The percentage of U.S. workers enrolled in employer-based retirement plans has declined over the past couple decades and "retirement inequality" has worsened since 401(k) plans were introduced in the 1980s.
Those were the big takeaways of a study by the liberal-leaning Economic Policy Institute that explored the impact of defined contributions plans – which were never meant to replace Social Security or defined benefit pension plans – on retirement savings.
The rise of the 401(k), EPI said, created new disparities between the wealthy and those who earn less. EPI’s “Retirement Inequality Chartbook” offers dozens of charts that look at retirement preparedness and outcomes by income, race and ethnicity, education, gender and marital status.
Its conclusion? The 401(k) revolution created a few big winners and many losers.
“Retirement insecurity has worsened for most Americans as retirement wealth has become more unequal. For many groups, the typical (50th-percentile, or median) household has no savings in retirement accounts and balances are low even when focusing only on households with savings,” EPI said.
Retirement inequality has grown because wealthier individuals are more likely to contribute to retirement accounts on their own, EPI said. Higher-income workers also have more disposable income and a higher investment-risk tolerance, receive larger tax breaks and are more likely to work for employers that provide generous matches, its study said.
What’s more, because of the decline of traditional pension plans, enrollment in all types of retirement savings plans has decreased steadily in the past 30 years, EPI said.
Median retirement savings today are $44,000, EPI said. A household at the 90th percentile of the retirement savings distribution had nearly 100 times more retirement savings than the median household, its study found. The top 1 percent of households had more than $1.3 million in retirement account savings.
“Much of the 401(k) era coincided with a long bull market propping up household wealth measures even as traditional pensions became scarcer and the savings rate declined,” EPI noted. “This house of cards collapsed in (a downturn in) 2001, and then again at the end of 2008” at the start of the Great Recession.
Disparity by age. Successive generations should be saving more in retirement accounts due to their higher average incomes. But while the retirement savings of middle-aged and older households have generally grown, those of younger households have stayed flat or declined in recent years. GenX’ers have saved roughly the same as baby boomers did at the same ages, and savings of the youngest boomers are also languishing. For prime-age workers (age 26–61) — both full- and part-time — participation declined from 52 percent in 2000 to 45 percent in 2010.
Disparity by income. The share of households with savings in retirement accounts increased across income groups in the 1990s before stagnating in the 2000s, according to EPI, but retirement accounts were never widely held by households in the bottom two-fifths of the income distribution. Even among households in the middle fifth, only half had savings in these accounts.
In 2010, households in the top income fifth had an average of $308,674 in retirement account savings, which constituted 72 percent of total savings ($430,344) in these accounts. Assuming higher income households receive tax subsidies for at least a portion of their savings, EPI found that most tax subsidies for retirement savings go to high-income households.
The median retirement savings for households in the top income fifth is $160,000, compared to $8,000 to $36,000 for households in the bottom four-fifths. EPI stressed that these amounts are for households with retirement savings. The median for all households, including those with no retirement savings, is close to zero since nearly half of households have no savings at all.
Disparity by race and ethnicity. EPI found that white workers were slightly better off and black or Hispanic workers were worse off in 2010 than they were two decades earlier.
Black workers had a similar participation rate to white workers in the early 1990s, but fell behind by 2010. Hispanics, who always participated less than blacks and whites, saw an even more dramatic drop by 2010.
In 1992, black workers were more likely to participate in a defined-benefit pension plan than white workers. That disparity became even greater in 1998, when more white workers moved to defined contribution plans. Black workers are more likely than white workers to be employed in the public sector and may seek out jobs with secure pensions due to less inherited wealth, EPI found.
Roughly twice as many white households as black and Hispanic households have savings in retirement accounts. White households have more than six times as much saved in retirement accounts as Hispanic and black households, on average, and that disparity has gotten bigger over the past 20 years.
Disparity by education. Defined benefit pension participation fell more among less-educated workers, EPI found. It also fell for the most educated workers because those with graduate and professional degrees were more likely to be covered by DB plans to begin with, EPI found.
Seventy percent of households headed by someone with a college degree or more education have savings in a retirement account. Only 41 percent of households headed by someone with a high school diploma or GED have savings in these accounts.
Households headed by someone with a college degree have nearly six times as much saved in retirement accounts as households headed by someone with a high school diploma or GED. That disparity has increased significantly over the last two decades.
Trends by gender and marital status. According to EPI, unmarried people, especially women, are less prepared for retirement than their married counterparts. Participation in employer plans is much higher for married men than unmarried men. Thus, the retirement savings gap between men and women, though it has narrowed, remains large. The savings gap between couples and single households is large and growing — and only partly explained by income differences between the two groups. The wealth gap between couples and single households is even larger than the retirement savings gap, the study found.