Americans’ retirement income comes from several sources. For most, Social Security income (Old-Age, Survivors, and Disability Insurance) is the foundation of financial security in retirement. The economic status of older Americans, as measured by the official poverty rate, has improved dramatically over the past several decades. In 1959, more than one in three older Americans lived in poverty. Today less than one in ten do. This drop is a testament to the success of Social Security.
Several factors have made it more challenging for future generations of retirees to achieve and maintain an adequate income in retirement. First, employers who once sponsored defined-benefit pension plans have shifted to defined-contribution plans, such as 401(k)s. These plans usually require workers to actively contribute to receive employer matching contributions and place greater risk on employees to save adequately and invest well. Second, few small employers offer any type of retirement savings plan to their workers. Both factors have led to many people approaching retirement with only a modest amount of retirement assets.
Most people supplement their Social Security benefits with income from other sources, including employer-sponsored retirement plans and personal savings. A large and growing number of older people either need or want to work during what are typically considered the retirement years. For some of those below the poverty line, public-assistance programs provide an income floor.
Additional efforts are needed to ensure financial security in retirement. Policymakers must strengthen Social Security so it can provide an adequate level of benefits to those who would otherwise suffer economic hardship—notably women, certain racial and ethnic groups who have less access to work-based savings vehicles, and people living alone.
Additionally, people need adequate protections in employer-sponsored retirement plans, expanded access to such coverage, and policies to encourage and facilitate saving. State-based strategies enabling small businesses to easily offer retirement plans to workers should help on both fronts.
Over the past two decades, Congress has enacted significant tax and employee-benefit legislation. The Pension Protection Act of 2006 made major changes in the rules governing private retirement plans. Such statutory changes have, on balance, increased access to these benefits and made the plans fairer to workers with low and moderate incomes. However, some legislative and regulatory pension activity has been driven by a desire to find needed government revenue, particularly in the short term, by limiting the tax subsidies provided to retirement plans.