A majority of Texans are not saving adequately for retirement. One key reason is that half of working Texans do not have the opportunity to save at work, which is the best and most common way individuals build retirement savings.
National studies estimate that between one-half and two-thirds of Americans are at risk of not having enough savings to maintain their standard of living in retirement or cover long-term care costs. It is estimated that the average Texas private sector worker has just $32,028 in his or her retirement account(s), far below the 10 years of annual salary that many financial advisors recommend.i
While Social Security is one important source of funds for retirement, this benefit will replace only about 36 percent of prior income on average. However, one in three Texans over 65 rely on Social Security as their only source of income.
Workers’ lack of access to a retirement plan at work spans all incomes, races and ethnicities and employer sizes, but the gaps in access are greatest for workers who are: employed by small businesses, under the age of 45, less educated, low-income, or are Hispanic, Black or Asian.
Benefits to Increasing Retirement Savings Rates
When Texans are provided an opportunity to save for retirement, they take advantage of it. Specifically, 84 percent of full-time, full-year workers that have access to a plan participate. Retirees with retirement savings are able to spend more money in their communities and are more likely to be self-sufficient. Increased retirement savings rates also produce economic benefits to the state and save the state money.
Policy Solutions to Expand Retirement Savings in Texas
States have made significant progress to expand access to workplace retirement plans in the private sector, typically through the adoption of innovative public-private partnerships. Since 2012, nine states have passed new policies that are now being implemented. Texas has a similar opportunity to explore three policy approaches to expand access to retirement savings:
- State-sponsored automatic savings program – Through this program, private sector employees are automatically enrolled in an IRA plan overseen by the state and can opt-out of participating.
- State-sponsored 401(k) plan – Under this model, states can offer a (401)k plan called an open Multiple Employer Plan (MEP) to an unlimited number of employers and workers.
- Automatic savings program combined with a state-sponsored 401(k) plan – This model combines an automatic savings program for employee contributions with a state-sponsored 401(k) plan for employer contributions.
In 2017, the 85th Texas Legislature considered HB 3601, which combined an automatic savings program for employee contributions with a state-sponsored 401(k) plan for employer contributions. Texas should consider pursuing this approach, which would lead to the most robust program.
Texans cannot afford for the state government to wait to address the inadequate level of individual retirement savings in our state. It’s high time for Texas to focus on policies that make it easier for employers to offer a retirement savings benefit for workers.
Read the full paper, Working Texans Face an Alarming Retirement Savings Shortfall and 2-pager, link?
i For workers with defined contribution plans, such as a 401K or IRA. Defined contribution plans are the most common way Texans are savings for retirement, which do not guarantee a specific benefit during retirement.