Income Inequality Could Disrupt Retirement Savings for Generations

Over the past decades, the gap between high- and low-income Americans has grown substantially, and should those trends continue, a large swath of future seniors could face a bleak retirement future.

Working for the Urban Institute, a trio of researchers set out to examine the long-term effects of the income gap on the future of U.S. retirement, projecting earnings for various groups of earners through 2085. And depending on where you happen to sit on the income ladder, things are about to become either much better or much worse.

If the current difference between the earning power of college-educated Americans and their high-school-graduate counterparts continue, lifetime income for the lowest fifth of people would drop 2% by 2045, 5% by 2065, and 9% by 2085.

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“The impact would reverberate into retirement, because Social Security benefits are tied to lifetime earnings, and how much people can save for retirement depends on how much they earn,” the group — Damir Cosic, Richard W. Johnson, and Karen E. Smith — wrote in the report, released at the end of last month.

For instance, under those assumptions, the bottom fifth of seniors aged 67 to 75 would see a 3% decline in mean income by 2045, 6% in 2065, and 13% in 2085.

The news is better for those in the top quintile, who would see overall lifetime income rise by 2%, 5%, and 8% in those three years; accounting for just incomes achieved between 67 and 75, those increases would work out to 3%, 5%, and 7%.

The Urban team came up with multiple policy suggestions to help mitigate these long-term trends, including raising the federal minimum wage from $7.25 per hour to $12, but the researchers note that such a change would only help offset and not completely eliminate the problem.

They also warned that their findings relied solely on examining the so-called “education gap” in earnings, and did not take into account other long-term macroeconomic trends — such as fast-growing income for the top 1% of earners at the expense of remaining workers.

“Because our projections do not account for these increases at the very top of the wage distribution, our estimates may understate the future growth in wage inequality,” the team wrote.

Furthermore, the results were derived under the assumption that seniors would continue to receive their full Social Security benefits for the duration of retirement. The government, however, has projected that the program will only allow for full benefits through the mid-2030s, with beneficiaries receiving only about three-fourths of their earned Social Security income thereafter.

“Cuts to Social Security could reshape the distribution of future retirement income,” they note.

Outside of upgrades to the social safety net and a higher minimum wage, the team recommends that the government offer financial literacy classes for all workers, while also requiring employers that do not offer pensions to automatically place a portion of employees’ wages into retirement accounts.

“Together, these programs could provide all workers with a path to retirement security even as wage inequality grows,” the authors concluded.

Written by Alex Spanko

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  • In the past half century, we have seen a turn in what was once considered the social responsibility of employers. During the 80s, plan salespeople made great inroads of convincing American nongovernmental union workers that defined contribution retirement plans with their separate account ownership provided great opportunities to plan participants to retain the stock market gains that employers were currently able to enjoy and use in providing future contributions to their employee defined benefit retirement plans.

    With dot coms taking off in the 90s, fewer and fewer employers were contractually required to have defined benefit retirement plans. Everyone looked like they were winning until the drop in the dot com values. Now it was clear that employers were saved from large contingent and actual liabilities while fewer nongovernmental workers were going to be prepared for retirement. I saw this first hand in a largely union dominated industry.

    To see this problem getting worse for younger workers was not unexpected. Yet the short-sighted plan salespeople had little to lose and a whole lot to gain from wholesale abandonment of defined benefit retirement plans and adoption of defined contribution retirement plans. The level of the social responsibility of employers for the retirement of their employees has gone from a high during the late 40s through the early 80s to a staggering low and now horribly low but not as low as a decade ago.

    While some individual small companies (smaller doctor’s offices, in particular) still have true defined benefit retirement plans, the only place where defined benefit retirement plans still have some dominance is in government retirement plans. It will be decades before we see the return of defined benefit retirement plans (even though the retirement plan salespeople would greatly benefit from their return), if we ever see the wide adoption of these plans again.

    Like the early part of the last century, more of the responsibility for retirement is that of the employee rather than the employer. Perhaps that is as it should be but then again look at where the country is heading as to the future financial position of its retirees.

    Reverse mortgages have their place in retirement today. It is truly sad that its acceptance is so low. There is no recovery of reverse mortgages that could possibly make up for the loss that so many Americans must face due to the enormous reduction in nongovernmental defined benefit retirement plans.

    • Carmine,

      I must say I am very impressed with your comment. I could not top it, that is why I did not put a comment in myself.

      Your comment was and is a great one, I fully understand where you are coming from. I was in the thick of things during these times as well, I can relate to everything you stated.

      I hope everyone reading your comment got out of it what I did, job very well done Carmine!

      John A. Smaldone
      http://www.hanover-financial.com

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