"Retirement Savings Adequacy in U.S. Defined Contribution Plans"
We evaluate retirement savings adequacy in the U.S. using a large panel dataset comprising the contribution rates, salary, tenure, account value, plan features and asset allocations of more than 300 thousand US workers with a 401(k) account. Our simulations account for medical expenditure, longevity, and investment risks, and realistically model the likelihood of withdrawals due to hardship, job separation, and reaching age 59 1/2. We find that, based on their current account balances, income, saving, and investment behavior, close to three quarters of the workers in our sample are not saving enough for retirement. The dispersion is related to the generosity of employer contributions, account balances, but also worker saving behavior, which can potentially be changed going forward. The shortfall worsens if we introduce a bequest motive, decrease the fraction of housing equity available, or consider lower expected returns going forward. Only if we assume that individuals have both low risk aversion and very high discount rates do we conclude that the median agent is saving optimally. Given the magnitude of the problem, only major policy changes would fully addressed it, but a reasonable age-dependent minimum contribution rate could have a sizable impact, particularly for younger generations which have many years ahead of them to benefit from such a policy.
Enrichetta Ravina, Francisco Gomes
Ravina, Enrichetta, and Francisco Gomes. 2018. "Retirement Savings Adequacy in U.S. Defined Contribution Plans".