Low Income: Why Only 12% Save to Retire

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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.

joel margolis

Nothing prevents an individual or family from savings on its own without a pension plan. Admittedly it takes more effort but it’s not impossible, witness Osceola McCarty.

Adrian L. Sabater

You and other naive academics again want to push everything onto the employer, righteously believing that there are excess funds to support OSHA EPA and other government plans which cost companies so much that they cannot compete with China.
I’ve watched USA be run out of business by China.
I lived in China/Taiwan for 3 years. The factory workers live at the factories in multi-story motel-like apartments. Men on one floor and women on the next. 4-6 persons in a room, with a toilet at the end of the hallway. They all eat and socialize around a single TV in a community room. The companies who have taken over the electronics, clothing, and virtually everything sold in your malls, all work like this!
How can the idiot American politicians allow Chinese products in duty free????
Companies don’t vote, but their demise is the direct result of horrible global mismanagement.
Yes we should have what you recommend, but the China and regulations are the “1-2” punch that has put America out of work!

maryanne coppinger

Living in New Mexico, I see many families living with low incomes. I think one of the barriers to saving for retirement is the complex, inscrutable paperwork associated with investing. Couple this with low financial literacy, and you have people putting a few coins into IRA certificates of deposit and making microscopic interest on their savings. No interest equals not interested.

Furthermore, I feel strongly that business math and investing in the market courses should take the place of trigonometry and advanced algebra in high school curricula. A person can’t participate in the capitalist economy without a financial education.

Anne Hays Egan (@AnneHaysNM)

The study findings make sense to me. When people have a limited income, and the majority of employers for low-wage earners provide limited or no benefits, saving is nearly impossible. Food, rent/mortgage payments and transportation trump everything else.

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