Pension Contributions and Paycheck to Paycheck Living

The US have a worker/employer pension scheme much like the UK's, often called the 401(k) ...

Living From Paycheque To Paycheque

You contribute a percentage of salary pre-tax and your company matches what you put in up to a certain amount, which can vary from employer to employer in the ranges of 5 - 13% (usually around 6%). If you pay your 401(k) contributions post tax, then your final payout is 100% tax free.

In the USA, the average 401(k) employer match in 2024 was between 4% and 6% of salary. The most common pension structure is a 50% partial match of contributions up to 6% of salary. Of course like all these schemes, in a perfect world, you should put the maximum amount you can afford in it, but at a minimum, you should always contribute up to the point where your company matches what you put in. In fact the 'formula' suggested, is taking your age, and dividing it in half to calculate what you should contribute .... for instance when I was 60 I had 30% of my salary going into the company pension scheme.

In 2023, Americans saved an average of 7.1% of their salaries in their 401(k)s (no average figures for UK, but by law the minimum is 5% with 3% employer contribution, unless you opt out of the scheme), which was actually higher than the overall personal savings rate that year which is disturbing. However less than 12% of working-age Americans were on track in 2023 to max out their contributions (There is an upper limit of $30,500, including “catch-up” contributions for those 50 and older and $23,000 for those under 50).

In 2023, 88% of eligible employees in Great Britain participated in a workplace pension, which is the same as the previous year. The average employer contribution in private sector schemes is between 7% and 14%, while in the public sector it's around 20% where 3.73 million employees (95% state sector and the rail unions) are currently members of fully-open final salary schemes, down from 4.1 million a year ago.

According to SunLife insurance, nearly 7 million people aged over 50 in the UK still have no private pension savings. The reason often given why so many people make such small or no pension contributions (certainly not the figures experts state is required) is that they either expect their families to look after them (South Asian families), they are maxed out on credit and debt repayment, and are little more than a lost salary or two away, from deep financial problems.

The figures for those who allegedly live 'pay-cheque to pay-cheque' have hardly changed in decades: In the UK in 2022, WTW's Financial Wellbeing study of over 4,000 UK employees concluded that a third of UK workers (36%), are living month-to-month without any spare cash for emergencies or shocks, with a quarter (26%) struggling financially.

While in the US, according to research from Bank of America, in October 2024, around 35% of households earning less than $50,000 per year are living paycheck to paycheck, up from 32% in 2019. Higher-income households also report struggling, with around 20% of households with more than $150,000, living paycheck to paycheck, the research found. Now if, and its a big if, these figures are true, then that could be why so many are not maxing their pension contributions. 

But there's a problem, which is that the questions in these surveys can be very leading e.g asking consumers whether they agree with the statement, “I am living pay-cheque to pay-cheque,” and almost half of respondents say 'yes' ... well in a way, we all live 'pay-cheque to pay-cheque', so the fact that 50% said yes, and yet the US survey concluded only 35% (of those earning under $50,000 pa) were really living 'paycheck to paycheck' in the states, suggests that the real answer/truth is a little more complicated. 

For instance, there is a complete lack of a formally accepted definition of what living 'pay-cheque to pay-cheque' actually means in the studies. So when respondents agree to that question does it mean that they have other reasons for the answer such as saving more (for a mortgage, or putting more into their pension scheme?) and this left them a little vulnerable?

Similarly the other classic question "Would you struggle to pay the bills if you suddenly lost a month's income" or something similar, has no definition of struggle .... it could simply mean that you would have to take some money out of your savings, or cut back saving for that mortgage?

Or what about the personal circumstances of the person being asked? They could simply be a gambler and thus always spending to the max. Finally there's the 'difficulty' question. Answering 'Yes' to the question of living "paycheck to paycheck,” but adding 'without any difficulty', puts an entirely different slant on both the question and the answers .... So how many people really do live simply from 'pay-cheque to pay-cheque' in the sense of no other resources, with no way of getting more in either the US or UK? .... now that's the big question.  

Personally I think that there's no doubt, that given the overall conformity of the results on the many surveys on this question, that a significant proportion of the populations of both the UK and USA, do indeed live on a salary to salary basis, and that many would have little resources to easily survive being made unemployed, or meeting a significant unexpected bill, without having to make some hard decisions .... but we don't see anything like that number of people walking the streets, or declared bankrupt/homeless. So in reality, people survive, they continue to work and get paid, and therefore are in fact managing their budgets (even if they are balancing on a knife edge), that they make the correct necessary financial decisions and manage.

So the question as to why so few max out their pension contributions has to be a choice issue, maybe a poor long-term choice, but nevertheless one they take to manage their day to day lives and not cut back today to pay for the future e.g. that foreign holiday on the credit card now instead of a £1,000 in the pension pot.

I am not immune to the struggles of families living on a continuous cycle of managing finances month to month, just a small step away from financial disaster (my teens and early 20's were like that, or worse) .... so I guess that I made later life decisions to cut out some immediate pleasures, in order to make sure that my old age was free of that issue, but whether that was a better or worse choice its impossible to say objectively.