Joe Torsella, treasurer for the Commonwealth of Pennsylvania, is very concerned about the retirement crisis in America and its impact on his state.

When Congress or state officials talk about retirement, most people assume they are talking about public-sector pensions, he says.

“But what’s clear from the work we’ve done and what we’re seeing as national data is that we have a different kind of crisis on a slower fuse that is getting much less attention with vast and troubling implications,” Torsella says.

When people don’t save enough for retirement, the states have to pick up the slack in long-term care and Medicaid and Medicare costs and state budgets get messed up trying to allocate enough funds to handle these extra charges, he says.

“Our day-to-day concern is financing of the general fund in Pennsylvania,” he says.

Pennsylvania has been at a four-month budget impasse over roughly the same amount of money in the state budget that is attributable to insufficient retirement savings: $702 million.
The Keystone State decided to commission a study to look at its demographics and its ever-growing population of retirement age people.

“As we suspected, there are significant impacts to state finances going forward from the state of our retirement preparedness,” Torsella says.

The good news is that there is bipartisan interest in the state legislature to find ways the state may facilitate solutions to the retirement crisis, he says.

Ethan Conner-Ross of Econsult Solutions, a Philadelphia-based economic consultancy, helped research the report for the state of Pennsylvania. He looked at how much the state would likely spend in assistance costs for future retirees due to insufficient savings. He also looked at the economic impact on both the state’s employment and tax base.

The rule of thumb is that people need to be able to replace between 70% and 85% of their working age income for a secure retirement. In 2015, Pennsylvania spent $4.25 billion in assistance costs for elderly residents. Fifty-four percent of this cost was attributed to the 21% of the elderly population who have $20,000 or less in annual household income, according to the report.

If these elderly individuals had enough saved for retirement, state assistance costs would have been about $3.5 billion, a savings of $700 million.

According to the Econsult report, the net difference in state assistance costs due to insufficient savings is projected to grow from $700 million in 2015 to $1.1 billion in 2030.

The state to the rescue

If people don’t have enough saved for retirement, the state has to step in to help with long-term care costs, home and community-based services, long-term managed care, Medicare, Medicaid, the PennCARE program, property tax and rent rebates, free and reduced transit and more. They also don’t have enough money to spend to help boost the state’s economy.

“It is estimated that given sufficient savings levels, Pennsylvania’s elderly population would have contributed an additional $2 billion in household spending in 2015,” according to the report.

The report also pointed out that much of a person’s household expenditures leave the state, either via direct spending in neighboring states or through Internet shopping. Because of that, the report estimates that the “total loss in economic output in the state economy from reduced spending due to insufficient savings is nearly $2.8 billion for 2015. This loss of activity represents a loss of more than 20,000 full-time equivalent jobs and more than $850 million in employee earnings.”

The state spends an average of $2,000 per resident in assistance costs. That number falls steeply as income levels increase, says Conner-Ross. “Twenty-one percent of the population with the lowest incomes accounts for 54% of the expenditures.”

He adds that the state spends about $1,500 per household for middle class households that make $40,000 or more annually. Those households account for 83% of state expenditures.

The report quantified how insufficient retirement savings was calculated. For example, if a person made a working age income of $60,000 a year, their recommended replacement income in retirement would be $45,000. If that sample person only had an annual retirement income of $30,000, the gap due to insufficient savings would be $15,000.

So what can states do to solve this retirement savings gap?

Torsella says that his state has explored a number of options, including the notion of a marketplace to make more information about appropriate options available to employers or by pursuing a state-run automatic IRA model, as other states have done. Auto IRAs would be funded with an employee’s own money but they could take those savings accounts with them when they leave their current job. Employers could facilitate the use of these accounts by allowing automatic payroll deduction.

“In general, my takeaway is that auto enrolls have the most potential to make the biggest meaningful dent in this problem,” Torsella says.

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