savings account of any kind.

Doing the Math

Among families who owned a retirement savings account in 2001, the mean value of all such accounts was $95,943, but the median value of all accounts was $27,000. The median value of the retirement accounts held by families headed by a worker between the ages of 55 and 64 was $55,000 in 2001. However, consider that for a 65-year-old retiring in December 2003, $55,000 would be enough to buy a level, single-life annuity that would pay $408 per month, based on the federal Thrift Savings Plan’s current annuity interest rate of 4.375% while a $55,000 balance was enough to buy a joint-and-survivor annuity of $394 per month at age 65 at the same interest rate.

Census data from 1999/2000 paint an even more discouraging picture of the number of Americans properly saving for retirement, according to the CRS study. An estimated 38.1 million families with at least one worker between of 21 and 64, (49%), owned one or more retirement accounts, including IRAs, Keogh accounts, and 401(k) accounts in 2000. Meanwhile, an estimated 39.9 million such families, (51%), did not own a retirement savings account of any kind. Among the families who owned a retirement savings account of any kind in 2000, the mean value of all such accounts was $60,510. The median value of all the families’ accounts was just $24,000.

Family “Ties”

Both the Census data and Federal Reserve survey show that rates of retirement plan ownership and average account balances rise steadily with family income and with level of education. Homeowners and married couples are more likely to have a retirement account than are renters or single persons. Both surveys show that while the rate of IRA ownership among employees of small businesses differs only a little from that of workers at large businesses, workers at firms with more than 100 employees are much more likely to participate in a 401(k) plan than are employees of smaller businesses

The report cautions that the available data raises red flags about the future. “The uncertain future of Social Security and the declining prevalence of traditional defined-benefit pensions that provide a guaranteed lifelong annuity have put much of the responsibility for preparing for retirement on the shoulders of the worker. The low rate of personal savings in the United States and the lack of any retirement savings accounts among millions of American workers, indicate that there is a need for greater awareness among the public about the importance of setting aside funds to prepare for life after they have stopped working.”