How 401(k)s Have Worsened the Retirement Gap

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The privatization of retirement plans has helped make retirement inequality even greater than income inequality.

Over the past couple decades, the shift from pensions to 401(k)s has driven retirement inequality to an all-time high, making it harder for the majority of Americans to retire comfortably—or at all, as new analysis from the Economic Policy Institute shows.

“We used to have a fairly egalitarian retirement system. We don’t anymore,” EPI economist Monique Morrissey said during a press call Thursday. Morrissey says that’s largely due to the rise of 401(k)s as primary retirement plans, which she says was never supposed to happen. Initially, 401(k)s were created to be a supplement to pensions.

However, while 401(k)s have become most common type of retirement plan, they provide only a small source of income for seniors. The majority of their income comes from Social Security, wages, and—for those who still have them—pensions. 

As the report shows, retirement inequality not only mirrors income inequality, but the impact of 401(k)s exacerbates inequality.

“The bottom 60 percent of working-age families receive 17 percent of total income but hold 7 percent of retirement account balances,” the report notes. “Meanwhile, the top 20 percent receive 63 percent of income and hold 74 percent of retirement account balances.”

Put simply, families that make less money have less money to save for retirement.   

(Economic Policy Institute)

In fact, when you compare income and retirement savings for families at their peak-earning capacity, the retirement gap is worse than the income gap.

(Economic Policy Institute)

While 401(k)s have become the preference of employers, they remain a minor source of income for retirees who are working-class, people of color, and women.

Especially for people of color, Social Security and pensions remain crucial for retirement. For African Americans and Hispanics over 65, Social Security benefits and pension make up a majority of their income sources. 

(Economic Policy Institute)

The same goes for single women, who rely on Social Security benefits for nearly half their income when they reach retirement age.

(Economic Policy Institute)

The destruction of the American pension system and the inadequacy of Social Security as a primary source of retirement income has left most working Americans stuck without a stable way to leave the workforce.

“Today, most workers have lost the traditional pensions that once covered about half the workforce,” Teresa Ghilarducci wrote in the Prospect’s 25th anniversary issue. “Meanwhile, the affluent are more likely to be healthier as well as wealthier in their golden years—all of which adds up to the elderly rich being able to control their quality of life to a far greater degree than middle-class and poor elders.”

And so long as incomes remain stagnant for many Americans, and employers continue to substitute 401(k)s for traditional pensions, the inability to adequately save for retirement will continue—and the gap will worsen.



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