While Americans can stash away gobs more money in their retirement accounts next year, a huge swath of workers won’t benefit from the huge increase in the annual contribution limit for 401(k)s and similar workplace retirement plans.
That’s because 45% of American households don’t have these types of retirement accounts, according to Federal Reserve data, while a quarter of those surveyed have no retirement savings or pension at all. Even those who do have access to these plans don’t sock away nearly enough to come close to the maximum contribution.
That means the generously higher limit won't help close the shortfall in retirement savings of many millions of Americans, who will likely rely more heavily on Social Security to make ends meet in old age.
“The system is benefiting the wealthy,” Joanna Ain, associate director of policy at Prosperity Now, told Yahoo Money. “It's terrific that we’re increasing these amounts for tax-deferred retirement account savings, but these are not the households I stay awake at night worrying about. We have so many low-income families and households that are not at the point where they're even starting to think about retirement.”
Last month, the Internal Revenue Service announced record high maximum annual contributions to 401(k) and similar retirement accounts. Workers who have a 401(k), 403(b), most 457 plans, and the federal government's Thrift Savings Plan can contribute up to $22,500 next year, up 9.7% from the limit of $20,500 this year.
But these employer-sponsored plans aren’t universally available.
An estimated 57 million workers in the private sector have no access to an employer-sponsored retirement plan like 401(k)s, according to research by the Georgetown Center for Retirement Initiatives, including contractors, freelancers, gig economy workers, and part-time workers. Meanwhile, nearly two-thirds (74%) of small businesses with 50 or fewer workers do not offer a plan, according to a survey by Sharebuilder 401(k).
The lack of access to these plans is particularly acute for the lowest earners. Among workers with the lowest 20% of income, nearly 4 in 5 (79%) have no 401(k) accounts, according to researchers from the Center for Retirement Research at Boston College.
“It’s a big problem because 57 million people have to patch up a DIY retirement, and they can least afford it,” Ramsey Alwin, president and CEO of the National Council on Aging (NCOA), told Yahoo Money. “Most of them are in low-wage jobs to begin with and investment retirement accounts, if they were to open one, have much higher fees than 401(k) plans offered by employers. So it’s a double whammy. It would be hard for these people to save even in an employer-sponsored retirement account, let alone outside one.”
This year’s staggering inflation just exacerbates the problem.
“It affected all households, but it's likely to have a bigger impact on lower- and middle-income workers' ability to save than it will on higher-income workers,” Christine Benz, Morningstar's director of personal finance, told Yahoo Money. “Lower- and middle-income workers tend to spend a bigger share of their salaries on non discretionary expenses like food, rent, home heating, and gas, and those are some of the areas where we've seen the highest inflation rates over the past year.”
Maximum retirement contribution limit means little to many workers
Even those fortunate workers who do have access to retirement plans fall short of meeting the full amount the IRS allows them to contribute year after year.
Only 14% of workers contributed the maximum allowable amount to their 401(k)s in 2021, according to Vanguard's latest “How America Saves” report.
Not surprisingly, the highest-earning workers were much more likely to “max out” than lower-, middle-, and even upper middle-income workers — 58% of workers making more than $150,000 were making the maximum allowable contributions. Those percentages were in the single digits for workers making $99,999 or less.
“Most workers don't come close to making the maximum allowable contributions to their tax-sheltered retirement plans,” Benz said. “So the recent increases in IRA and 401(k) contribution limits will be a non-event for them.”
Social Security only goes so far in meeting living costs for retirees
This dearth of retirement savings has lasting repercussions for future retirees.
Consider this: the median 401(k)/IRA account balance for working households approaching retirement (ages 55–64) was $144,000, which could dole out slightly more than $500 per month in income during retirement, according to researchers from the Center for Retirement Research at Boston College.
For lower-income households that are less likely to have access to retirement savings plans through their employers, the retirement readiness gap is even more grim: The median account balance is only $32,200 for those who do have a 401(k).
And Social Security, without staring down the road to 2034 when the program’s reserves are expected to run out, doesn’t fill the cost-of-living gap today even with the huge 8.7% increase in benefits for 2023.
“The benefits are quite modest and have not been sufficient to cover the true cost of aging in awhile,” Alwin said, noting the poverty rate among people 65 and older increased from 9% in 2020 to 10.3% in 2021. “This increase shines a glaring spotlight on the fact that Social Security and Medicare, the bedrock of retirement security for so many, are not sufficient to lift all older adults above poverty.”
Kerry is a Senior Columnist and Senior Reporter at Yahoo Money. Follow her on Twitter @kerryhannon