How Much Should the Poor Save for Retirement? Data and Simulations on Retirement Income Adequacy among Low-earning Households

Both policymakers and members of the public are concerned regarding the adequacy of U.S. households’ retirement savings. In response, proposals have been made to expand Social Security benefits and to establish state government-run retirement plans for private sector employees. In both cases, the largest effects would be on low-earning households, who currently have low rates of retirement plan coverage and participation and who rely heavily upon Social Security benefits in retirement. However, there has been little systematic analysis of the retirement saving needs of low-earning households other to point out that they currently save little. But this leaves open the possibility that low savings are appropriate given Social Security’s progressive benefits. I explore these questions in two ways. First, I present a variety of data on the retirement saving and retirement incomes of low-earning households. While these households save little, their retirement incomes have risen steadily over the past decades and their poverty rates dropped significantly, seemingly as a result of rising real Social Security benefits. Low-income retiree express less satisfaction with the adequacy of their retirement incomes than other retirees, but their self-assessed retirement income adequacy has increased in recent years. Second, I present a simple model to calculate the household wealth and saving rates necessary for stylized earners to achieve income-specific retirement income replacement rate targets, net of scheduled Social Security benefits. For very low earners, roughly the poorest quintile of the earning distribution, little savings are necessary on top of Social Security. For earners above that level saving requirements increase, but are likely achievable so long as an earner has access to a retirement plan and participates in it.