How Employers Made Funding Retirement Entirely Our Problem

It used to be employers’ problem. 

Now it’s ours…

Until the start of the 401(k) plan, in the 1980s, most American workers relied on three things for retirement:

• Social Security, funded jointly by employees and employers, each paying in an amount that started at 1% of employee wages in the 1930s, and is now 6.2% each.
• Defined benefit pensions, funded by employers, with payouts based on employees’ length of employment with the specific employer, and their final salary.
• Private savings, funded by employees to the extent that they choose to save and invest some of the money they earn, rather than spend it all.

But employers didn’t love the pension system. 

A CNBC article quotes Monique Morrissey, an economist at the Economic Policy Institute, “The risk is all on the employer or the pension fund. The pension fund or the employer has to figure out how many years on average the people in the pension fund are going to live and has to tie the benefits to projected earnings.”

The employer’s pension fund is on the hook for those benefits, whether or not they manage to bring in market returns high enough to bridge the gap between employer contributions and employee benefits.

The 401(k), however, changed all that.

Now, our retirement “stool” has only two legs:

• Social Security.
• Private savings, including 401(k) plans.

We didn’t just change retirement plans; we changed who carries the risk.

As a “defined contribution” plan, a 401(k) plan puts the employer on the hook only for the current contributions they choose to make. Not for investing well or ensuring the resulting balance provides enough retirement income for the retiree’s lifespan.

In short, employers shifting from defined benefit to defined contribution plans moved longevity risk, market risk, and behavioral risk from corporations to individuals, and most people didn’t notice until it was too late.

Worse, most individuals were never trained to manage those risks.

Understandably, most people are unhappy about it.

According to the National Institute on Retirement Security (NIRS), “A national opinion poll finds that working age Americans are increasingly worried about retirement, and they see a return to pensions as a way to restore the American Dream of retirement. Eighty-three percent of respondents say that all workers should have a pension so they can be independent and self-reliant in retirement, and more than three-fourths of Americans agree that those with pensions are more likely to have a secure retirement.”

How Well Are We Doing in Funding Our Retirement?

According to the Investment Company Institute, at the end of the third quarter of 2025, US retirement assets topped $48 trillion, including:

• $18.9 trillion in Individual Retirement Accounts (IRAs) – private savings
• $13.9 trillion in defined contribution plans like 401(k), as well as the less common 403(b) and 457 plans – private savings again
• $12.6 trillion in defined benefit plans (private and government) – pensions 
• $2.6 trillion in annuity reserves – a form of private savings

Those look like big numbers, but let’s break them down by household to see what people actually get to retire on.

According to Federal Reserve data, the average American household where the “reference person” is aged 65-74 has about $609k in retirement funds. For those aged 75 or older, that number is significantly lower, at $462k.

But that’s the average, which is skewed by the very wealthy.

A more informative measure is the median, the value at which half the group is above, and half below. 

There, the numbers are significantly lower, at $200k for those aged 65-74 and $130k for those 75 or older.

Americans have other financial assets (e.g., savings accounts, taxable portfolio, etc.) that can also be tapped in retirement, where the averages are $897k and $826k for the two age groups, respectively; and the median is again much lower, at $120k and $50k, respectively.

Summing the two types of accounts, the average for 65-74 year olds is just under $1.6 million, but the more illustrative median is only $320k (Table 1).

Table 1. Average retirement funds and total financial assets look substantial, but the median, which isn’t skewed by the small percentage of the uber-wealthy, is far from enough.

A $320,000 nest egg may sound substantial, but spread across a 25- or 30-year retirement, it offers a safe monthly draw of just $1000 to $1500.

That’s closer to a supplement than a solution, barely covering the average rent or mortgage payment, let alone groceries, utilities, and healthcare expenses.

That’s not retirement comfort.

That’s retirement fragility.

So maybe Social Security closes the gap?

Can Social Security Save Us?

That depends.

Mostly, it depends on your income, since Social Security is progressive by design. Its Primary Insurance Amount (PIA) replaces a larger fraction of lower incomes and a smaller fraction of higher incomes.

The PIA formula is a sum of three amounts relating to your Average Indexed Monthly Earnings (AIME, Table 2), which for 2026 are:

• For the first $1,286 of your AIME, your benefits replace 90%.
• For the portion between $1,286 and $7,749, your benefits replace 32%.
• For anything above $7,749, your benefits replace 15%.

All this ignores the looming exhaustion of the Social Security Trust Fund, now projected to happen in 2032. If no changes are enacted to address the issue before then, according to the Committee for a Responsible Federal Budget (CRFB), benefits would have to be cut by about 24%.

If implemented across all three PIA components, such a cut would change PIA to (in 2026 dollars, Table 2):

• For the first $1,286 of your AIME, 68.4%.
• For the portion between $1,286 and $7,749, 24.3%.
• For anything above $7,749, 11.4%.

Table 2. What Social Security retirement benefits replace now, and once the trust fund runs out (likely in 2032), if benefits are cut. Note that a 24% cut would address only the immediate shortfall. As the years go by, that shortfall is expected to worsen. 

The CRFB states, “We estimate that this would be equal to an $18,100 annual benefit cut for a dual-earning couple retiring at the start of 2033 – shortly after trust fund insolvency. At the same time, those retirees might experience reduced access to health care due to an 11 percent cut in Medicare Hospital Insurance payments. The cuts would grow over time as scheduled benefits continue to outpace dedicated revenues.”

How Confident Are Middle-Income Americans About Retirement?

With the above in mind, it’s little wonder that a CNO Financial Group survey found that, “Among middle-income Americans ages 50 to 85, one in three (32%) say they feel less confident in their retirement plans than they did a year ago, and two in five (41%) doubt they will have enough money to live comfortably throughout retirement—including nearly half (49%) of pre-retirees.”

They find that the top concerns are inflation, outliving savings, and cuts to Social Security benefits.

The NIRS survey agrees with CNO, “When asked if the nation faces a retirement crisis, 79 percent of Americans agree there indeed is a retirement crisis, up from 67 percent in 2020. More than half of Americans (55 percent) are concerned that they cannot achieve financial security in retirement. When it comes to inflation, 73 percent of respondents said recent inflation has them more concerned about retirement.”

There are some obvious reasons why these issues hit middle-income Americans especially hard.

In a Yale Tobin Center for Economic Policy report, the authors find that “in two-thirds of plans, employer contributions exacerbate pay inequity. Employer contributions are highly concentrated, with 44% of dollars accruing to the top 20% of earners.” 

This isn’t surprising, since the highest earners have a higher employer matching contribution cap (which is usually a percentage of income), plus, these high earners are typically better able to contribute a larger fraction of their income to their retirement plan.

Tax incentives are similarly skewed toward higher-income earners, since retirement savings tax deductions impact taxpayers’ marginal tax brackets, which, in our progressive tax system, are higher for high earners. 

For example, if you earn enough to reach the 24% tax bracket and live in a state where your state and local income tax is another 8%, and don’t itemize, every dollar you contribute to a tax-deferred retirement plan reduces your take-home pay by $0.68. If, on the other hand, your marginal federal tax rate is 12%, with the same state and local tax rate, every dollar you contribute to your retirement plan reduces your take-home pay by $0.80.

As a result of all the above, middle-income Americans feel increasingly stretched thin, being “too rich for help, but too poor for comfort and security.”

Financial Challenges Facing Middle-Income Americans

Retirement insecurity is no longer just a low-income problem. It is increasingly a middle-income margin problem. Multiple financial challenges impact middle-income Americans:

• Liquidity constraints driven by higher prices.
• Tax incentives skewed toward higher-income earners.
• Employer retirement plan matching contributions benefiting high-earning employees.
• Historically high real estate costs, along with mortgage rates that are more than double what they were a few years ago.
• Social Security benefits replace a small fraction of even middle-income earnings, especially if those benefits get cut as a result of the trust fund running out.
• Healthcare costs rising faster than overall inflation.

With all these, it’s especially difficult to not just save enough for a comfortable retirement, but even more so to build in a sufficient margin of safety or even know how much is “enough.”

Asking the Pros

I asked several financial advisors to weigh in on the topic. Here’s what they have to say.

Q. Many middle-income households appear “fine” on paper but have very little margin of safety. In your experience, how common is this, and what does it look like in real life?

A. Omar Morillo, Senior Wealth Advisor, Imperio Wealth Advisors, answers, “It’s extremely common to see middle-income households pass a static replacement-rate test on paper but collapse under stress testing. They may have a decent projected income in retirement, but with minimal emergency savings, high discretionary spending, and no buffer for market downturns or healthcare shocks. The slightest deviation from assumptions turns ‘fine’ into fragile.”

Alex Bridges, Wealth Advisor & Founder of Tiverton Wealth, agrees, “It’s very common. I regularly meet people with solid incomes, nice homes, and good careers who look financially stable from the outside. But when we review the numbers, there is little to no savings and no real investing happening. Often, they tell me they can’t free up anything each month. More often than not, it comes down to lifestyle creep. Income rises, spending rises with it, and the safety margin never gets built.”

Claire Thornton, Founder & Financial Planner at Hyla Financial, says, “It’s a confusing place for people to find themselves. Among six-figure earners (especially young families juggling childcare on top of everything else), I often hear the same refrain: ‘We feel broke.’ More often than not, that feeling is a signal that spending and values have drifted out of alignment. It’s time to go back to basics and measure goals against how money is being spent.”

Q. Since the shift from defined benefit pensions to 401(k)-style plans, individuals now bear longevity, market, and behavioral risk. Which of these risks do you see creating the most problems for middle-income retirees?

A. Morillo again, “All three risks matter, but behavioral risk is the silent killer for middle-income retirees. People underestimate how emotions distort savings behavior and withdrawal timing. You can have good longevity assumptions and decent market returns, but if someone stops contributing too early, chases returns, or panics in downturns, the outcome is materially worse.”

Bridges agrees again, “Behavioral risk, without question. Markets go up and down, and people are living longer. Those are realities. But what hurts most people is procrastination, under-saving, and emotional decision-making. I have many retired clients who only ever had 401(k) plans and are doing just fine. The difference is that they were disciplined. They consistently contributed, often maxed out their plans, and stayed invested.”

Thornton sees another risk as the most important, “The risk I see creating the most problems for middle-income retirees isn’t market volatility, it’s distribution management. A single additional dollar of income can trigger meaningful downstream consequences. Crossing an IRMAA [Medicare’s Income-Related Monthly Adjustment Amount] threshold can lead to higher Medicare premiums two years later, while poor income-tax coordination can shift Social Security from 50% taxable to 85% taxable or push capital gains from the 0% into the 15% bracket. For many middle-income retirees, the challenge isn’t how much they’ve saved, but how (and when) they draw from pre-tax, Roth, and taxable accounts. Thoughtful distribution sequencing can materially improve outcomes!”

Q. If Social Security benefits were reduced by roughly 20–25% in the next decade, how would that affect middle-income retirees differently from higher-income retirees?

A. Bridges says, “Middle-income retirees would feel it more. They tend to rely on Social Security for a larger portion of their retirement income. Higher earners usually have more diversified income sources and larger investment portfolios to cushion the impact. For many middle-income households, a reduction of that size would require real spending adjustments or a delay in retirement.”

Morillo totally agrees, “A substantial reduction in Social Security isn’t just a cut in income. It erodes the floor of retirement security. Middle-income retirees depend on Social Security for a larger share of their essential spending than high-income retirees, who have diversified income sources. Reducing benefits by 20–25% would push many from ‘just managing’ into outright shortfalls.”

Q. If a middle-income household wants to increase its retirement “safety margin” over the next 5–10 years, what is the single most impactful change you would recommend?

A. Bridges suggests, “Increase savings and be disciplined about investing. If you have 10 years, that’s a meaningful length of time. Max out retirement contributions, cut unnecessary spending, and stay consistent. And just as important, work with a fee-only advisor who specializes in retirement planning. Transparent advice with no product incentives can make a significant difference in the final stretch before retirement.”

Morillo expands, “The single most impactful change is prioritizing savings earlier and consistently, even at the expense of current lifestyle. Speeding up contributions when you’re earning income leverages compound growth and creates a vital safety margin that can absorb longevity risk, market volatility, and unexpected needs.”

The Bottom Line

The retirement trap is no longer just poverty.

It’s having little if any safety margin. Having too much to qualify for help, but not enough to feel safe.

The most important question then becomes, what can you do to increase your retirement safety margin?

The main things under our individual control include the following:

• Increase your retirement margin by resisting lifestyle inflation in housing. Just because the bank will lend you more doesn’t make it wise to borrow every dollar they offer.
• Only buy a car (or two) if you need it (or them). If you do buy, buying a new, reliable car and driving it for at least 10 years proves to be less expensive than buying used cars.
• Find ways to increase your income. This can be achieved by learning skills your employer values, taking on tasks that make your supervisor’s job easier, and/or monetizing existing or new skills through a side gig.
• Each time your income grows, dedicate at least half and up to two-thirds of the increase to retirement investments. Use the remaining half or third to enhance your enjoyment of life in the present. This makes it easier to stay the course.
• Try to keep your fixed costs as low as possible as a fraction of your overall budget, especially in retirement. The flexibility this gives you allows higher safe draws in retirement.

Disclaimer: This article is intended for informational purposes only, and should not be considered financial advice. You should consult a financial professional before making any major financial decisions.