Overview

Today, many Americans rely on savings in 401(k)-type accounts to supplement Social Security in retirement. This is a pronounced shift from a few decades ago, when many retirees could count on predictable, constant streams of income from traditional pensions (see “Types of retirement plans,” below). This chartbook assesses the impact of the shift from pensions to individual savings by examining disparities in retirement preparedness and outcomes by income, race, ethnicity, education, gender, and marital status.

The first section of the chartbook looks at retirement-plan participation and retirement account savings of working-age families. The charts in this section focus on families headed by someone age 32–61, a 30-year period before the Social Security early eligibility age of 62 when most families should be accumulating pension benefits and retirement savings. The second section looks at income sources for seniors. Since many workers transition to retirement between Social Security’s early eligibility age and the program’s normal retirement age (currently 66, formerly 65), the charts in the second section focus on retirement outcomes of people age 65 and older.

Jump to the charts

Part One: How will working families fare in retirement?

The first section of the chartbook looks at the retirement prospects of working-age families, focusing especially on retirement account savings. Except for one, all charts in this section are based on data from the Federal Reserve Board’s Survey of Consumer Finances (the first chart uses the Federal Reserve Board’s Financial Accounts data). In the Survey of Consumer Finances, a family consists of an “economically dominant” single person or couple, whether married or living together as partners, and all other persons in a household who are financially interdependent with that person or couple. The family’s age and education level are based on the age and education of the male in a mixed-sex couple or older spouse in a same-sex couple (Bricker et al. 2014).

Most of the charts focus on retirement account savings, a measure that includes savings in 401(k)-style defined-contribution (DC) plans, IRAs, and Keogh plans for self-employed people and small-business owners. The measure excludes assets held by defined-benefit pension funds, which are not account-type plans.

In addition to other demographic factors, the charts show trends in retirement preparedness by six-year age group or birth cohort from 1989 to 2013. Six-year groups were chosen because the Survey of Consumer Finances is conducted every three years, but six-year groups produce larger sample sizes. All charts use inflation-adjusted dollars and, where possible, are shown on comparable scales. Dollar amounts in charts may reflect rounding by survey respondents.

Key findings of the following charts include:

Retirement wealth has not grown fast enough to keep pace with an aging population and other changes. The first chart offers what at first appears to be an encouraging picture, the growth since 1989 in retirement wealth—assets in pension funds plus savings in retirement accounts—relative to income. Unlike other charts in this section, this measure is for the entire population, not just working-age families. As Figure 1 shows, retirement wealth more than kept pace with incomes over the past quarter century, growing faster than income in the 1990s and rebounding after two stock market downturns in the 2000s. Retirement wealth nearly doubled as a share of personal disposable income between 1989 and 2013, with retirement account savings exceeding pension fund assets after 2012 (and briefly in the late 1990s and mid-2000s). The shift in wealth from pension funds to retirement accounts occurred years after participation in defined-contribution plans surpassed that in defined-benefit plans (Figure 2).

What Figure 1 does not show is that retirement wealth should have increased more to keep pace with an aging population, offset Social Security cuts, and serve as a hedge against the increased longevity risks and investment risks brought on by a shift from traditional pensions to individual savings. Retirement account savings increased before the Great Recession as the large baby boomer cohort approached retirement. However, retirement account savings by age group stagnated or declined in the new millennium even as traditional pension coverage continued to decline (Figures 2-5). Meanwhile, Social Security benefits are replacing a declining share of pre-retirement earnings due to benefit cuts passed in 1983 that are gradually taking effect (Reno, Bethell, and Walker 2011). The change in plan type should have been accompanied by an increase in retirement assets to account for the diminishing use of pooled pension funds, which benefit from economies of scale and risk pooling and are thus more cost-effective than individual accounts. In other words, in a retirement savings account system, people need to set aside more, because these accounts are not as efficient as pensions.

The shift from traditional pensions to individual savings has widened retirement gaps. In addition to retirement wealth not growing fast enough, retirement disparities have grown with the shift from traditional pensions to retirement savings accounts. These disparities are the main focus of this chartbook. As Figure 6 shows, high-income, white, college-educated, and married workers participate in defined-benefit pensions at a higher rate than other workers, but participation gaps are much larger under defined-contribution plans. The distribution of savings in retirement accounts is even more unequal than participation in these plans (Figure 7). There are large differences between mean and median retirement savings because mean savings are skewed by large balances for a few families (Figure 8). For many groups—lower-income, black, Hispanic, non-college-educated, and unmarried Americans—the typical working-age family or individual has no savings at all in retirement accounts, and for those that do have savings, the median balances in retirement accounts are very low (Figures 9–15).

In theory, the shift from defined-benefit to defined-contribution plans could have broadened access to retirement benefits by making it easier and cheaper for employers to offer benefits. However, participation in all employer-based retirement plans has declined in the new millennium (Figure 2). Retirement inequality has grown because most 401(k) participants are required to contribute to these plans in order to participate, whereas workers are automatically enrolled in traditional pensions and, in the private sector, are not required to contribute to these plans. Thus, higher-income workers (with their greater capacity to make contributions) are more likely to participate in defined-contribution plans.

In addition to their greater disposable income, higher-income workers have a higher investment-risk tolerance, receive larger tax breaks for saving, and are more likely to work for employers that offer plans and provide generous matches (CBO 2013; Morrissey 2009). 401(k) and IRA contribution limits, a Saver’s Credit targeted at low- and moderate-income families, and other attempts to ensure that tax subsidies for retirement do not disproportionately flow to high-income families have proven ineffective at leveling the playing field.

Workers’ retirement prospects are increasingly affected by economic downturns. 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 house of cards collapsed in 2000–2001 and again in 2007–2009. In 2013 most families still had not recovered their losses from the financial crisis and Great Recession, let alone accumulated additional savings for retirement (Figures 5, 7, 8).

Successive generations should be saving more in defined-contribution plans due to declining defined-benefit pension coverage, Social Security benefit cuts, and higher incomes. While the retirement account savings of families approaching retirement grew before the financial crisis and Great Recession, those of younger families stayed flat. But families approaching retirement had more to lose—and did—when asset prices collapsed in 2007–2009 (Figures 3–5, 16). Recessions can be very damaging to workers nearing retirement, since they have less time to make up losses and their retirement outcomes are influenced more by investment returns than new contributions. In addition, many older workers who lose jobs tap retirement savings.

Families with large account balances saw large dollar declines after 2007. But in percentage terms, the financial crisis and ensuing recession had a greater impact on families with small balances. While the median (50th percentile) family saw its meager retirement account savings drop by more than half between 2007 and 2010, the 90th percentile family experienced a 5 percent decline. Thus, retirement inequality continued to grow in the aftermath of the Great Recession (Figure 7).

Other forms of saving, including home equity, may be tapped to pay for retirement. But family net worth took an even bigger hit than retirement savings following the collapse of the housing bubble and ensuing recession (Figure 17). Like retirement savings, overall wealth has grown more unequal in recent decades, as all but the top 20 percent of working-age families have seen declines in net worth (Figure 18).

The growth in retirement inequality has not been random—the rich have gotten richer and the poor poorer. 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 (Figure 9). This disparity has grown in the new millennium as the share of working-age families with retirement account savings declined for all except the top income group. While it is normal for higher-income families to have more savings, the fact that most families in the bottom half of the income distribution have no retirement account savings at all is a serious policy failure.

Income inequality and differences between younger and older families explain some, but not all, of the inequality in retirement savings. In 2013, families in the top income fifth accounted for 63 percent of total income, but 74 percent of total savings in retirement accounts (Figure 19). Even within age groups, retirement account balances are more unequally distributed than income (for example, Figure 20).

The shift from defined-benefit to defined-contribution plans has exacerbated racial and ethnic disparities. Black workers’ participation in employer-based retirement plans used to be similar to that of white workers, but black workers began lagging behind white workers in the 401(k) era, while Hispanic workers fell even further behind (Morrissey 2016; Morrissey and Sabadish 2013). Only 41 percent of black families and 26 percent of Hispanic families had retirement account savings in 2013, compared with 65 percent of white non-Hispanic families (Figure 10). Even among families nearing retirement (age 56–61), the majority of black and Hispanic families have no retirement account savings (not shown on chart). Racial and ethnic gaps in retirement account balances are even larger than participation gaps—and growing. For families with retirement account savings, the median amount is $22,000 for black and Hispanic families, compared with $73,000 for white non-Hispanic families (Figure 11).

Retirement readiness gaps have widened between workers with and without a college education. The share of families with retirement account savings increased across education groups in the 1990s and declined across education groups in the 2000s. In 2013, only families headed by someone with some college experience were more likely than not to have retirement account savings (Figure 12). Even among families approaching retirement (age 56–61), the typical family headed by someone with a high school education or less had no savings in retirement accounts (not shown on chart). For families with retirement savings (Figure 13), median account balances grew much more for families headed by someone with a college degree than for other families before the Great Recession, and have been fairly flat across the board since.

Single people and women face particular challenges. Single people tend to be less prepared for retirement than their married counterparts. Even among those approaching retirement (age 56–61), most single men and women do not have any retirement account savings (not shown on chart). In the past, married women were less likely to be covered through their own employers than were single women, but married women’s participation increased as their earnings grew (Morrissey and Sabadish 2013). In the new millennium, the biggest change has been the decline in the share of single men with retirement account savings and in the amount single men have saved in these accounts (Figures 14–15).

Though declines for single men closed savings gaps between single men and women, women generally remain more vulnerable than men because they live longer and are more likely to outlive their savings—and, in the case of married women, their spouses. Women can expect to live around 2.3 years longer than men in retirement (Social Security Trustees 2015). Because women earn less and accumulate less retirement savings and benefits than men, never-married, divorced, and widowed women are at greater risk of experiencing hardship in retirement than their male counterparts.

Part Two: How are older Americans faring in retirement?

Charts in this section focus on the income of people 65 and older and are based on data from the U.S. Census Bureau’s Current Population Survey Annual Social and Economic Supplement (CPS-ASEC) (Flood et al. 2015). Unlike the Survey of Consumer Finances, the CPS focuses primarily on individuals rather than families. Though the goal is to assess retirement outcomes, some people in this age group are still working.

Until recently, the CPS did a poor job of capturing distributions from retirement accounts and other types of asset income, making it a problematic source for assessing retirement income. A 2014 survey redesign to correct this problem resulted in large percentage increases in these income measures (DeNavas-Walt and Proctor 2015; Semega and Welniak 2015). But as charts in this section will show, income from retirement accounts remains modest in dollar terms.

Because many families withdraw retirement account savings in lump sums, the size of these distributions for any family in a given year, whether a large sum or nothing at all, does not tell us how important this income source is for that family. But the mean value of these distributions across families does give a sense of the importance of retirement account savings relative to other sources of income. Going forward, it will be possible to assess how much these distributions are affected by economic conditions—for example, people tapping retirement funds when they lose jobs in recessions.

Key findings of the following charts include:

Less educated, minority, single, and female seniors are most likely to have low incomes in retirement. Seniors with a college degree or more education have median annual incomes more than twice as high as those with a high-school diploma or GED. The median income for seniors without a high-school diploma is barely above the official poverty threshold, which was $11,354 for single seniors in 2014 (DeNavas-Walt and Proctor 2015). Racial and ethnic disparities are also significant, with more than half of Hispanic seniors and nearly half of black seniors living on less than full-time minimum-wage earnings ($15,080 per year). Unmarried older women, including widows, have lower incomes than unmarried men and a lower standard of living than married couples, taking into account the fact that couples’ living expenses are less than twice those of a person living alone (Figure 21).

Social Security is the most important and evenly distributed source of retirement income. Social Security contributes 35 percent of total income for people age 65 and older (see “Sources of income,” below, for a description of this and other income categories). Social Security benefits are not only the most important income source but also the most evenly distributed. While benefits are somewhat smaller in dollar terms for low-income, less-educated, black, Hispanic, and female seniors, they are larger as a share of income for these groups than for other seniors (Figures 22–28).

Many seniors are still working. Earned income, including farm and business income, is the second most important income source for seniors after Social Security, providing 29 percent of total income. Earnings are not as evenly distributed as Social Security benefits, disproportionately accruing to younger, higher-income, college-educated, Hispanic, and male seniors. Earnings exceed Social Security benefits for seniors in their mid- to late 60s, those in the top income fifth, those with college degrees, and married men in this age group (Figures 22–27). Earned income has increased in importance as Americans increasingly delay retirement. The share of people 65 and older who are employed is now higher than in over half a century (author’s analysis of Bureau of Labor Statistics data).

A diverse group of retirees relies on pension benefits. Nearly three in 10 seniors (29 percent) receive public- or private-sector defined-benefit pension benefits, and the median benefit received is $13,200 (Figure 29). Public and private pension benefits together constitute the third-largest source of income for seniors after Social Security and earnings, providing 17 percent of total income (Figure 23).

Pension benefits are important to seniors across demographic groups, but are a somewhat larger share of income for middle- and upper-middle-income, college-educated, black, and male seniors than for other seniors (Figures 24–27). Women are almost as likely as men to receive public-sector pension benefits, which constitute 8 percent of seniors’ total income (Figure 27 and 30). Seniors with high-school diplomas are almost as likely as those with college degrees to receive private-sector pension benefits, which constitute 9 percent of seniors’ total income (Figures 26 and 31).

401(k)s and IRAs are not an important source of retirement income. Retirement account distributions account for less than 3 percent of seniors’ total income (Figure 23). They constitute a somewhat larger share of income for higher-income, white non-Hispanic, college-educated, and male seniors than for other seniors (Figures 24–27). Non-Hispanic white seniors are three times as likely as black or Hispanic seniors to receive retirement account distributions (Figure 32). Among seniors with income from these accounts, the median amount is higher among Hispanic ($6,000) than black ($3,000) seniors, perhaps because Hispanics are less likely than blacks to participate in defined-benefit pensions (Figure 29).

One possible explanation for why retirement account distributions are less important than pension benefits is that today’s seniors, when they were working, were more likely to participate in defined-benefit pensions than workers today. However, 401(k)s have been around long enough that they should be contributing more to senior incomes. In the private sector, the number of active participants in defined-contribution plans surpassed the number in defined-benefit plans a long time ago, in 1984 (U.S. Department of Labor 2015).

Retirement account distributions are a much smaller share of total income than pension benefits even for a subset of seniors who almost certainly participated in 401(k)s and other defined-contribution plans longer than they participated in defined-benefit pensions—those age 65–69 (Figure 23) (author’s analysis of SCF microdata for 1989–2013 and U.S. Department of Labor 2015). Though this partly reflects the fact that many 65- to 69-year-olds are still working and distributions from retirement account plans are not required until age 70½, the poor showing for defined-contribution plans and IRAs nevertheless bodes poorly for future retirees with less pension income to fall back on.

Conclusion

The trends exhibited in these figures paint a picture of increasingly inadequate savings and retirement income for successive generations of Americans—and growing disparities by income, race, ethnicity, education, and marital status. Women, who by some measures are narrowing gaps with men, remain much more vulnerable in retirement due to lower lifetime earnings and longer life expectancies.

Decades after the number of active participants in 401(k)-style plans edged out those in traditional pensions, 401(k)s are not delivering substantial income in retirement, and that income is not equally shared.

Retirement security has also been affected by changes in Social Security, notably the gradual increase in the normal retirement age and other benefit cuts implemented in 1983; by broader income and wealth trends, such as growing earnings inequality and the collapse of the stock and housing bubbles; and by other factors, such as trends in out-of-pocket medical costs. A description of these broader trends is outside the scope of this chartbook. However, we can assume that as the value of employer-based retirement plans is declining and retirement savings are growing more unequal, retirement security is declining and growing more unequal, since there is little evidence of countervailing trends.

The shift from pensions to account-type savings plans has been a disaster for lower-income, black, Hispanic, non-college-educated, and single workers, who together add up to a majority of the American population. But even among upper-income white college-educated married couples, many do not have adequate retirement savings or benefits. The evidence presented in this chartbook—that the retirement system does not work for most workers—underscores the importance of preserving and expanding Social Security, defending defined-benefit pensions for workers who have them, and seeking new solutions for those who do not.

— The author thanks Tanyell Cooke for research assistance.

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