This post was originally written by Tyler Bond in 2018.
Defined benefit pensions are the most secure form of retirement savings. This has been true for decades and is why cities and states have offered pensions to their public employees for more than a hundred years. Pensions also used to be common in the private sector, but they have experienced a rapid decline in recent decades. The ongoing attacks on pensions are part of a broader shift that promotes increasing retirement inequality.
Social Security has long been the foundation of retirement in the United States. While Social Security was never intended to provide the sole source of income in retirement, it does act as a floor to prevent retirees from falling into extreme poverty. Unfortunately, for many workers, Social Security replaces a lower portion of their pre-retirement income than it did in past decades. In part, this is because the retirement age is increasing, which means workers have fewer years to collect their Social Security benefits. Compounding this problem is the widening gap in life expectancy between high-income and low-income workers. High-income workers get more out of their Social Security benefits because they live longer and collect more in benefits. Due to their lower life expectancies, low-income workers are also likely to claim their Social Security benefits early, which means their benefit amount is reduced.
The rise of defined contribution plans, such as 401(k)s, has also exacerbated retirement inequality. Defined contribution plans favor high-income workers who have more disposable income to contribute to those plans. High-income workers are also less likely to experience dramatic swings in their income, swings which can make saving for retirement challenging. According to the Economic Policy Institute, in 2013, high-income households earned 63 percent of income, but had 74 percent of savings in retirement accounts. High-income earners are also more likely to have access to a retirement savings plan through their employer, which makes it much more likely that they will actually save for retirement. Low-income workers, especially those who work in the service sector, often do not have access to an employer-provided retirement plan.
Public pensions have also been under attack in recent years. Anti-pension ideologues often promote cash balance or hybrid plans. These plans retain some elements of defined benefit pensions, but they shift more risk onto workers and require them to pay more for their benefits. This risk-shifting increases retirement inequality because it is the lowest-paid public employees who can least afford to bear a greater burden for their retirement. Requiring public employees to pay more for a lesser benefit reduces take-home pay for current public employees, which increases income inequality in the present and retirement inequality in the future.
As income inequality has increased in the United States, retirement has not been immune from those greater societal forces. With the rise of 401(k)s and the decline of private-sector pensions, a secure retirement is becoming hard to achieve for low-income working Americans. This makes it all the more important to protect pensions for nurses, librarians, sanitation workers, and other public employees. Pensions provide the best path to a secure retirement for working families.