It used to be that most American workers could expect guaranteed checks in retirement thanks to a pension, or what economists call a defined-benefit plan. But in the 1980s, the country went through a major shift, with employers ditching pensions in favor of 401(k) accounts. Those accounts, known as defined-contribution plans, don’t guarantee payouts, leaving it up to the employees to enroll, contribute, and make smart investment decisions to ensure they’ll get enough money in old age.
The shift from pensions to 401(k)s hasn’t just left Americans in a riskier situation. It’s also created huge gulfs between what well-to-do, white workers can save up for retirement and what people of color and low-income workers have in their nest eggs.
According to a new report from the Economic Policy Institute, “retirement disparities have grown with the shift from traditional pensions to retirement savings accounts.” People who are rich, white, college-educated, and married are far more likely to participate in a 401(k) plan than others. More than two-thirds of people in the top fifth of the income distribution are enrolled in 401(k)s, compared to just 4 percent of the poorest fifth; about half of white workers are enrolled, versus 32 percent of black workers and 20 percent of Hispanics. While there are also disparities in pension use, it’s far starker among defined-benefit plans.
The majority of black and Hispanic families have no retirement account savings at all, even among families nearing retirement age, compared to less than a third of white families. Even those families that do have savings stored up have far less: the median white family has $73,000 socked away, compared to $22,000 for people of color.
Before the 401(k) boom, black and white workers used to have similar rates of participation in retirement accounts. But that’s now changed, with black families falling behind.
The same has been true for gaps between the rich and less well off. Nearly 90 percent of families in the top fifth have retirement accounts, versus less than 10 percent of those at the bottom. The wealthiest families are 10 times as likely as the poorest to have a retirement account.
Gaps in retirement savings between rich and poor are even starker than gaps in their actual incomes. The top fifth has 63 percent of the income but 74 percent of all retirement savings; the bottom has 2 percent of the income and 0 percent of the savings.
All Americans have become less likely to participate in any kind of retirement plan, defined benefit and defined contribution alike. But the richest are better positioned in the 401(k) age given that participants in these plans have to contribute, requiring a worker to have extra money to put into an account, compared to pensions where workers don’t have to put in money and are automatically enrolled. They also get bigger tax breaks on their retirement savings and are more likely to work for an employer with a generous plan.
The Great Recession made things even worse. The share of families with retirement account savings declined after the downturn and has yet to fully recover.
While the wealthiest families with the most stored up also lost the most in their retirement accounts in terms of sheer dollar amounts, when it comes to losses as a percentage of their overall savings poorer families suffered worse. The median family saw more than half of its savings disappear between 2007 and 2010, while those in the top 5 percent only saw a 5 percent decline.
There’s another source of income that retirees rely on: Social Security. But those benefits are replacing less and less of people’s earnings thanks to cuts passed in 1983. While some Democratic lawmakers have called to expand benefits, many Republicans have proposed ideas that would further reduce them.