It’s the third week of October and that means it’s National Retirement Security Week! Formerly called “National Save for Retirement Week”, this week is intended to promote retirement savings to the American public. This week is established by a U.S. Senate resolution, but is used primarily by the private investment industry to promote its products to working people. In honor of this week, let’s take a look at the retirement security of working families.
Let’s start with an overview of the retirement landscape in the U.S. The vast majority of American workers participate in Social Security, which forms the bedrock of the retirement security system. However, more than a quarter of public employees in the U.S. do not participate in Social Security, due to historical reasons. Individual workers are also able to save on their own through IRAs and other private savings accounts. After Social Security, though, most working people save for retirement through employer-sponsored retirement plans, typically either defined benefit pensions or defined contribution plans, like 401(k)s. These employer-sponsored plans are where we want to focus today.
As we’ve discussed before, defined benefit pensions in the private sector have declined significantly in the past three decades. Most private sector workers today only have access to a defined contribution 401(k) plan, if they have access to an employer-sponsored plan at all. This is an important and often-overlooked point: at any given time, only about half of working people have access to an employer-sponsored retirement plan. The researchers at the Center for Retirement Research ran the numbers and found that from 1989-2013, the percentage of all workers without a workplace retirement plan, whether defined benefit or defined contribution, has remained constant in the mid-50s percentage. For these workers who don’t even have access to a retirement plan through their job, they are probably not saving anything for retirement.
Now, even if a worker does have access to a workplace retirement plan, it is most likely to be a 401(k) in the private sector. In 2013, 71 percent of workers only had access to a defined contribution plan. We’ve documented many times before how 401(k)s have failed as a retirement savings plan, including during National Save for Retirement Week last year.
The rise of the 401(k) over the past thirty years has coincided with a period of historic wage stagnation and increasing income inequality. The confluence of these events has led to an increase in inequality in retirement savings. The investment firm Vanguard tracks the number of Americans contributing to 401(k) plans each year. In 2013, 36 percent of workers who earn over $100,000 a year made the maximum contribution to their 401(k). Only 6 percent of upper-middle class workers maxed out their 401(k) contributions and only 2 percent of middle class workers maxed out. Among low-income workers, virtually no one maxed out. This means that even among workers who have access to an employer-sponsored retirement plan, which is less than half of all workers, the majority of them are not contributing the maximum amount, meaning they are likely to not have enough saved for a secure retirement.
Often the response of the financial industry to low savings rates is to emphasize financial literacy and education. That is certainly important and its value should not be disputed. However, increased financial literacy alone will not solve the retirement security crisis. More working people need access to retirement savings plans and they need to contribute more to those plans. They also need a way to manage those funds when they reach retirement. Many 401(k) plans pay out a lump sum of savings at retirement and a worker may have $100,000 and no plan for how to spread that out over the rest of their lifetime. On Wednesday, we’ll examine how pensions provide the solution to many of these problems.