The goal of a retirement savings plan, like a pension, is to replace a certain amount of pre-retirement income during retirement. In earlier periods of American history, many elderly citizens spent their last years in desperate poverty with little savings or income in retirement. Defined benefit pensions and programs like Social Security were created so that working people could save during their careers in order to have a secure retirement. Unfortunately, income inequality during working years leads to inequality during retirement. In fact, retirement inequality is often worse because many low-income working people lack access to a retirement savings plan through their employer.
The Economic Policy Institute offers some very revealing numbers on the inequalities in retirement savings. The median (50th percentile) working-age family had only $5,000 in retirement savings in 2013. Meanwhile, the 90th percentile of retirement savers had $274,000 –a more than 5,000 percent difference! High-income families are also eleven times more likely to have a retirement savings account than are the lowest-income families (88 percent versus 8 percent).
In 2013, only 4 percent of families in the lowest fifth of income participated in a defined contribution plan, compared to 68 percent of families in the top fifth that participated. Defined contribution plans, like 401(k)s, promote greater inequality in retirement. While the top fifth of households earn 63 percent of income, they have 74 percent of retirement savings. The bottom three fifths of households combined earn 17 percent of income and have only 7 percent of retirement savings.
Retirement savings are also an element of net worth. The 90th percentile of households had a net worth in 2013 of $920,900 compared to the 10th percentile which had a negative net worth of -$2,090.
College-educated families are more likely to have retirement savings than families without a high school diploma: 76 percent to 18 percent. College-educated families also have much greater retirement savings –$95,000– than families without a high school diploma –$14,700.
While it may seem obvious to many people that high-income households would have more in retirement savings than low-income households, the important takeaway is this: defined contribution plans, like 401(k)s, exacerbate these differences. Participation in 401(k)-style plans is more unequal than participation in pension plans and 401(k) plans benefit high-income households more. This is why we at NPPC fight to protect pensions: to promote a more equitable and secure retirement for all.