The number of individuals prepared for retirement is low. This is especially the case for low-income individuals, so says Rich Jones, director of policy research at the Bell Policy Center, a nonprofit research group based in Denver.

The risk is not just to the lower income. As lower income retire, the need for public assistance increases. Dealt with later, once individuals are in retirement, the issue will likely cost more. This could also put a burden on the generations that follow. If their children have to take care of their parents, then the children’s ability to retire is at risk.

Groups on both sides of the political spectrum are suggesting creating retirement plans. The Center for Economic and Policy Research on the left and the Heritage Foundation on the right have suggested some kind of universal retirement account, making it easier for people to put away money and make investments.

However, not everyone is in support of a public based plan.  As Lisa, posted on Colorado Public Radio’s blog on the article about Coloradans have reason to worry about retirement savings, new report finds:

Everyone has the opportunity to save for retirement even if their employer doesn’t offer a program, it is called an IRA (Individual Retirement Account). If you do not have an employer sponsored program it is even tax deductible. People who are not saving for retirement are not taking advantage of programs that already exist so why would they take advantage of a new program?

Urgency Mounts
As population ages, this is becoming more urgent.  There is a need to lower the hurdle for small businesses to provide retirement plans. Jones’ study found that 81 percent of workers in businesses with 10 and fewer employees do not have workplace retirement plans.

“Small employers are working 24/7 on their business, so setting up a retirement plan for their employees or even themselves is really complicated and time-consuming,” Jones says. “And it could be more expensive for that small business to run the program.

Other states such as California are taking action. California passed a law to study whether to administer a retirement plan for people without access to retirement savings plan.

As Lisa explains, retirement saving plans already exist, but the willingness, education, resolution, and experience may not be there to manage the program.

Certainly for small businesses, there are barriers such as cost and complexity.

For individual in the top two earnings quintile, the story is much different. For those individual with $59,000 in income or more, all participants were offered a plan and 65% of those are taking advantage of the plan.

This is still a low number, and this may not be enough for them to retire, but it is significantly better than the low-income populace.  The largest impact falls on low-income workers.  According to Bell Policy Center, 74 percent of workers who earn less than $21,000 annually have no workplace retirement plan.

This disparity is what has lead Colorado to draft House Bill 1377: “Coloradans are less prepared for retirement today than in previous decades, and the overwhelming majority of people in the state are concerned about their ability and their children’s ability to retire.”

The disparity seems to fall to the businesses low-income work for.

In most cases, it’s because their employers don’t offer plans. According to Bell Policy Center study, Retirement at Risk, 45 percent of private-sector employees in prime working age work for an employer that doesn’t offer retirement savings plans.

The Bell Policy Center finds that nearly 1 million Coloradans of prime working age (25-64) employed in the private sector don’t have retirement plans through their employers.

In the past, individual relied on pension plans, defined benefit plans that provided income in retirement.  Defined benefit plans were provided by employers and paid for and managed by the employer. The risk was on the employers shoulders to provide the income.

Now businesses provide 401k plans. 401k plans are defined contribution plans where most of the money comes from the individual and is invested by the individual.

As a result, individuals across the nation, and specifically, in Colorado are concerned with running out of money, how long will they live, and can they save the money for retirement.

This issue was expressed in a quote from Colorado Public radio’s interview.

Janneli Miller is an adjunct professor with Fort Lewis College in Durango, Colo. Despite being well educated, she doesn’t have retirement plans from her previous jobs and she is worried about having enough money for retirement.  “I am 59 years old and have absolutely no retirement savings at all,” Miller says.

More disconcerting, is that “What I consider to be my retirement right now is I do own a home,” she says nervously. “And I pretty much figure that that’s my retirement.”

As financial advisors know, there are great limitations to relying on your home for retirement income.

The takeaway is that individuals need help in the form of a plan, help supporting them to show them they can do this and in many cases, providing small businesses with low cost, alternative to helping employees with a retirement savings plan.

By James Cornehlsen, CFA

Keywords: Personal Finance, Retirement, IRA, Individual Retirement Account