Income inequality and its impact on retirement security

As a follower of the Alliance, you have seen evidence of the retirement crisis in the United States. Not only do Americans widely believe there is a crisis, but hard evidence also shows that many are not prepared to meet the costs of living day-to-day after they have stopped working.

We know there are gaps in retirement’s three-legged income stool of Social Security, pensions, and savings.

Many moderate earners rely too much on Social Security benefits. We reported earlier that one in four older adults get 90% of their income from Social Security. There are real questions about the sustainability of the trust, but polling also shows that a significant portion of the population does not have a retirement plan that includes other sources of income. Also, not all workers are eligible to receive Social Security benefits.

On top of that, over the past several decades, many employers have shifted from defined benefit plans to defined contribution plans.

While more and more workers have access to 401(k) plans, only half of private-sector workers take advantage of the plans. There are efforts to get these employees to participate — and to do so sooner rather than later. For moderate earners, this may be easier said than done.

This paradigm shift has resulted in fewer employers offering pensions, especially in the private sector. Only 15% of private-sector workers participated in a defined benefit plan. The participation of public employees is better, with more than three-fourths (77%) of state and local government workers having pensions.

A recent report from the National Conference on Public Employee Retirement Systems (NCPERS) attempts to draw a line between recent pension changes, income inequality, and economic growth.

The report found an increase in income inequality due to the shift from defined benefit plans to defined contribution plans. Additionally, changes to remaining pension plans, such as increasing employee contributions, reducing benefits, and excluding new hires also increases income inequality. In turn, income inequality slows the growth of the US economy.

This impact becomes circular and self-perpetuating. The disparities in income between the wealthy and the rest of the population has an obvious impact on consumption. Workers of moderate means spend less than those of higher means, and their spending is focused on everyday needs, reducing what they can direct to savings or investment accounts.

Reduced savings further destabilizes that three-legged retirement income stool and adds to the ongoing crisis.

Elected officials and policy makers need to focus on how to both strengthen public pensions but also make retirement savings easier for all workers – both public and private sector alike. If unchecked, this retirement crisis will continue to harm retirees and slow the US economy – subsequently impacting all Americans.