Following two stock market downturns in the 2000’s, current working families as a whole have seen income and retirement wealth rebound. Households with at least one working adult between the ages of 32 – 61 (the 30-year period before social security benefits become available at 62) have had their retirement wealth keep pace with incomes over the past quarter century*. However, this overall growth in retirement account savings is unequal within this age pool and a sizeable percentage of working adults may be facing inadequate amounts.
A large contributor to retirement wealth issues is the shift from traditional pensions to individual retirement saving accounts. Defined-contribution plans, such as 401(k)s and similar (i.e. IRAs), were introduced in the 1980’s and have largely replaced defined-benefit plans, or pension plans, in employee benefit packages offering retirement options. Defined-contribution plans differ from pension plans by making the employee responsible for investment decisions and shouldering risks. In these plans all employer contributions are predetermined and unaffected by potentially low returns. Conversely, pension plans hold the employer responsible for funding promised benefits, leaving the risk of having to make up a difference in contributions to fall on them. Assets in individual retirement funds are also more vulnerable than in pensions, since contributions to these accounts are voluntary and may be drawn from during times of financial hardship.
The 401(k) era’s peak was concurrent with the years building up to the market dip in 2000 – 2001. With another decline following shortly after in 2007 – 2009, many of the families affected by first recession were still attempting to recover what they had lost in savings, let alone working to accumulate additional retirement funds. The share of working families with retirement account savings dropped by 5 percentage points following the recessions, reflecting the vulnerability of these funds being accessed before retirement during times of financial need*. Older workers during these years were even more affected by this worrisome trend as they were left with less time to make up the lost retirement savings with new contributions before actually retiring.
Age is just one of the demographics exposing retirement inequality. Surveys show that perhaps the largest gap in participation of retirement plans is found across income groups. In the past decade the share of working families with retirement accounts has declined for all ages except within the top income group. It would not be unusual for top-earning families to have more savings than earners in the lower brackets, but it’s a much different issue when families in the bottom half of the income pool have no retirement savings at all. This greatly contradicts the theory that shifting from defined-benefit pension plans to defined-contribution plans would result in more retirement saving participation.
The intent of introducing plans like 401(k)s as an alternative to pensions was to broaden access to retirement benefits by making it more affordable for employers to offer. However, popularity with employers has not resulted in a rise of involvement, as voluntary contribution on the part of the employee has not been popular with lower income earners. Employees are automatically enrolled in traditional pension plans and may even be exempt from making contributions (depending on the plan benefits offered by the employer). With participation, and ultimately contribution, becoming voluntary in plans such as 401(k)s it is clear only higher-income workers have been willing to make the contributions. Despite having a higher volume of disposable wages, higher-income workers also tend to have a higher tolerance of investment risk and receive larger tax breaks for saving.
Breaking down the big picture event further, additional gaps are found between different races, marital status’, and gender. Despite the overall growth of retirement wealth in working class families over the past two decades, the current retirement system is not infallible and will leave many with the need for additional assets. The state of retirement for working Americans is much more complex than it first appears, and this closer picture emphasizes the need for individuals to get educated on all available planning options to better prepare for the future for themselves and their loved ones.
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*The State of American Retirement, Economic Policy Institute