The Gig Economy and the Looming Retirement Crisis

The modern workforce is rapidly evolving, and with it, so is the way people plan for retirement. The days of working 9-to-5 in a full-time job with employer-sponsored benefits are becoming less common. Instead, we’re seeing the rise of the gig economy, where freelance, contract, and part-time work have replaced traditional employment for millions of Americans. While the gig economy offers flexibility and independence, it’s leaving many workers facing a looming crisis when it comes to retirement. At the same time, the traditional employer-sponsored 401(k) system – a cornerstone of retirement planning in America – may no longer be adequate for this changing workforce. The question is: how can gig workers build a safety net, and what will 401(k) plans look like in a decade?

The changing workforce landscape

According to the Freelance Forward Economist Report (2021), more than a third of US workers are part of the gig economy – whether as full-time freelancers, side hustlers, or independent contractors. The gig economy is attractive for its promise of flexibility, autonomy, and the ability to carve an independent path. But there’s a downside: gig workers often operate outside the traditional employer-employee relationship, which means they miss out on many of the benefits that full-time employees take for granted.

For full-time employees, retirement planning is often simplified by automatic 401(k) contributions and employer contributions. In contrast, gig workers must manage their own retirement savings with no employer to fall back on. The unpredictable income that many of these workers face makes saving for the future even more difficult. This structural shift in the workforce is creating a divide: those with employer-sponsored retirement benefits and those without.

While Solo 401(k) plans are available to freelancers, many aren’t taking advantage of it. This is partly due to a lack of awareness among gig workers, but also because setting up and managing a Solo 401(k) is often seen as more tedious than simpler retirement options, like an IRA.

The retirement crisis for gig workers

Retirement, for most freelancers, is a distant and daunting prospect. Without employer-sponsored plans, they lack the ease of payroll deductions and automatic contributions. Furthermore, because many gig workers are young, they often prioritize immediate financial concerns, such as paying off debt or managing inconsistent income, over long-term retirement savings.

Even for those who manage to save, the amount is often inadequate. Freelancers have access to tax-advantaged accounts like IRAs and SEP-IRAs, but these require discipline and foresight – two factors that can be hard to maintain when income fluctuates. The financial products available to gig workers simply aren’t as accessible or widely adopted as the traditional 401(k).

The result is a growing retirement gap. Freelancers are retiring with far less security than their traditionally employed counterparts. And as the gig economy continues to grow, this issue will only intensify. Without intervention, millions of gig workers may find themselves unable to retire comfortably, or at all. The data shows that gig workers on average expect to retire 3 years later than full-time employees (67 years old vs. 64 years old).

The future for 401(k)s 

The employer-sponsored 401(k) is at the heart of the retirement savings model. Introduced in the 1980s, it was designed for a stable, full-time workforce. It relies on automatic payroll deductions and is often paired with an employer contribution, making it an attractive and easy way to save for retirement. However, the workforce is no longer as stable or full-time as it used to be.

Many 401(k) plans have high fees, complex investment options, and limits that don’t account for modern financial needs. Furthermore, younger workers – those most likely to be part of the gig economy – are often not prioritizing retirement savings. When they do, they’re often overwhelmed by the complexity of 401(k) investment options. This can leave gig workers feeling less confident about achieving their retirement goals (42%) than those in full-time employment (45%).

As the gig economy grows and the nature of work continues to evolve, is the 401(k) system outdated? For many, the answer is yes. The traditional model of employer-based retirement planning no longer fits a workforce where full-time, long-term employment is becoming less common.

The need for flexible retirement solutions

If 401(k)s are no longer a one-size-fits-all, what is the solution? The future of retirement planning must be more flexible, adaptable, and inclusive of the gig workforce.

IRAs and SEP-IRAs are an option for gig workers, but they come with their own challenges. For one, they require freelancers to be proactive about setting money aside and managing their investments – tasks that are more difficult when income is unpredictable.

Financial planning apps, which are making it easier for gig workers to automate savings, invest wisely, and plan for the future, are a step in the right direction, but more needs to be done.

The financial services industry must innovate to offer products that more closely align with the realities of gig work. Flexible retirement plans, low-fee investment options, and easy-to-use platforms can empower freelancers to save. But policy changes are also needed. Officials could introduce new retirement savings incentives for gig workers or consider portable benefits that can move with workers across jobs and careers. These changes will be crucial in preventing a retirement crisis among gig workers.

The role of employers and government

While gig workers may not have traditional employers, that doesn’t mean they don’t deserve retirement benefits. Companies that rely heavily on gig workers – such as Uber, DoorDash, and other tech platforms – could begin offering retirement options as part of their compensation packages. While this may seem unlikely now, the pressure is growing for gig companies to provide more comprehensive benefits to their workers. Retirement planning should be part of that conversation.

The government also has a role to play. Tax incentives for freelancers who save for retirement, or a mandate that gig platforms contribute to workers’ retirement, could provide much-needed relief. There’s also the potential for expanding programs like myRA, a US government-sponsored retirement plan launched in 2015 (but since discontinued) aimed at people without access to employer-based retirement savings options. Bringing back such initiatives in an improved form could help solve the retirement gap for gig workers.

The future of retirement savings

The future of retirement in a gig-based economy is uncertain. As the workforce continues to shift away from full-time employment, retirement planning must evolve to accommodate gig workers, freelancers, and contractors. By creating more flexible, innovative retirement solutions, and through policy support from both companies and the government, financial institutions can ensure that all workers have the opportunity to retire comfortably, no matter how they earn their living.