A report released Thursday from the U.S. Government Accountability Office (GAO) shows the shift away from traditional pensions to 401(k)-like plans contributes to inequality. Bloomberg reported Friday, "The U.S. retirement landscape is starting to look like a Charles Dickens novel.” These "defined contribution (DC)" plans, the report notes, "have become the dominant form of retirement plan for U.S. workers," but 60 percent of all U.S. households in 2013 had no retirement savings in one.
Further showing this inequality, the GAO reports that while 81 percent of working, high-income households had savings in a DC plan, only about 25 percent of working, low-income households had any savings in one. Also from 2007 to 2013, the average balance in such accounts held by white working households didn't significantly change, but for black working households, the average balance in plans dropped significantly—from $31,100 in 2007 to $16,400 in 2013.
Further, according to GAO's projections, households in the lowest earning group accumulated DC savings that generated lifetime income in retirement, as measured by an annuity equivalent, of about $560 per month on average (in 2015 dollars). Yet, 35 percent of this group had no DC savings at retirement.
In contrast, households in the highest earning group saved enough to receive about 11 times more per month in retirement and only 8 percent had no DC savings.
A 2013 paper from the Economic Policy Institute showed how this shift away from traditional pensions to 401(k) retirement plans has been a "disaster," fueling inequality and creating more insecure retirements.
Economist Dean Baker also noted in December that "Your retirement prospects are bleaker than ever," attributing it to "the disappearance of traditional defined benefit pensions and the failure of 401(k)-type plans to fill the gap.” He added, "The vast majority of Americans who expect to retire in the next decade can count on little income other than their Social Security. This is true not only for low-income workers, who have struggled most of their lives, but also for millions of middle-income workers," Baker wrote. "Although Social Security is a tremendously important program, and provides a solid base that retirees can depend upon, its $16,000 average annual benefit doesn't go very far. Many if not most can expect to see sharp reductions in living standards.” Hello Tiny Tim….
