According to a new study, the 401(k) savings account isn't adequately providing for people's retirement and is adding to the nation's growing wealth inequality.
The report from the Economic Policy Institute, a liberal-leaning public policy think-tank, illustrates how the shift from pensions to individual savings accounts has affected retirees. The authors find that it is the wealthiest workers who are benefiting the most because they can actually contribute enough to make 401(k) plans work for retirement.
"401(k)s were never designed to replace pensions for most workers. They serve primarily as a tax shelter for high earners," said economist Monique Morrissey, the report's co-author, in a statement. "The 401(k) revolution has been a disaster, yet some policymakers are calling for cuts to Social Security, which will be the only significant source of retirement income for most Americans--if they are able to retire in the first place."
The report also found:
- Households earning in the top fifth accounted for 72 percent of total savings in retirement accounts in 2010 and were the only income group that had more than their annual income saved in these accounts.
- Participation in defined-benefit pensions by workers from 25 to 61 years old declined over the past decade, from 52 percent in 2000 to 45 percent in 2010.
- For single people, black and Hispanic households and those headed by someone without a college degree, the median household has no savings in retirement accounts.
- On average, white households have more than six times as much saved in retirement accounts as Hispanic or black households.
- Also, households with a college degree have six times the amount saved in retirement accounts compared to those with only high school degrees.
According to the report:
Retirement-income inequality has grown in part because most 401(k) participants are required to contribute to these plans in order to participate, whereas workers are automatically enrolled in defined-benefit pensions and, in the private sector, are not required to contribute to these plans. Thus, higher-income workers are much more likely to participate in defined-contribution plans. In addition, higher-income workers have more disposable income and a higher investment-risk tolerance, receive larger tax breaks, and are more likely to work for employers that provide generous matches.
There is little sign of improvement any time soon. While younger workers, who have seen their job choices down-scaled in the wake of the recession, should be saving more to make up for the loss in pension and Social Security benefits, their retirement savings have stayed flat or even declined in recent years.