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Americans are worried about their retirement security. Many feel that they are inadequately prepared and research indicates that a growing number could be at risk of having to make substantial, painful cuts in their spending in retirement. The gap between those who will be able to securely retire and in good health and those who struggle already exists and is likely going to grow . This is no accident, but the result of decades of wrongheaded policy decisions.
Retirement income inequality is already very large when considering differences between those who have a DB pension and those who do not and who instead rely more on their own savings. Recent retirees – those who retired within the last five years -- with a DB pension received a median income of $60,673 (in 2016 dollars) from 2010 to 2016. In comparison, those without a DB pension had less than half – 49.2% -- of that median income with $29,873. As fewer and fewer people have DB pensions and retirement savings accounts such as 401(k)s and IRAs become more widespread, retirement income inequality will likely only increase.
The retirement income gap by benefit type has actually increased over time. From 1989 to 1998, those without a DB pension had $26,932 (in 2016 dollars) or 52.2% of the $51,574 that those with a DB pension had (see figure below). From 2001 to 2007 that ratio dropped to 50% and then to 49.2% from 2010 to 2016. The gap by retirement benefit in the population then widened because DB pensions have become less widespread and because savings in other retirement benefits do not make up for the loss of those benefits.
To be clear, people without a DB pension already work hard to compensate for the lack of sufficient retirement savings. They tend to work longer, retiring on average at age 65.4 years from 2010 to 2016, compared to 64.0 years for those with a DB pension (see figure below).
And, recent retirees without DB pensions tend to be in worse health than those with a DB pension and that health gap in retirement is increasing (see figure below). Those without DB pensions often cannot work longer and they may face higher health care costs in retirement. That is, there isn’t much room to improve retirement incomes for those who rely on Social Security and their own savings, unless retirement policy changes course.
Once retired, those recent retirees without DB pensions also have fewer financial resources such as savings relative to their incomes than those with DB pensions (see figure below). This means that people without DB pensions will find it more difficult to maintain their incomes into the future.
And this savings gap has also increased over time. From 2010 to 2016, recent retirees without DB pensions only had 54.7% of the financial savings relative to their income than those without DB pensions. Prior to the Great Recessions, both groups, especially those without DB pensions, had more savings relative to their incomes and the gap in savings by DB pension status was thus much smaller, as the figure below shows. It has become harder for those without DB pensions, who rely solely on their financial savings to maintain their incomes outside of Social Security, to do so.
A number of factors contribute to a growing number of people having too few savings. These include slow wage growth, high debt levels and increasing income instability.
Amid these mounting challenges, retirement policies have not made it easier for those who actually need to save more to do so . This is especially true for families of color, lower-income households, those without a college degree and single women – groups that are typically struggle more in retirement. In fact, retirement policies over the past few decades have generally made savings more complex, particularly for those who do not have a retirement plan at work. And Congress has doubled down on inefficient savings incentives over the past two decades. As a result, the tax code showers ever large rewards on high-income earners, who typically save enough for their future, while offering little help to low-income earners. Finally, retirement policies have done little to protect savers from massive financial risks that can result in low rates of return over time and make it even harder to prepare for a decent retirement.
Countering rising retirement income inequality, federal and state policymakers will need to rethink retirement policy. This will mean, among other things, making it easier for people to save for their future. It could even mean requiring that people save part of their income for their future. Forced savings work for a number of reasons as demonstrated by DB pensions, Social Security and home ownership. And a new direction in retirement policy will also mean putting greater emphasis on tax incentives for low-income and moderate income families, instead of showering the biggest tax breaks on those who already have the most. Moreover, a different approach to retirement savings will make sure that those savings are protected for the future as much as possible. Pursuing the same old inefficient policies instead will only further retirement income inequality for decades to come.
