The 401 (K) and IRA, two of the most popular retirement savings accounts, were created to help Americans save a little more for their so-called ‘golden years’.
To this end, the federal government provides savers with tax incentives, which according to some economists result in a loss of about $200 billion per year in tax revenue. Money that could, for example, be invested in public social security (Social Security).
Federal data suggests that these accounts and the tax benefits they bring primarily benefit only a few Americans, the wealthy.
For families in the top 10% of income, retirement savings accounts averaged $559,000 in 2022, according to the Consumer Finance Survey.
Among Americans with average income, retirement savings averaged only $39,000, and nearly half of that group had no savings at all for retirement.
This happens because many smaller employers do not offer 401(k) plans. Even when they do, workers often refuse to participate because they do not have enough income to save or because they fear needing to withdraw the money before retirement and facing tax penalties.
Many economists believe that the United States is facing a retirement savings crisis. Less than half of Americans have retirement accounts, Census data shows. Even among those nearing retirement age, between 56 and 64 years old, the percentage of savings accounts was below 60% in 2020.
Without a retirement account, most retirees depend on Social Security. But monthly checks from Social Security averaged about $1,800 in 2023. A typical family managed by someone aged 65 or older spends $4,345 per month, according to a BlackRock analysis of federal statistics.
The government does not tax income contributed to a traditional 401 (k) or IRA. You pay taxes when you withdraw the funds in retirement.
Even so, as the data described shows, most Americans do not take advantage of this, many because they cannot or because they do not have access to it. These low-income Americans have more pressing priorities, such as paying rent, for example.
The wealthiest Americans, on the other hand, tend to make the most of the tax benefits. According to an investigation by the Urban-Brookings Tax Policy Center, three-fifths of the tax benefits from retirement savings go to people who are among the top 20% of Americans in terms of income. More than four-fifths go to people who are among the top 40% richest.
The fundamental problem with this retirement system is that it rewards people who do not need help, argue many economists.
So what does the future of retirement in the U.S. look like?
Source: USA Today