As we’ve written about extensively on this blog, employer-sponsored retirement plans have changed a lot over time. In the private sector, 401(k)s have largely replaced defined benefit pensions and this shift has weakened the retirement security of working families. 401(k)s favor the wealthy and a new study provides further evidence of this fact.
A new study from the Center for Retirement Research looks at pension plan participation and wealth from 1992 – 2010 (note: the authors use “pension” to refer to both defined benefit plans and defined contribution 401(k)-style plans). The researchers look at data from 1992, 1998, 2004, and 2010 and focus on plan participation, pension wealth, the retirement income derived from that wealth, and the income replacement rate.
The report confirms that the shift from defined benefit plans to 401(k)-style defined contribution plans has lessened retirement security. Participation in employer-sponsored retirement plans has declined over time. Even though participation in 401(k)-style plans has risen, it has not offset the decline of defined benefit pensions. The rise in 401(k)-style plans has had several negative effects. First, 401(k) plans primarily benefit the wealthy. The researchers found that high-income households had 52 percent of the wealth in 401(k)-style plans, compared to just 35 percent of the wealth in defined benefit plans. Second, the increase in 401(k)-style plans has caused a decrease in the wealth-to-income ratio. This is because the wealth accumulated in 401(k)-style plans is not easily transformed into income in retirement. Defined benefit plans are superior in providing steady, reliable income in retirement.
What should we take away from this? For one thing, the report shows how harmful the decline in defined benefit pensions has been. Replacing defined benefit pensions with defined contribution 401(k)-style plans has skewed retirement savings toward the wealthy and has lowered the overall participation rate in employer-sponsored retirement plans. Both of these facts contribute to the retirement security crisis facing working families. The authors also emphasize that employer-sponsored plans are providing less retirement income than in the past, so future retirees will be more dependent on Social Security benefits. Finally, this report is further evidence that forcing teachers, firefighters, and other public employees from defined benefit pensions into 401(k)-style plans would only exacerbate the retirement security crisis.