Think Income Inequality Is Bad? Retirement Inequality May Be Worse.
But last summer,
Across the country, a large portion of American workers lack any retirement account or haven't saved nearly enough to retire. An updated index published by the
In recent years, rising home values and stock market gains have led to slight savings improvements for American households overall. Over the longer term, however, an increasing number of workers will face financial challenges in retirement, with the share of working-age households unprepared having climbed about 20 percentage points since the late 1980s. A range of factors drive this trend: a higher
The outlook is particularly bleak for those on the lower rungs of the income ladder. A steady shift away from guaranteed pensions to defined contribution savings plans has contributed to more savings inequality over the long term. Escalating housing costs and stagnant earnings for many lower- and middle-income families are further squeezing their retirement accounts. Meanwhile, wealthier households are reaping the benefits of climbing investment values.
All of this explains why the latest data from the federal Survey of Consumer Finances reflect solid savings growth for the most affluent families with the top 20 percent of household incomes, but flat retirement savings for everyone else. Vast disparities are also found across demographic groups. When the average liquid retirement savings of white families is compared with that of African-Americans and Hispanics, the gap has widened fivefold over the past 25 years, according to the
Inadequate retirement savings carry serious long-term implications for governments as well as citizens. They create an expanding cohort of residents who have to rely on government services or who might, for instance, miss property tax payments because they can't pay other bills. "It matters not only for families and individuals, but for their cities and communities," McKernan says.
The single biggest hurdle for many is access. By most estimates, about half of private-sector workers aren't offered plans through employers. They tend to be in low-wage jobs, or working for smaller companies uncomfortable with the administrative costs of retirement plans.
Interest in the issue has mounted in state legislatures. Most have debated or are considering bills to improve access to retirement savings plans, with nine states enacting legislation, according to the
The state that's furthest along is
Employees are automatically enrolled unless they opt out. Extensive research by behavioral economists concludes that this auto-enrollment component is crucial in nudging workers to save and allowing plans to build up large pools of participants. A similar but recently terminated federal program, known as myRA, didn't automatically enroll participants, and few signed up. OregonSaves is working better. About 70 percent of employees in the first wave of registered businesses chose to stay in the program rather than opt out. "When we move from a place where around half the people are saving to where most are saving for retirement, it changes the dynamic dramatically," says
Another challenge state-sponsored plans must confront is that program costs will rise faster than revenues as investment returns gradually accumulate. The
Programs sponsored by local governments remain fairly limited.
More states will soon launch their own programs, and it's always possible that
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