In the 1980s, retirement benefits started to make a big shift from pensions, which guarantee a worker a certain amount when he retires, to 401(k)s, which leaves investment decisions with the workers and means that if their savings take a hit, no one will help make up the difference in old age. But the risk of retiring with nothing left in one’s savings account isn’t spread evenly. A new report from the Economic Policy Institute shows that in today’s age of the 401(k), wealthy workers and white workers are far more likely to have retirement savings.
The use of 401(k)s, what the report calls “defined-contribution” plans because employers only contribute a set amount that won’t change over the years and investment decisions fall mostly to the workers, has skyrocketed in recent years, while the share of workers with “defined-benefit” plans, or pensions that guarantee a certain payout when a worker retires with an employer making up the difference if investments fall short, have sharply declined.
Because 401(k)s, unlike pensions, require that participants contribute in order to participate and more generous matches are usually made for higher-income workers, those making more money are much more likely to participate in them. The big shift from pensions to 401(k)s has meant huge inequalities when it comes to retirement savings: The report notes, “A household at the 90th percentile has nearly 100 times more retirement savings than the median household.” The typical household has no savings in a retirement account at all.
And even though retirement savings in 401(k)s have increased since the 1990s, most of that has gone to the top earners. “[R]etirement accounts were never widely held by households in the bottom two-fifths of the income distribution,” the report notes. “Even among households in the middle fifth, only half have savings in these accounts.”
The disparities aren’t just among income groups, but also between white workers and workers of color. About twice as many white households have savings in retirement accounts as black and Hispanic ones.
White households also have far more saved up in their accounts. On average they have over six times as much saved up as black and Hispanic households.
And the differences between races aren’t just because of income. White households have seen bigger retirement savings compared to their incomes than households of color.