This blog is a re-post of a blog published by Tyler Bond on August 20, 2018. Updated and new information will be indicated with italics.
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 (EPI) – updated 2019 – offers some very revealing numbers on the inequalities in retirement savings. The median (50th percentile) working-age family had only $7,800 in retirement savings in 2016. Meanwhile, the 90th percentile of retirement savers had $320,000 –a more than 4,000 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 13 percent).
In 2016, only 10 percent of families in the lowest fifth of income participated in a defined-contribution plan, compared to 70 percent of families in the top fifth that participated. Defined-contribution plans, like 401(k)s, promote greater inequality in retirement. While about nine in ten families in the top fifth of households had savings in retirement accounts, just one in eight families in the bottom fifth of households had savings in retirement accounts.
Retirement savings are also an element of net worth. The 90th percentile of households had a net worth in 2016 of $1,090,000 compared to the 10th percentile which had a negative net worth of -$820.
College-educated families are more likely to have retirement savings than families without a high school diploma: 80 percent to 24 percent. College-educated families also have much greater retirement savings –$107,000– than families without a high school diploma –$30,000.
Finally, racial gaps in retirement savings are also particularly stark. As we’ve covered before, “41 percent of black households do not have any retirement savings at all. Even for black families that do have retirement savings, they pale in comparison to the retirement savings of a typical white family. According to the EPI, black families had median savings of $29,200 saved for retirement, while white families had more than twice as much saved with median savings of $79,500.”
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.