How 401(k)s have failed most American workers
Today, many Americans rely on savings in 401(k)-type accounts to supplement Social Security in retirement. This is a pronounced shift from a few decades ago, when many retirees could count on predictable, constant streams of income from traditional pensions (see “Types of retirement plans,” below). This chartbook assesses the impact of the shift from pensions to individual savings by examining disparities in retirement preparedness and outcomes by income, race, ethnicity, education, gender, and marital status.
The first section of the chartbook looks at retirement-plan participation and retirement account savings of working-age families. The charts in this section focus on families headed by someone age 32–61, a 30-year period before the Social Security early eligibility age of 62 when most families should be accumulating pension benefits and retirement savings. The second section looks at income sources for seniors. Since many workers transition to retirement between Social Security’s early eligibility age and the program’s normal retirement age (currently 66, formerly 65), the charts in the second section focus on retirement outcomes of people age 65 and older. (...)
Retirement wealth has not grown fast enough to keep pace with an aging population and other changes. The first chart offers what at first appears to be an encouraging picture, the growth since 1989 in retirement wealth—assets in pension funds plus savings in retirement accounts—relative to income. Unlike other charts in this section, this measure is for the entire population, not just working-age families. As Figure 1 shows, retirement wealth more than kept pace with incomes over the past quarter century, growing faster than income in the 1990s and rebounding after two stock market downturns in the 2000s. Retirement wealth nearly doubled as a share of personal disposable income between 1989 and 2013, with retirement account savings exceeding pension fund assets after 2012 (and briefly in the late 1990s and mid-2000s). The shift in wealth from pension funds to retirement accounts occurred years after participation in defined-contribution plans surpassed that in defined-benefit plans (Figure 2).
What Figure 1 does not show is that retirement wealth should have increased more to keep pace with an aging population, offset Social Security cuts, and serve as a hedge against the increased longevity risks and investment risks brought on by a shift from traditional pensions to individual savings. Retirement account savings increased before the Great Recession as the large baby boomer cohort approached retirement. However, retirement account savings by age group stagnated or declined in the new millennium even as traditional pension coverage continued to decline (Figures 2-5). Meanwhile, Social Security benefits are replacing a declining share of pre-retirement earnings due to benefit cuts passed in 1983 that are gradually taking effect (Reno, Bethell, and Walker 2011). The change in plan type should have been accompanied by an increase in retirement assets to account for the diminishing use of pooled pension funds, which benefit from economies of scale and risk pooling and are thus more cost-effective than individual accounts. In other words, in a retirement savings account system, people need to set aside more, because these accounts are not as efficient as pensions.
The shift from traditional pensions to individual savings has widened retirement gaps. In addition to retirement wealth not growing fast enough, retirement disparities have grown with the shift from traditional pensions to retirement savings accounts. These disparities are the main focus of this chartbook. As Figure 6 shows, high-income, white, college-educated, and married workers participate in defined-benefit pensions at a higher rate than other workers, but participation gaps are much larger under defined-contribution plans. The distribution of savings in retirement accounts is even more unequal than participation in these plans (Figure 7). There are large differences between mean and median retirement savings because mean savings are skewed by large balances for a few families (Figure 8). For many groups—lower-income, black, Hispanic, non-college-educated, and unmarried Americans—the typical working-age family or individual has no savings at all in retirement accounts, and for those that do have savings, the median balances in retirement accounts are very low (Figures 9–15).
by Monique Morrissey, Economic Policy Institute | Read more:
Image: Fiscal Times
Today, many Americans rely on savings in 401(k)-type accounts to supplement Social Security in retirement. This is a pronounced shift from a few decades ago, when many retirees could count on predictable, constant streams of income from traditional pensions (see “Types of retirement plans,” below). This chartbook assesses the impact of the shift from pensions to individual savings by examining disparities in retirement preparedness and outcomes by income, race, ethnicity, education, gender, and marital status.
The first section of the chartbook looks at retirement-plan participation and retirement account savings of working-age families. The charts in this section focus on families headed by someone age 32–61, a 30-year period before the Social Security early eligibility age of 62 when most families should be accumulating pension benefits and retirement savings. The second section looks at income sources for seniors. Since many workers transition to retirement between Social Security’s early eligibility age and the program’s normal retirement age (currently 66, formerly 65), the charts in the second section focus on retirement outcomes of people age 65 and older. (...)Retirement wealth has not grown fast enough to keep pace with an aging population and other changes. The first chart offers what at first appears to be an encouraging picture, the growth since 1989 in retirement wealth—assets in pension funds plus savings in retirement accounts—relative to income. Unlike other charts in this section, this measure is for the entire population, not just working-age families. As Figure 1 shows, retirement wealth more than kept pace with incomes over the past quarter century, growing faster than income in the 1990s and rebounding after two stock market downturns in the 2000s. Retirement wealth nearly doubled as a share of personal disposable income between 1989 and 2013, with retirement account savings exceeding pension fund assets after 2012 (and briefly in the late 1990s and mid-2000s). The shift in wealth from pension funds to retirement accounts occurred years after participation in defined-contribution plans surpassed that in defined-benefit plans (Figure 2).
What Figure 1 does not show is that retirement wealth should have increased more to keep pace with an aging population, offset Social Security cuts, and serve as a hedge against the increased longevity risks and investment risks brought on by a shift from traditional pensions to individual savings. Retirement account savings increased before the Great Recession as the large baby boomer cohort approached retirement. However, retirement account savings by age group stagnated or declined in the new millennium even as traditional pension coverage continued to decline (Figures 2-5). Meanwhile, Social Security benefits are replacing a declining share of pre-retirement earnings due to benefit cuts passed in 1983 that are gradually taking effect (Reno, Bethell, and Walker 2011). The change in plan type should have been accompanied by an increase in retirement assets to account for the diminishing use of pooled pension funds, which benefit from economies of scale and risk pooling and are thus more cost-effective than individual accounts. In other words, in a retirement savings account system, people need to set aside more, because these accounts are not as efficient as pensions.
The shift from traditional pensions to individual savings has widened retirement gaps. In addition to retirement wealth not growing fast enough, retirement disparities have grown with the shift from traditional pensions to retirement savings accounts. These disparities are the main focus of this chartbook. As Figure 6 shows, high-income, white, college-educated, and married workers participate in defined-benefit pensions at a higher rate than other workers, but participation gaps are much larger under defined-contribution plans. The distribution of savings in retirement accounts is even more unequal than participation in these plans (Figure 7). There are large differences between mean and median retirement savings because mean savings are skewed by large balances for a few families (Figure 8). For many groups—lower-income, black, Hispanic, non-college-educated, and unmarried Americans—the typical working-age family or individual has no savings at all in retirement accounts, and for those that do have savings, the median balances in retirement accounts are very low (Figures 9–15).
by Monique Morrissey, Economic Policy Institute | Read more:
Image: Fiscal Times
