Income Groups Show Wild Variance in Retirement Savings

Retirement wealth has not grown fast enough to keep pace with an aging population and other changes.

“The State of American Retirement,” a paper from the Economic Policy Institute, looks at the retirement prospects of working-age families, focusing especially on retirement account savings.

According to Monique Morrissey, an economist with the Institute, retirement wealth has grown nearly twice as fast as income since 1989, an initially encouraging picture. In 2013, the author examined increasingly inadequate savings and retirement income.  

Aggregate retirement wealth (assets in pension funds plus savings in retirement accounts) nearly doubled as a share of personal disposable income between 1989 and 2014, even as rising inequality worsened retirement insecurity for most families, Morrissey says.

A more finely shaded look shows that retirement account savings have exceeded defined benefit (DB) assets since 2012, as well as briefly in the late 1990s and mid-2000s. The rise of retirement accounts for individuals is significant since these account assets are more affected by economic downturns than pooled pensions. Contributions are voluntary, and funds may be withdrawn in hard times. In addition, individual retirement account investments are less diversified and investment returns more volatile.

That shift away from traditional pensions has widened retirement gaps, Morrissey contends, and disparities in retirement savings balances have increased. High income, white, college-educated and married workers participate in DB plans at a higher rate than other workers. Participation gaps are much larger under defined contribution (DC) plans.

Economic downturns increasingly have a negative impact on workers’ retirement prospects, according to Morrissey’s findings. Much of the 401(k) era coincided with rising stock and housing prices that propped up family wealth measures even as the savings rate declined. This economic situation reversed in 2000 and 2001, when the tech stock bubble burst, and again in 2007 to 2009, with the financial crisis.

NEXT: How the financial crisis affected retirement savings

In 2013, most families still had not recovered their losses from the financial crisis and Great Recession, let alone accumulated additional savings for retirement. Using data from the Federal Reserve Board’s Survey of Consumer Finances, Morrissey shows a widening gap between the retirement haves and have-nots since the recession.

Nearly half of working-age families have nothing saved in retirement accounts, and the median working-age family had only $5,000 saved in 2013. Meanwhile, the 90th percentile family had $274,000, and the top 1% of families had $1,080,000 or more. These huge disparities reflect a growing gap between haves and have-nots since the Great Recession as accounts with smaller balances have stagnated while larger ones rebounded.

One issue: participation in retirement savings plans is highly unequal across income groups. In 2013, nearly nine in 10 families in the top-income fifth had retirement account savings, compared with fewer than one in 10 families in the bottom-income fifth.

Morrissey concludes that savings and retirement income for successive generations of Americans are increasingly inadequate, and that disparities by income, race, ethnicity, education, and marital status are also growing. By some measures, women are narrowing gaps with men, but still remain more vulnerable in retirement because of lower lifetime earnings and longer life expectancies.

“The State of American Retirement” can be downloaded from the website of the Economic Policy Institute, an independent, nonprofit research group that analyzes the impact of economic trends and policies on working people in the U.S.