The move away from pensions and toward 401(k)s has gutted retirement security for many Americans. Defined contribution plans, like 401(k)s, are risky and unreliable and disproportionately benefit the wealthy. An increasing number of Americans are entering their golden years with inadequate savings. The consequences of this shift in retirement policy have become more real each day, specifically with the dramatic increase in the number of elderly people filing for bankruptcy. A new report from the Consumer Bankruptcy Project (CBP) reveals the stunning details.
Workers bear all the risk in 401(k) plans. Since individual workers manage their own investments, they are subject to the mercies of the financial markets. If a crisis like the Great Depression occurs just before a planned retirement, workers could see their retirement savings wiped out overnight. This is clearly a worst case scenario, but even without a major financial downturn, many workers fail to save adequately in 401(k) plans. Despite rising employment numbers, real wages for working people have remained stagnant and inflation is increasing faster than wages are growing. This stagnant pay makes it more difficult for workers to save for retirement. This lack of savings results in Americans entering retirement with inadequate income.
Poor retirement income is a major concern, but it gets even worse when compounded with rising costs. Many older Americans struggle with high healthcare costs. While Medicare and Medicaid do help, those programs have become less generous over time, which forces older citizens to bear more of the cost. This can be a real challenge for someone living on a fixed income.
Over the past thirty years, retirement has become more precarious for more Americans. The private sector has largely shifted from pensions to 401(k)s. Social Security replaces a lower proportion of income than before. Retirees must bear more healthcare costs, even with Medicare and Medicaid. The job market remains challenging for older workers. If an older employee loses a job, it is difficult to find a new one and a new job rarely pays as much for an older employer as a previous job did. All of this has led to a situation where the number of older Americans filing for bankruptcy has skyrocketed.
According to the report from the CBP, the rate of bankruptcy among seniors has increased between 200 and 300 percent since 1991. Seniors now account for 12.2 percent of all bankruptcy filers, a significant increase from 2.1 percent in 1991. The increase in the number of seniors in bankruptcy is not just a consequence of the aging of the U.S. population. The increase has been so dramatic, it cannot just be attributed to a larger senior population.
Seniors are filing for bankruptcy at such rapidly increasing rates because their financial situation is dismal. The median total debt of bankrupt seniors is $101,600. This is three times their annual income and results in these folks having a negative wealth of $17,390. Even among non-bankrupt seniors, the percentage with debt increased from 41.5 percent to 60 percent between 1992 and 2016. During that same time, the amount of debt these households carried grew five-fold, from $6,000 to $31,300.
The move toward defined contribution retirement plans, like 401(k)s, is not the sole cause of the increasing rate of bankruptcy among seniors, but it is a contributing factor. The sharp rise in bankruptcy is occuring in a context where more risk is being shifted to the individual. This includes the risk of saving adequately for retirement. To begin fixing this problem, policymakers must protect pensions and other sources of secure income in retirement. Continuing to attack and chip away at pensions will only make this problem worse. Then, policymakers need to think about how they can expand access to retirement security for more Americans.