Low-Paid Means At Risk in Retirement

By Martha M. Hamilton
Sunday, October 14, 2007

The rich are different from you and me. They have more money in retirement.

And it may be that the gap between those who have lots of money for retirement and those of us with less will grow. In part, that's because the rich are getting richer.

But there's another element: Workers are depending on a system that may provide low- and moderate-income people with less money for their retirement.

"When people look out the window right now, the people retiring look pretty comfortable," said Alicia H. Munnell, director of the Center for Retirement Research at Boston College. "We're still in the golden age of retirement."

More workers retire with traditional pensions today than will in the future. Some are even retiring with both traditional plans and 401(k)s or some other type of retirement savings on top of their Social Security. That combination can add up to a comfortable old age, especially if you also have retiree health insurance.

Even so, not everyone in the golden age of retirement is raking in the gold: In 2006, half of all Americans age 65 and older had annual incomes of less than $16,890, according to the Congressional Research Service. A quarter of all retirees depend on Social Security for 100 percent of their income.

While the traditional pension plan has its drawbacks, it tends to cover pretty much everyone at the workplace, including lower-paid workers. Now that type of plan is disappearing. In its place come defined contribution plans like the 401(k). But workers don't have to participate in these plans.

And guess which workers most often choose not to put aside money for retirement? Lower-income workers often struggle just to meet the mortgage or pay the rent. Even if they do have money to save, the incentives are not as enticing for them as for higher-income workers, said Christian E. Weller, senior economist at the Center for American Progress. Because 401(k) plans reduce taxable income, a worker in top tax bracket gets 35 cents for every dollar saved. A lower-paid worker with a marginal tax rate of 10 percent gets 10 cents.

In 2001, only 13.7 percent of workers who earned $20,000 or less participated in 401(k) plans, compared with 67.1 percent of workers who earned more than $100,000, according to an analysis by Munnell and Annika Sunden, authors of "Coming Up Short: The Challenge of 401(k) Plans," published by Brookings Institution Press.

The income gap in the United States has been growing since the 1970s. While those disparities are likely to translate into a wider gap in retirement, it should be offset to some extent by Social Security's equalizing effect on retirement income.

Although changes need to be made to Social Security, it's important to recognize how it has succeeded in reducing poverty among the elderly. One in three people age 65 and older was in poverty in 1960, according to the Congressional Research Service. Today, it's less than one in 10. Social Security replaces a higher percentage of lower earning workers' incomes than it does for higher-paid workers, which is one of its strengths.

Even so, poverty remains high for women, minorities, the less-educated and people over 80, the Congressional Research Service points out. Three-quarters of the elderly poor are women.

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