A $6.6 Trillion Shortfall

U.S. households with workers in their peak earning years face an astounding $6.6 trillion gap between the money they'll need for retirement and the money they'll have, according to a new analysis by the Center for Retirement Research at Boston College.

The advocacy coalition Retirement USA revealed the dramatic gap Wednesday at the kickoff of a monthlong "Wake Up, Washington!" campaign.

The campaign goal is to draw attention to the "failure of the U.S. retirement system" and illustrate "how far behind Americans are in their retirement savings today," said Maria Freese—director of government relations and policy for the National Committee to Preserve Social Security and Medicare, a member of Retirement USA—in a press release.

According to the retirement income analysis, about 70 million American households with people between ages 32 and 64 will be short $6.6 trillion—an average of about $90,000 per household—in the amount they'll need to live comfortably in retirement.

The analysis took into account major sources of retirement income and assets: Social Security, traditional pension plans, defined contribution plans such as 401(k)s, personal savings and housing values. It didn't factor in health care costs.

Retirees Constance and Charles Morton, both 66, know what spiraling health care costs can do to a retirement. The couple has nearly depleted their personal savings account to pay for Charles' medical bills. He was diagnosed with Parkinson's disease four years ago.

The Mortons have no pension plan and no 401(k) because neither worked for employers that sponsored retirement plans. They live on a modest fixed income in a small beach town in Virginia.

"We bought real estate and thought that would be our answer" to achieve retirement security, says Constance Morton, a grandmother of 19. "We can't afford to stay in our home and we can't sell it. We never realized how much we needed to live in retirement."

No job-based retirement plan for many

Like the Mortons, half the American workforce has no pension or employer-provided retirement savings plan, says Karen Friedman, executive vice president at the Pension Rights Center.

That's why leaders from the AFL-CIO, the Economic Policy Institute, the National Committee to Preserve Social Security and Medicare, the Pension Rights Center and the Service Employees International Union got together to create Retirement USA in March 2009: to make the case for a new retirement system.

They also emphasize, along with AARP, that the Social Security program must be strengthened, not cut.

Members of the initiative have collected proposals by experts in academia, public policy and consumer affairs on how to improve the retirement system.

One proposal, called the Guaranteed Retirement Account Plan, would require workers and employers to each contribute 5 percent of a worker's wages to a retirement account.

Under this plan, the government would guarantee a 3 percent annual return adjusted for inflation. If actual investment returns were consistently higher than 3 percent, the plan trustees could distribute a surplus to participants. A separate fund would be maintained to ride out periods of low investment returns. A full-time worker who contributed to the plan for 40 years and retired at age 65 could expect to receive about 25 percent of pre-retirement income, to supplement Social Security benefits.

Another proposal would establish a defined benefit plan sponsored and administered by the federal government. All workers eligible for Social Security benefits would be able to join. Retirement benefits, which would equal 20 percent of Social Security benefits, would be paid in the form of annuities and be protected against inflation.

As pension plans decline in number, working Americans rely increasingly on their 401(k) plans to carry them through their retirement years. But since the recession took hold and the stock market tanked, the 401(k)—America's most common retirement savings tool—has come under scrutiny for its potential to put retirement savings in jeopardy.

Even when all the right moves are made, such as adequate contributions, diversification and age-appropriate allocation, the 401(k) is still a risky proposition.

Shift to 401(k)s "a disaster"

"The shift from pensions to 401(k)s has been a disaster for working Americans," says Monique Morrissey, an economist with the Economic Policy Institute in Washington. "It has shifted the cost [of retirement] to workers in a way they weren't fully aware of. What's clear is the risk falls on the worker, not the employer."

Friedman says employers and government must share responsibility for the retirement security of all working Americans. She says the current system has failed many retirees who rely solely on Social Security, and if the system doesn't change, tomorrow's retirees may also face an uncertain future.

"People are afraid they'll have to work until they die," she says. "We need a 21st-century retirement income system to supplement Social Security. This is a call to action."

To find out how much you'll need to retire comfortably, go to AARP's retirement planning calculator.

Carole Fleck is a senior editor at the AARP Bulletin.