Study warns of Pa. residents’ retirement shortfall as treasury pushes savings program

Pennsylvania is facing a $17.8 billion budgetary impact through 2035 due to insufficient retirement savings among the state’s aging population, according to a Pew Research study issued Thursday.

State Treasurer Stacy Garrity pointed to the study as “even more evidence that the time to solve this problem is now,” in part by implementing a state-organized retirement contribution system for workers whose employers do not offer them.

What it says: The study - commissioned by Pew from Philadelphia-based analyst Econsult Solutions - uses as a baseline the assumption that Pennsylvania households making less than $75,000 per year will need to have at least 75 percent of their pre-retirement income after retirement in order to be stable.

However, based on current demographics and savings rates, the average household that will be hitting the retirement age of 65 between now and 2035 will come up around $7,800 per year short of that stability benchmark, according to the study. That post-retirement income calculation includes current Social Security schedules, according to Pew.

The gap between what prospective retirees will need and what they have saved is projected to increase demand for state-funded programs that help low-income seniors, including Medicaid, tax and rent rebates, and others. This direct cost to the state is estimated at $14.6 billion through 2035, according to study.

Further, reduced economic activity by retirees will cut state revenues by $3.2 billion through 2035, according to the study, through lost sales tax revenue and other mechanisms.

The Keystone Saves Act: To cushion the blow, lawmakers have proposed a program called Keystone Saves, for which Garrity is a vocal proponent.

One of the core problems with retirement savings in Pennsylvania is that about two million Pennsylvania workers, according to Garrity, don’t have access to an employer-sponsored retirement plan like a 401(k).

Although anyone can set up a personal retirement account, very few will consistently pay into it unless they can have small contributions deducted from each paycheck; having an employer-side payroll deduction makes people five times more likely to save, Garrity said.

Under the Keystone Saves proposal, employers who do not otherwise offer a retirement plan would be enrolled in a program where the state treasury would receive payroll deductions from employees. The treasury would then facilitate those employees investing their savings with various firms and funds.

Twelve states currently have such programs, and the average employee in those states is making $130 to $170 per month in contributions, according to Pew analyst John Scott – a savings level that would eliminate the bulk of Pennsylvania's shortfall.

A bill creating the Keystone Saves program has been run in at least the last two legislative sessions with bipartisan support, but never crossed the finish line, although Garrity said Thursday she is "optimistic" that there would be a lot of bipartisan support this session as well.

Why it’s happening: The broad issue is that tax revenue from those who are currently working supports social welfare programs for those who are not, mainly those who have aged out of the workforce.

The ratio between those two groups is not moving in Pennsylvania’s favor: there are currently 43 retiree households for every 100 working age households in the state, but by 2035 that will shift to 55 retired households for every 100 working, according to Pew.

“That may be fine if people were sitting on sufficient retirement savings, but that’s not what this study projects,” Scott said, and “the tax base that’s supporting a lot of the programs that help elderly residents is not growing as quickly” as the retired population.

Traditional defined-benefit pension plans – where the employer is on the hook for any shortfalls – have also declined sharply in recent decades, creating additional risk, according to the Social Security Administration.

Only 11 percent of private sector workers are participating in a defined benefit pension today, about a third of the level that was seen in the 1980s, according to the Bureau of Labor Statistics.