Economist: The system is 'flawed' when most Americans have little or no retirement savings

It's no secret that Americans are falling short when it comes to saving enough for retirement. But as a new report shows, many are disastrously unprepared — and that may point to flaws in the system.

Progressive think tank the Economic Policy Institute found that Americans 56 to 61 had a median balance of $21,000 in their 401(k) accounts in 2016, which is the most up-to-date data on file. That total reflects almost 30 years of savings.

Younger generations do not fare much better. Older millennials (ages 32 to 37) have about $1,000 saved in their 401(k)s.

The problem is that while 401(k) plans are meant to supplement Social Security, the benefits distributed by the government agency are modest. Currently, the average Social Security retirement benefit is about $1,470 a month, or about $17,640 a year, according to the Center on Budget and Policy Priorities.

Meanwhile, the typical American spent about $3,900 a month last year on basics such as food, housing, utilities, transportation and health care, according to the latest consumer spending data from the Bureau of Labor Statistics. Retirement accounts, ranging from pensions to 401(k)s to individual retirement accounts, are expected to fill the gap.

But when it comes to 401(k)s, that's not happening.

At least one economist says that the problem lies primarily with the plans, not with Americans' savings habits. "The system is designed to make people feel bad about themselves — everyone privately thinks that they're screwing up. And yet if everyone is screwing up, then it's clearly a system flaw," Monique Morrissey, economist at the Economic Policy Institute and author of the report, tells CNBC Make It.

As more and more American employers move away from offering pensions, 401(k)s and similarly structured retirement plans have risen in popularity. But the biggest problem with relying on 401(k) plans to supplement Social Security benefits is that many people simply don't have access to employer-based retirement plans.

"The No. 1 problem is a coverage problem," Morrissey says. Nearly 40 million private-sector employees do not have access to a retirement plan through their employer, according to a 2018 study by the U.S. Bureau of Labor Statistics.

Most people without any 401(k) savings are in that position because they don't have access to a plan at work, often because their employer doesn't have a plan at all, they're part-time or they haven't been at the company long enough to qualify.

Even if people are covered and participating in their retirement plan, Morrissey says "401(k) plans were not well designed to serve in lieu of a real pension."

First, 401(k) plans can be difficult for employees to navigate, even with changes lawmakers have put in place to make it easier for consumers to get started. Last year, 65% of companies with more than 5,000 employees automatically enrolled workers in 401(k) plans at a small set deferral rate, according to data from Vanguard. Many times, these programs will start employees off at a 3% contribution rate and gradually increase it to 6%.

Yet even though these auto-enroll programs get consumers started, the projections and assumptions that they need to make can be difficult to navigate. To determine how much you should invest to retire comfortably, you need to broadly estimate your lifetime earnings, as well as make some assumptions on what market returns will look like.

As Morrissey points out, small variations in those assumptions can make a huge difference. If you slightly tweak your expectations to be more pessimistic or more conservative, you could get results that specify you need to be saving close to half of your income.

If millennials want to retire at 65 and have enough to live off even half of their final salary in retirement, for example, they would need to save 40% of their income over the next 30 years if investments return less than 3%, according to recent academic research from Olivia S. Mitchell, a professor and executive director of Wharton's Pension Research Council at the University of Pennsylvania.

That type of savings goal becomes "overwhelmingly impossible to do and people give up," Morrissey says.

Additionally, 401(k) contributions are voluntary and you can tap your funds for a variety of purposes before retirement, a situation that makes these types of retirement savings accounts more "vulnerable" than traditional pension benefits to economic downturns.

For millennials, the good news is that it's not too late to jump-start retirement savings. Juggling saving for retirement with covering rising day-to-day housing, health care and living expenses and working to wipe out existing debt can feel overwhelming, but it's possible.

First, take some time to prioritize your financial goals. "Millennials will need to have a clear idea of what is most important to them in the long-term. Kids? House? Life experiences?" says Bart Brewer, a certified financial planner with California-based Global Financial Advisory Services. Trade-offs may need to happen, he adds.

It can also help to create a written monthly budget and carefully manage your credit. Young people need to be very careful about dramatically raising their standard of living, Brewer says. "It's much harder to ratchet down after you've ratcheted up."

And while they're not perfect, it's worth enrolling in your employer's retirement plan if you're eligible. Once you have your 401(k) account set up and your contributions flowing in, it's important that you select how to invest your funds — otherwise your retirement money will essentially act like a savings account.

Also, make sure to contribute enough to take advantage of any match your company may offer. Some companies offer to match the amount of money you put your 401(k), up to a certain point: If you put 5% of your salary into your 401(k), your employer may also contribute 5%, depending on the type of program. The median matching level is 4% among Vanguard 401(k) plans.

Last, you may need to consider working longer and waiting to claim Social Security until later. "Benefits from Social Security are 76% higher if you claim at age 70 versus 62, which can substitute for a lot of extra savings," Mitchell says.

If you're able, don't retire, Mitchell says. "If you can keep working, do so. If you can't work full-time, work part-time. Every little bit helps."

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