Social Security, 401(k) Savings Could Sustain Retirement
The analysis from the Washington, D.C.-based Employee Benefit Research Institute (EBRI) finds that, assuming current Social Security benefits are not reduced, 83% to 86% of employees with more than 30 years of eligibility in a 401(k) retirement plan could have sufficient funds to replace at least 60% of their age-64 wages and salary.
When the threshold for a financially successful retirement is increased to 70% replacement of age-64 income, the analysis finds that 73% to 76% of the employee set will still meet that threshold through 401(k) assets and Social Security payments combined. At an 80% replacement rate, the analysis finds that 67% of the lowest income quartile will still meet the threshold if they have had 30 years of access to a 401(k).
Automatic enrollment in 401(k) plans can also play a role in successful saving for retirement. The EBRI analysis examines auto-enrollment with an annual 1% automatic escalation provision and empirically derived opt-outs, and finds that the probability of success increases substantially for employees in those plans, as follows:
- Between 88% and 94% could potentially achieve 60% threshold;
- Between 81% and 90% could achieve a 70% replacement threshold; and
- Between 73% and 85% could achieve an 80% threshold.
EBRI notes that the use of auto-enrollment as a plan feature has grown significantly since the enactment of the Pension Protection Act of 2006.
With regard to Social Security benefits, Jack VanDerhei, EBRI research director, says that such benefits are an integral component of retirement income security, particularly for lower income workers.
VanDerhei, who is also the author of the analysis, explains, “If we assume, as an example, that a proportional 24% reduction would be applied to Social Security retirement benefits for all simulated workers, the percentage of the lowest-income quartile under voluntary enrollment 401(k) plans with an 80% replacement threshold drops 17 percentage points, from 67% to 50%, while the highest-income quartile—which receives less proportionate benefits from Social Security—drops by only 9 percentage points, from 59% to 50%.”