May 14, 2014
Low Income: Why Only 12% Save to Retire
A new study estimating that just 12 percent of low-income older Americans save in a 401(k) or similar employer retirement plan also suggests that many more would save – if only they could.
The researchers – April Yanyuan Wu, Matt Rutledge, and Jacob Penglase of the Center for Retirement Research – focused on individuals between ages 50 and 58 with household incomes below three times the poverty line. That was less than $36,357 in 2010 for a one-person household, for example, and less than $46,800 for two people. The period studied spans 1992 through 2010.
Retirement saving primarily takes place in workplace plans. But to participate in a plan, workers must clear four hurdles. First, they need a job. Next, their employer must offer a retirement savings plan. If there is a plan, they must be eligible to participate. And if eligible, they must sign up and contribute.
A failure to sign up can’t be blamed for the dismal savings rate of this low-income group. Instead, the problem is that many never get the chance.
Only 42 percent of low-income older people are employed at any given time, making it difficult for a broad swath of this population to save consistently. When they are employed, they cluster in workplaces that have no retirement savings plan. Only 44 percent work for employers offering such plans, according to the Center, which also sponsors this blog.
The bottom line is that just 12 percent end up participating in a savings plan.
This study casts some doubt on claims that low-income people don’t want to save. Their low level of saving seems all but assured by the poor quality of their jobs and their tenuous connection to the labor market.
So what can be done to improve this grim picture?
The employment issue is extremely difficult. But on the pension side, the study points to a clear-cut way to boost savings: require employers to offer a retirement savings plan to workers who aren’t covered and then automatically enroll them.
These changes could raise low-income participation in the plans to 42 percent – that’s the most optimistic outcome, according to the study.