Many times on this blog we’ve discussed the shift from defined benefit pensions to 401(k)-style defined contribution plans. While this transition has been most dramatic in the private sector, it is also occurring in the public sector. We’ve detailed how this shift puts more risk on working families and, therefore, reduces their retirement security. The United States is not alone in moving in this direction. Throughout wealthy nations, there has been an increase in reliance on financial assets, like 401(k) plans, to pay for retirement rather than social insurance programs, like Social Security, or defined benefit pensions.
According to the Schwartz Center for Economic Policy Analysis (SCEPA), rich countries saw a marked shift from social insurance programs to reliance on individual financial wealth as a way to provide retirement income. The increased financialization of retirement has consequences. This shift has corresponded with a greater share of elderly citizens working and also with an increase in elder poverty.
These outcomes should not be surprising. We’ve documented how 401(k)-style plans favor the wealthy. The SCEPA report concurs, pointing out that “retirement systems that rely on personal asset accumulation work best for those with more education, higher incomes, or steady jobs.” A simple look at the retirement savings of workers at different income levels shows dramatically different levels of retirement preparedness. According to the Economic Policy Institute, families in the 90th income percentile have an average of $274,000 saved for retirement, whereas families in the 50th (median) income percentile only have $5,000 saved. Among families in the middle fifth of the income ladder, only 52 percent have a retirement plan, whereas 88 percent of families in the top fifth of the income ladder do. Moreover, 68 percent of families in the top fifth participate in a defined contribution plan, while only 38 percent of families in the middle fifth do.
In countries like the United States that have moved significantly toward financialization of retirement savings, older people are more likely to work longer and face poverty in retirement. These older workers may lack sufficient retirement savings due to the risky and unreliable nature of 401(k)-style plans. Defined contribution plans are rife with opportunities for working families to lose significant portions of their retirement savings, whether through high fees, a sudden downturn in the financial markets, or insufficient contributions. Defined benefit plans, like pensions and social insurance programs, like Social Security, do not impose these risks on individual workers. As the SCEPA researchers state: “Governments and employers should bear the investment and longevity risks. Unlike households, governments can spread losses and gains over a longer period.”
As anti-pension ideologues continue to attack public pensions across the United States, it is time for us as a nation to take a long, hard look at the consequences of the shift from pensions to 401(k)-style plans. The evidence so far is discouraging.