The haves and have-nots in retirement will largely be defined by who is offered and best utilizes a retirement plan at work. Only about half of private sector workers had any sort of employer-sponsored retirement plan in a given year between 1979 and 2008, according to a new Center for Retirement Research at Boston College analysis. Many workers also move in and out of retirement plan coverage throughout their career as they change jobs, which leads to smaller retirement payouts than if they consistently participated. Plus, about a third of primarily low-income households are not covered by any sort of retirement plan throughout their entire working life. These people will be entirely dependent on Social Security in retirement.
A related Boston College study found a growing inequality in retirement plan participation, with wealthier Americans being more likely to fully utilize their retirement plan. The retirement preparedness gap has become more pronounced as more private sector companies dropped traditional pensions and shifted workers into 401(k)s.
The percentage of employers offering some form of retirement benefits has remained relatively stable for the past 25 years. But as private sector employers eliminated mandatory pensions and began offering only voluntary retirement accounts, fewer low- and middle-income workers utilized their retirement benefits. Workers in the top third of the income scale had nearly constant participation throughout the shift, but participation for the middle third declined from 94 in 1979 to 86 percent in 2008. Among low-paid workers, participation in any sort of retirement plan fell even more sharply from 85 to 69 percent over the same time period.
For low-income workers, not being able to afford to participate or a desire not to tie up their money were the biggest reasons for not participating in their retirement plan, Boston College found. Many middle earners also said they weren’t financially able to participate, but additionally listed other reasons for failing to save including a spouse having a plan or just not thinking about it.
All income groups were more likely to utilize a traditional pension when it was offered than a 401(k). For example, in 2007, 91 percent of individuals whose employer sponsored a traditional pension participated compared with only 67 percent of workers provided with a 401(k).
In theory, employees who consistently save throughout their working lives can accumulate admirable 401(k) account balances. For example, a worker who earns about $50,000 annually when entering retirement who saved 6 percent of income each year and received a 3 percent employer match is likely to accumulate $320,000 in his 401(k) upon retirement, according to Boston College calculations. But in reality, most people accumulate far less. Many employees don’t participate in a 401(k) at young ages, job hop between employers who do and don’t offer retirement plans, withdraw small account balances when they leave a job, and simply can’t afford to, or don’t, save. The typical person entering retirement had just $78,000 in his or her retirement account in 2007, according to the Federal Reserve.