Many Older Adults Lack Financial Security: What Can We Do?

An older woman holds a coffee cup and looks thoughtfully out her bedroom window.

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America is grappling with a significant shift that endangers the financial stability of its older adults. As private industry transitioned from employer-managed defined benefit pensions to self-directed defined contribution programs, many Baby Boomers found themselves unprepared for this drastic change. The consequences have been severe, creating a ripple effect that impacts an entire generation of Americans.

Too many older adults now rely heavily on Social Security for most, if not all, of their retirement income. According to AARP, about 1 in 7 (about 14%) retirees depend on Social Security for 90% or more of their income. As of August 2024, the Social Security Administration reported that the average Social Security check is $1,920. Without substantial additional savings, many retirees are left in poverty or on the brink. This troubling reality stems from a lack of foresight and financial literacy, meaning many did not save adequately during their working years.

Our collective failure to help workers plan for their future has led to an unsustainable situation where many older adults live without financial security. However, we can learn from this crisis and take action to better prepare future generations.

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How can society reverse the tide?

To address this crisis, we need to examine consumer behavior, explore new tax policies and implement other incentives to encourage Americans to save more effectively for retirement.

One of the biggest obstacles is the widespread lack of financial literacy in the U.S. Yes, more schools have introduced financial literacy programs to their curriculums. But more extensive efforts are needed. A study from CFA Institute and the FINRA Investor Education Foundation found that 23% of Gen Z investors have no formal financial education, compared to 42% of their non-investing peers.

Many Americans are unaware of key financial concepts, like compound interest, the benefits of starting to save early or how to choose the right retirement accounts. Without this basic understanding, people are less likely to save enough for retirement. Misconceptions about the sustainability of Social Security also create a false sense of security, leading to under-saving.

Addressing this gap requires a concerted effort to promote financial education, especially among younger generations. Schools, employers and government agencies must all play a role in providing resources and encouraging financial literacy, which could significantly increase personal savings rates.

Policy reforms are necessary, too

Improving retirement outcomes will also require substantial policy reforms. Social Security, once the cornerstone of retirement security, is no longer the full solution. With the system facing a funding shortfall, proposed solutions include raising the retirement age, modifying contribution caps or introducing means-testing for benefits.

One promising approach is to increase contribution limits for retirement accounts, making it easier for Americans to save more during their working years. Another potential reform is to automatically enroll workers into retirement plans, a strategy that has successfully boosted participation rates. Many employees miss out on these opportunities simply because they do not opt in, leaving valuable employer matches and tax-deferred growth untapped.

Targeted tax incentives could also help, especially for middle- and low-income workers who often have no choice but to prioritize immediate financial needs over long-term savings. Expanding the Saver’s Credit, which rewards retirement contributions, could incentivize greater participation in retirement accounts. While such reforms are politically contentious, they are necessary to address the systemic shortcomings that leave many Americans unprepared for retirement.

Extra challenges for freelance and contract workers

In today’s rapidly changing labor market, the gig economy adds another layer of complexity to retirement planning. Millions of workers in freelance or contract roles lack access to employer-sponsored retirement plans. Traditional retirement vehicles, like 401(k)s, are often unavailable, and many face challenges in consistently contributing to individual retirement accounts (IRAs).

Providing more flexible retirement options for gig workers, allowing those who take breaks from the workforce to make catch-up contributions and increasing opportunities for part-time workers to save for retirement are crucial steps toward addressing the retirement savings gap. Potential solutions include offering tax incentives to encourage IRA contributions and expanding portable retirement benefits that move with workers between jobs. Additionally, implementing government-mandated retirement plans for gig workers could help them steadily grow their savings over time.

Generational perspectives on retirement planning reveal troubling disparities. Younger Americans, particularly Millennials and Gen Z, have grown up hearing that Social Security may not be available in its current form by the time they retire. This has prompted many to begin saving earlier than their parents or grandparents did. Yet, even with this awareness, most younger workers are still not saving enough.

A key factor driving this shortfall is the burden of student loan debt, which forces many young workers to prioritize debt repayment over retirement savings. Additionally, wage stagnation and the high cost of living in many areas leave little room for discretionary savings.

One of the most critical issues

The looming funding crisis for Social Security remains one of the most urgent issues in retirement planning. Without reform, the program is projected to be able to pay only 79% of scheduled benefits by 2033. Many Americans, particularly those close to retirement age, are unsure of what this will mean for their financial future.

While Social Security was never intended to be the sole source of retirement income, many Americans rely on it as their primary or even only source. For those without significant savings or pension plans, reduced Social Security benefits could spell disaster. Until political leaders address the need for reform, uncertainty will persist, making it all the more important for individuals to build their own safety nets through personal savings.

What you can do

There are prudent strategies that can be implemented to address a potential shortfall in retirement income.

For those planning their retirement:

Wait until you reach full retirement age before collecting Social Security benefits to maximize your monthly payments.
Aim to maximize your contributions to private retirement savings accounts. If you're over 50, take advantage of catch-up contributions to boost your savings.
Consider the option of working beyond the traditional retirement age, whether full time or part time, to potentially shorten the time you rely solely on retirement income.
Carefully evaluate your retirement income needs, considering your goals, housing, health care and potential long-term care expenses.

For those who have already retired:

Look into options for supplemental income, such as rejoining the workforce on a part-time basis if needed.
Be aware of your responsibilities regarding required minimum distributions (RMDs) to avoid costly penalties.
Investigate products and strategies that can convert your retirement savings into steady income streams, such as low-cost annuities and systematic withdrawal plans.
Diversify your withdrawals across different retirement accounts and be mindful of the tax implications associated with each source.

At all stages of retirement planning:

Consult with a financial adviser who specializes in retirement planning to ensure your savings align with your retirement goals.

Fixing the American retirement crisis requires a multifaceted approach that addresses both individual behavior and structural inefficiencies. On the individual level, increasing financial literacy is crucial. Workers need to understand the importance of saving early, the mechanics of investing and how to make the most of their retirement accounts. Employers and financial institutions can play a significant role by providing educational resources and facilitating automatic savings programs.

On the policy level, reforms must focus on ensuring the sustainability of Social Security while promoting personal savings through tax incentives and employer-sponsored plans. Ensuring that all workers, including those in the gig economy, have access to retirement savings options is also essential to prevent millions from falling through the cracks.

Without decisive action, the retirement crisis will continue to worsen, leaving future generations to bear the brunt of inaction. Empowering individuals with knowledge and providing the right incentives are the keys to ensuring that more Americans can enjoy a secure and dignified retirement.

Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

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Ryan Munson is a research manager at CFA Institute. His research focuses on pensions and the future of finance, exploring how extra-financial factors impact the investment industry and investment professionals. Ryan serves on the advisory board for the Mercer CFA Institute Global Pension Index. He is the author of several CFA Institute publications, including the Future State of the Investment Industry, the Future of Work in Investment Management series and the CFA Institute Investor Trust series.