We’ve written before about how 401(k)s favor the wealthy, but also how pensions can help low-income workers prepare to retire. In general, low-income workers struggle to save for retirement and that is reflected in the large disparity in retirement savings between the wealthy and the poor. Two new studies shed further light on this subject.
The first of those studies comes from the Schwartz Center for Economic Policy Analysis. Researchers there examined the effect of financial shocks on the likelihood of taking early withdrawals from 401(k)s and IRAs. The types of financial shocks they considered included job losses, job changes, the onset of poor health, and divorce. They found that low-income workers are more likely to experience these financial shocks than either moderate- or high-income workers. They also found that experiencing a financial shock increased the likelihood that a low-income worker would take a cash disbursement or other form of withdrawal from their 401(k) or IRA. The consequence of this is that low-income workers end up with less saved for retirement because they withdrew part or all of their money early (and paid a penalty for that).
The second study, from the Center for Retirement Research, looked at the ability of workers of different socioeconomic status to work until age 70. As the average life expectancy has increased, there have been calls from some to raise the average retirement age. However, those gains in life expectancy have not been distributed evenly. Wealthy, or high socioeconomic status, individuals have increased their life expectancy much more than low-income individuals have. Therefore, raising the retirement age would mean low-income individuals would have fewer years of retirement to enjoy (because they don’t live as long).
These two studies are yet another reminder that income inequality persists after workers retire. In fact, the disparity may be even greater in retirement because the wealthy are able to save much more in 401(k) accounts and because the wealthy live longer and have more retirement to enjoy. We already know that defined benefit pensions are much better for low-income workers than 401(k)s. The private sector has largely abandoned pensions. Before the public sector does the same, we must consider the impact that moving away from pensions has on all workers, especially low-income workers.