Saving for retirement in America

In 2025, a record-setting 4.2 million Americans will turn 65, the conventional age of retirement. It’s encouraging, then, that “retirement savings is probably behavioral economists’ greatest success story,” according to Nobel-⁠winning economist Richard Thaler. Every year, employees and employers deposit $500 billion into employer-⁠sponsored retirement accounts, and recent analysis has found that matches from employers who offer them have become more generous over time. The total value of assets held in all types of retirement accounts came to $37.8 trillion in 2022.

And yet, Americans aren’t feeling particularly optimistic. According to a recent Gallup poll, only 45 percent of non-retirees expect to be financially comfortable in retirement.

That number starts to make sense in the context of who has retirement savings. Economists at Boston College’s Center for Retirement Research estimate that 40 percent of the U.S. working population aren’t saving enough to maintain their lifestyle after they stop working. And other research estimates that 33 percent of private-sector workers do not have access to an employer- sponsored retirement account at all.

So there may be good reason that a substantial number of American workers feel anxious. Not surprisingly, the $500 billion flowing into retirement accounts isn’t distributed evenly across the workforce. Hispanic workers, workers with less formal education, workers at smaller employers, and workers with lower incomes are all less likely to be covered by a workplace retirement plan, according to analysis by Brookings economist John Sabelhaus.

People may also be understandably overwhelmed when confronted with the complex set of tax incentives, investment vehicles, penalties, and fees that characterize the retirement savings landscape in the U.S. “There are so many rules and so much variation in retirement plans,” said MIT economist and Institute visiting scholar Taha Choukhmane, who studies household finances and behavioral economics. “And the stakes are incredibly high. People are making decisions about thousands of dollars, and they need to adjust those decisions over time as their situation changes.”

No one doubts the benefits of building a nest egg. But who should save more and how to help them do so is murkier. How do the carrots and sticks in the system affect savings? Whose savings do they affect? And could simple changes meaningfully affect the number of Americans who feel prepared to live well in retirement?

Signing people up to save

Traditionally, economics assumes rational decision-makers optimize their choices, no matter how those choices are presented. Behavioral economics offers a more realistic view: People can be “nudged” to change their behavior by the way choices are offered or framed, even when the choices themselves are not restricted and no incentives are offered.

In the context of workplace retirement savings, one celebrated nudge is changing the default participation option: New hires are automatically enrolled in a plan unless they actively choose to opt out, rather than having to actively opt in.

The research on automatic enrollment has documented impressive results. A recent meta-analysis of 19 different studies by Harvard Business School economist John Beshears and his colleagues found that automatic enrollment increased plan participation rates by 26 to 91 percentage points after one year. “There is a growing body of evidence that workers overwhelmingly perceive themselves as saving too little and welcome mechanisms that help them save more,” the authors of one of the early studies on automatic enrollment concluded.

Both firms and government took notice. When these studies first started appearing in the early 2000s, around 2 to 3 percent of firms auto-enrolled their workers in retirement savings. By 2017, the share was 41 percent. The government also stepped in with the SECURE Act 2.0 of 2022, which passed both the House and Senate by large margins. Among its provisions to help Americans contribute to retirement accounts is a requirement that most 401(k) plans established after 2022 auto-enroll new employees and auto-escalate their contribution rate beginning in 2025.

But that initial enthusiasm has recently been tempered, as new research points to more modest conclusions about the effect of automatic enrollment over the long term. Ultimately, plan participation matters only to the extent it increases savings at retirement. In a recent paper titled “Smaller than We Thought? The Effect of Automatic Savings Policies,” Beshears and his co-authors analyze the long-term outcomes of automatic enrollment and escalation. They estimate the average effect of being introduced to auto-enrollment and auto-escalation simultaneously is equivalent to a 0.8 percentage point increase in a person’s saving rate over their working years (that is, an extra $8 of savings for every $1,000 of income)—a positive amount, but not as much as previously believed.

“There’s nothing to take away from the initial research’s findings that the short-run impact from automatic enrollment or automatic escalation is very large,” Beshears said. “What we’re increasingly accounting for in a lot of subsequent research, including my own, is that there are other elements of the decision-making environment, which might be related to later points in time, more distant from the moment when you’re automatically enrolled, or related to other parts of households’ vast set of financial decisions that they’re engaging in on a regular basis.”

So what are the behaviors that undermine the initial impact of automatic enrollment and escalation?

For whom savings accumulate

Accumulating savings over the long term generally requires adding to savings, allowing the employer’s matching contributions to vest, earning a good return, and avoiding early withdrawals. But research has identified places in this process that are leaky.

To start, over time, more and more employees opt out of subsequent automatic escalation, Beshears and his co-authors have found. This action limits their savings accumulation.

Perhaps the biggest issue, however, is that many people leave their jobs after a relatively short tenure. As a result, their employer’s matching contributions may not have fully vested. In addition, leaving a job is a moment when a large fraction of balances (42 percent in Beshears’ sample) are withdrawn from 401(k) accounts, either because individuals choose to make withdrawals or because their employer compels them to, a practice allowed by law for account balances under $1,000. “Once you incorporate the fact that employees leave employers pretty frequently, that has a number of important implications for how automatic policies impact their retirement savings outcomes,” Beshears said.

Choukhmane’s research on the long-term effects of automatic savings policies finds similarly modest results. He also finds no evidence that auto-enrollment creates long-lasting saving habits: When a person moves from an employer with automatic enrollment to one without, they are not more likely to opt in. In fact, they are less likely to contribute than someone whose previous employer did not auto-enroll them.

But average effects can mask important variation across groups. “A policy that increases saving by 10 percent may be good or may be bad,” Choukhmane said. “What really matters is, whose contribution did you increase? Did you increase the contribution of people who are under-saving for retirement? Or did you increase the contribution of people who save a lot already?”

In this case, economists have found that automatic savings policies do create longer-lasting gains for a group that might benefit most: Those at the bottom of the income distribution. In a study of the thrift savings plan for federal employees, Justin Falk and Nadia Karamcheva conclude, “Both matching and automatic enrollment increased participation and contribution rates the most for workers least likely to participate in their absence—those who have low earnings and less education.” And a model by Choukhmane of a universal automatic enrollment policy predicts it would meaningfully increase wealth at retirement for those in the bottom 10 percent of the income distribution—by up to 26 percent, in fact, if all employers auto-enrolled employees with a 6 percent default contribution rate.

Automatic savings policies have another advantage, Choukhmane pointed out: “Most American workers with access to these plans are putting money in low-fee, well-diversified mutual funds. That wasn’t the case before, and it’s not the case in all countries. And I think that’s really a success.” The U.S. stock market has enjoyed a high rate of return over the past 50 years, making it a key driver of wealth accumulation.

While employer automatic savings policies might not be enough to reshape Americans’ financial security at retirement, they don’t hurt—and they might help groups that have low savings rates, even though the bulk of employer contribution dollars go to the top.

Who benefits from retirement savings incentives?

The U.S. government does more than nudge people to save, however. In 2019, the exclusions from income and payroll taxes for pensions and retirement accounts totaled around $275 billion, an amount equivalent to 8 percent of federal tax revenues that fiscal year. Add in the retirement contributions from employers, and about 1.5 percent of U.S. GDP is dedicated to incentivizing contributions to retirement savings plans.

Choukhmane has been studying who receives these retirement savings incentives. Intuitively, those who make the most are likely to have the ability to save the most, which means they will receive the most employer dollars. The data back this up: In an analysis of 1,300 employer-sponsored plans, Choukhmane and his co-authors found that 44 percent of employer-contributed dollars went to the top 20 percent of earners.

Choukhmane has also studied if there are differences in retirement contributions among employees who are otherwise similar to each other. In research that Choukhmane presented at the 2024 Institute Research Conference, he and his co-authors document differences in retirement contributions by race and by parental income even among employees who are the same age, have the same education, have been working at their firm for the same amount of time, and have similar incomes.

“Black and Hispanic workers with access to a 401(k) or a 403(b) plan contribute approximately 40% less than White workers,” the economists write. “These saving differences mean that median White earners receive more than double the matching benefits of their Black and Hispanic counterparts.” The gap is even larger when it comes to tax benefits: Black workers get $0.31 of tax benefit for every $1 that White workers get, according to the analysis.

Obstacles to saving

With all these pushes to save—nudges, tax breaks, employer matches—why don’t people save more?

Many simply can’t. It’s hard to save money when money is tight. In economic terms, many people face a “liquidity constraint.”

There’s also a human tendency to value the present over the future. It’s a tendency many of us recognize in ourselves, and research shows that people often desire a form of commitment as an antidote, whether it’s to complete homework, eat healthier, or save more.

The benefit of spending today can not only hinder accumulating savings but lead people to draw down savings from retirement accounts. Despite the typical 10 percent penalty, early withdrawals are quite common: Approximately 13 percent of individuals aged 25 to 55 take a penalized withdrawal each year, Choukhmane’s analysis found. The magnitudes are meaningful, too. One analysis found that early withdrawals out of retirement accounts in a year were equal to almost a quarter of the deposits into accounts in that year.

Just as retirement savings incentives affect different groups differently, the rates of early withdrawals vary across groups. In Choukhmane and his colleagues’ research, they find that Black workers with at least $1,000 in contributions are about twice as likely to make an early withdrawal as White workers are and 1.5 times as likely as Hispanic workers are. Workers whose parents have lower incomes are also more likely to make early withdrawals than workers with parents with higher incomes are.

Choukhmane concludes that making early withdrawals despite a hefty penalty suggests Black workers and workers with lower-income parents have a greater need for liquidity or less access to other sources of liquidity. Research suggests that Black workers are also more likely to provide financial assistance to family and friends. A study by sociologist Rourke O’Brien found that while lower-income White and Black households provide financial assistance to others at similar rates, higher-income Black households are two to three times as likely to as higher-income White households.

There are a number of factors, then, that make it hard to save adequately for retirement. It’s also worth pointing out, however, that it’s hard to know what an “adequate” amount is. How long will we live? What health conditions will we face? What will be the rate of return in the stock market? How much will we receive from Social Security?

“Sometimes, especially in policy circles, we’re too quick to conclude that people are not saving enough,” Choukhmane said. “And I think from working in this field, my takeaway is that this is a much harder question and it’s not obvious who is saving enough and who’s not saving enough.”

Innovative ideas to support savings

The system may not be broken. But given the large sums spent by employers and governments to spur savings, it is worth thinking innovatively. “Is this the most efficient way to spend this money? Can we change these formulas in ways that we can create better outcomes for retirees, better distributional outcomes?” Choukhmane asked.

One challenge is balancing the benefit of saving for tomorrow with the benefit of spending today. Early withdrawals are “a double-edged sword,” in the phrase of Brookings’ Sabelhaus. They reduce savings in retirement, but they provide much-needed cash during a difficult time, such as job loss or a health need. “If you don’t have these provisions [for early withdrawals], people won’t put money in in the first place,” Sabelhaus said. Research by Sabelhaus and colleagues concludes that withdrawals often follow times of hardship: People are more likely to take early withdrawals in the year after their income falls by 10 percent or more or the year after they get divorced.

One option, then, is to take a closer look at the list of allowed withdrawals. “Right now, if you want to finance your kid’s education, you’re exempt from the penalty. If you take money from an IRA to buy your first home, you’re not subject to the penalty. This is saying, okay, this is good behavior. But losing your job or a medical emergency for a non-dependent relative, that’s going to be penalized. And so having a hard look at these lists I think is very important,” Choukhmane said.

Another influential set of rules are those that come into play when people leave their job, a time when retirement savings are particularly leaky. A 2024 report from Vanguard found that between the ages of 25 and 64, U.S. workers have an average of nine employers. “You might think, oh, the employer wants you to keep the money in the plan, but in fact they don’t,” Sabelhaus said. “It’s hard for them, for the plan sponsors, to keep these small accounts around.” It could make a difference to savings if employers cannot compel withdrawals, if compelled withdrawals are not subject to penalties, or if there is a stronger framework to encourage moving the money to another retirement savings account.

In addition, “the median job switcher sees a 10 percent increase in pay but a 0.7 percentage point decline in their retirement saving rate when they switch employers,” the Vanguard report concluded. Changing how employers set contribution rates could address this. “A very common structure is that when an employee first joins a company, they’re automatically enrolled at a 3 percent contribution rate,” Beshears said. “It’s actually sort of puzzling from an economic theory perspective why it’s linked to employee tenure as opposed to something like employee age. Ideally you also want to think about employee family structure and what the demands on their income are.”

Employers could also change their matching schedules so that savings are distributed more evenly. Right now, matches are usually tied to how much the employee saves. Instead, Choukhmane and his co-authors propose, employers could contribute the same amount they do now, but instead make contributions proportional to employees’ income, not how much they save. The economists estimate this change would help to meaningfully close the savings gaps between Black and White workers, Hispanic and White workers, and those with the richest and poorest parents.

More broadly, incentives could be better targeted to those who would or could not save otherwise. Right now, Choukhmane pointed out, a majority of employer matching money goes to people who are saving above their employer’s match cap, suggesting they would have saved just as much without the match. It might be more effective to target those who are less able or inclined to save. How might a 200 percent match for up to 3 percent of earnings change savings outcomes for workers, for instance? Incentives could be an important complement to nudges.

Employers, too, could be affected by stronger incentives. Brown University economist John Friedman suggests replacing tax incentives for individuals based on the amount they save with tax incentives for employers based on the number of their employees who are contributing to retirement plans. Firms are more knowledgeable of and responsive to tax incentives than individuals are, Friedman argues, and this would provide good reason for firms to get creative about how to encourage employee saving.

Why save, anyway?

The personal saving rate in the U.S. was above 10 percent from 1960 to 1975. It then began a descent, and while the last 10 years have seen ups and downs, it was only 4.7 percent in 2023. Collectively, we are saving less, even while life expectancy has increased by almost 10 years.

And some people are working later in life, but not everyone can. For those without a college degree, both objective and self-reported measures of health have worsened over the past two decades, which can push people out of the labor force before their intended retirement.

In the absence of sufficient resources from retirees and the government, the burden of caring for older relatives often falls on adult children, which can meaningfully affect their economic outcomes. A study of Social Security’s early years found that adult children whose parents were likely to receive Social Security benefits were able to move to job markets that were a better match for their skills, and as a result, they earned more.

Retirement savings, then, is an issue not just for retirees but for the next generations, too. And where do things stand for the next generation? Economists Richard W. Johnson and Karen E. Smith summarize several factors that will influence where retirement savings are headed. First, the good news. Educational attainment, which is correlated with higher earnings, is rising. Higher average wages are contributing to higher Social Security payments, providing funding to an important source of retirement for many. And the authors project that the median retirement income for millennials will be higher than that of earlier generations.

But there are worrying trends as well. Homeownership rates are down and debt levels are up, which reduce the resources available to retirees. “If we think about what is the retirement saving crisis, there is a group that has to pay rent for the rest of their life. They’re not going to have a paid-off house and they’re not going to have the insurance value of being able to sell their house if something happens,” Sabelhaus said.

In addition, the labor force participation rate of middle-aged men has declined while health care costs have increased, two additional factors pointing to less economic certainty in retirement.

Saving for retirement is hard. The benefits of doing so are large. It is a space where carrots and sticks and nudges, private employers and government can work together to create conditions that make it just a little easier.

This article is featured in the Spring 2025 issue of For All, the magazine of the Opportunity & Inclusive Growth Institute