Saving Trends: Almost 20% of Adults Over 50 Have No Retirement Savings in the US, while 90% of British Do Not Save Enough

Across the U.S. and the U.K., concerns are mounting about inadequate savings for retirement. In the U.S., a recent AARP survey revealed that nearly 20% of adults aged 50 and older have no retirement savings at all. Policymakers have long favored strategies like automatic enrollment and auto-escalation in retirement plans to encourage savings. However, there has been limited exploration into how these measures affect individuals’ spending habits when more money is directed into retirement accounts. Do people adjust their spending accordingly, or do they rely more on credit to make up the difference?

New research from MIT Sloan professors Taha Choukhmane and Christopher Palmer provides insights into this question. Their study uncovers that when people are nudged to save more for retirement, they typically reduce their spending—but not enough to cover the shortfall—while also increasing their reliance on credit cards.

Palmer noted that the broader implications of these findings are crucial, especially in designing retirement savings plans that are equitable for lower-income earners. The research, titled “How Do Consumers Finance Increased Retirement Savings?” reveals that most individuals fund their increased retirement contributions by cutting discretionary spending. This effect is particularly pronounced among those with limited liquid savings, who also tend to use credit cards more frequently.

The study analyzed data from the U.K., where retirement savings are supported through a state pension plan, employer-sponsored workplace pensions, and personal pensions. Similar to the U.S., the U.K. faces a retirement savings shortfall, with estimates suggesting that around 90% of Brits aren’t saving enough.

Choukhmane and Palmer examined the spending behaviors of 614,000 individuals using anonymized data from a large U.K. financial institution between January 2016 and November 2019. They focused on the impact of a national auto-enrollment policy, implemented under the Pension Act of 2008, which gradually increased retirement contributions from 2% to 8% of an employee’s salary.

The comprehensive dataset allowed the researchers to observe how individuals adjusted their spending in response to the policy change. The financial institution categorized purchases, enabling the authors to identify specific areas where people cut back. The survey includes interesting findings:

For every $1.32 reduction in take-home pay redirected toward retirement, employees cut their spending by only $0.45 on average, primarily on non-essential items like dining out and leisure activities. Essential spending on groceries and rent remained unchanged, though there was a slight decrease in spending on streaming services and clothing. This reduction reflects a behavioral tendency to cut back on activities that provide immediate gratification when faced with reduced income.

Individuals with significant savings offset the reduction in take-home pay by drawing on their deposit balances and reallocating funds from their bank accounts to their retirement accounts. Checking account balances declined by an average of $1.32 per month as a result. The study’s model predicts that, over a 20-year period, these individuals may eventually deplete their savings and be forced to reduce spending further.

Lower-income individuals, particularly those with little to no savings, made the most significant cuts to their spending and also increased their reliance on credit cards. Younger customers and those with lower current account balances exhibited the largest reductions in overall spending. The modest increase in credit card balances is noteworthy, particularly in a high-interest-rate environment. If people continue to use credit to bridge the gap between reduced income and previous spending levels, they may find themselves with more retirement savings but also burdened with higher credit card debt. As Palmer pointed out, this could lead to a scenario where the benefits of retirement savings are outweighed by the costs of accumulating debt, a potential failure of the system.

This research underscores the complexities of retirement savings strategies and highlights the need for careful consideration of how such policies impact different segments of the population, particularly those with fewer financial resources.

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