401(k)s are replacing pensions. That’s making inequality worse.

September 3, 2013

The once-dominant defined benefit pension plan--which pays out a fixed amount after an employee retires--is on its way to becoming an historical artifact. More and more employers are offering 401(k) plans instead, which require employees to pay into their own accounts, sometimes with and sometimes without a matching contribution. And according to a new analysis from the labor-oriented Economic Policy Institute, the effect has been a stratification of retirement savings by education, income, and race--which could deepen inequality among the elderly as the population ages.

It's actually possible to tell a positive story here, in which the average size of retirement accounts has grown overall in recent decades, and aggregate saving and household net worth as a percentage of income have started to bounce back since the recession first hit in 2008:

But the moral starts to change as you look underneath the numbers. Those benefits split among a smaller share of the population: Overall, the percentage of workers participating in all employer-based retirement plans declined over the past couple decades, across all age groups.

That's because the top-earning people are choosing to put a lot more money away, while those who earn less can't afford to. Retirement savings by the top fifth of income earners have risen markedly, while they've declined or risen only slightly for most everyone else:

The Baby Boomers have done a good job of socking away money, and are pushing up the average as they approach retirement age. But younger people are saving at slower rates than their parents and grandparents:

There are also tremendous returns to education. While the share of people with college degrees participating in employer-based retirement programs stayed steady, the participation rate of less educated people declined. And the savings accounts of those with college degrees swelled much faster than those without:

The pattern repeats itself when you look at race. White people are pulling away from blacks and Hispanics, both in the share of those who have retirement accounts and in the amount of money they have saved up:

Looking at gender differences, the gap between women and men in returns on pension plans has decreased over the years, and retirement plan participation rates of men and women have gotten more equal (due in part to a slight decline for men):

Generous pensions have gotten a bad rap in recent years because of the difficulty that companies and governments have had in keeping up with their obligations (see: Detroit). But, when they were more prevalent, they did have the beneficial effect of locking in retirement security for all of those lucky enough to have one. Now, especially with workers having a harder time dealing with immediate needs, putting away money for retirement is a trade-off they're often not able to make--especially non-whites and the less educated.

Lydia DePillis is a reporter focusing on labor, business, and housing. She previously worked at The New Republic and the Washington City Paper. She's from Seattle.
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