New research from EPI economist Monique Morrissey finds that the shift to defined contribution plans—401(k)s—from defined benefit pension plans has increased inequities in retirement preparedness for U.S. families, based on their income, race, ethnicity, education, and marital status.
Morrissey explains that this shift to 401(k)s has placed the responsibility of saving for retirement onto workers, allowing policymakers to avoid fixing a broken retirement system.
“The American retirement system is often described as a ‘three-legged stool’ comprised of Social Security, employer plans, and personal savings,” said Morrissey. “This is misleading, since Social Security is by far the strongest leg of the stool. The employer leg has gotten much wobblier in the 401(k) era, and the savings leg has never provided much support. ”
Using the most recent data from 2016, EPI’s State of American Retirement Savings finds that:
- Only 54 percent of families headed by prime-age workers (age 32–61) participate in any kind of retirement plan, down from 60 percent in 2001.
- More than twice as many families have defined contribution plans as defined benefit plans, but participation in pensions is more equal across education, race, and income groups.
- Retirement savings have stagnated in the new millennium, with nearly half of families lacking any retirement savings. Median balances for families with savings range from $1,000 for families in their mid-30s to $21,000 for families approaching retirement in 2016.
- Only 35 percent of Hispanic families and 41 percent of black families have retirement account savings. In contrast, 68 percent of white, non-Hispanic families have retirement savings.
- Single men and women are less likely than married couples to have retirement savings, and the share of single men with savings has declined significantly.
In a companion report, Morrissey explains the policymakers should expand Social Security to the fullest extent possible, as it is the most effective way to boost American retirement. However, even the most ambitious Social Security plans do not eliminate the need for employer benefits. Therefore, policymakers should ensure that every worker receives some help from his or her employer and the federal government in preparing for retirement. Morrissey argues that a Guaranteed Retirement Account (GRA), which includes mandatory employer and employee contributions, a refundable tax credit offsetting the cost to lower-income workers, and annuitized benefits, would help workers who lack access to a good employer plan. Finally, Morrissey advocates for protecting the remaining defined benefit pensions, like those offered to union and public sector workers, because they are more efficient than defined contribution plans and shield participants from market and longevity risks.