As if the reality of saving for retirement isn’t daunting enough, the Financial Security Scorecard report issued by the National Institute on Retirement Security (NIRS) in July showcases a sobering picture of retirement security across the nation. Retirement security means having enough income to live comfortably, yet the reality is many Americans will likely not have retirement security when they retire. A recent U.S. Government Accountability Office retirement security report found that “about half of households age 55 and older have no retirement savings (such as in a 401(k) plan or an IRA.” While the NIRS report’s purpose is to educate state-level stakeholders and policymakers regarding the financial security issues faced by future retirees and what policies can be enacted to increase retirement security, anyone who expects to be a retiree should take a minute to review the report’s findings—if only to be reminded of the importance of planning ahead for your financial security during retirement and consider which states to retire in.
The Economic Pressures Behind the Rankings
To determine the retirement security for each state and how states ranked against each other, NIRS assessed “three sources of potential economic pressures for retirees.” These pressures included
- potential retirement income among private sector employees
- housing and healthcare costs for older households
- labor market opportunities for older workers
The rankings of these three sources were based upon eight variables. For example, for potential retirement income, the researchers analyzed the marginal tax rate on pension income and percentage of private sector workers participating in a retirement plan at work. The retirement costs of housing and health care variables included the average out-of-pocket expenditures for Medicare patients and the average Medicaid spending per elderly patient. Data sources which were used to calculate the rankings included U.S. Bureau of Labor Statistics, Center for Economic and Policy Research, U.S. Census Bureau and Centers for Medicare and Medicaid Services.
The result is a financial security scorecard for each state and the high and low scoring states for each source of economic pressure. One pattern the researchers found was that “no single state had the best or close to best ranking on all eight input variables in 2012.”
This year Wyoming ranked the overall highest, followed by Alaska, Minnesota and North Dakota. The reasons cited for this ranking include relatively strong labor markets and lower retiree costs. Lowest ranking states included California, Florida and South Carolina.
If you dig into the financial security scorecards, you can see the numbers behind the rankings. For example, in Washington, which earned a ranking of 8 for retirement income scores, the state ranks 10th in the nation with an average of $35,344 in the average defined contribution account balance and nearly 48 percent of private sector employees participating in an employee-sponsored retirement plan.
Perhaps the economic pressure that concerns seniors on a fixed income the most is retiree costs. While the cost of housing is expected to be high in urban areas, states do have housing subsidy programs for adults on a limited income, and state programs will also help pay for Medicare costs. When these two factors are combined, you can get a sense of which states are willing to spend money caring for their aging residents.
Again, North Dakota and Wyoming ranked the highest, while California, Florida, Illinois and Nevada ranked at the bottom. This is expected as the cost of living is quite high in California and Florida.
While the purpose of retirement is to escape the work place, for some retirees, they have to continue working to live comfortably. For many states, there are employment opportunities available, but this can be accompanied by low wages. The states ranking highest in this economic pressure category were Alaska, North Dakota and West Virginia. Not only did these states have a 4.4%, 2.2% and 3.6% unemployment rate (respectively) for seniors 55 and older, but the median hourly wages ranged from $15-$18. In contrast, North Carolina scored the lowest; even though its median hourly wage is $13.60, which is not the lowest rate, the unemployment rate is 7.9%.
What’s Needed to Create Retirement Security?
While future retirees can never save too much, policymakers can enact policies which address financial insecurities. This could mean increasing employment opportunities, encouraging retirement savings or increasing Medicare expenditures. But what should be heeded is how interconnected all these economic pressures are. As the report concludes, ” Weak labor markets for older workers tend to exist in tandem with higher retiree costs as reflected by low Medicaid generosity, high out of pocket Medicare expenditures, and high housing costs. In addition, higher costs seem to correlate with lower potential retirement income, as indicated by estimated average retirement savings account balances, workplace retirement plan participation, and income tax rates on seniors.”
Image courtesy of National Institute on Retirement Security (NIRS).