If Income Inequality is a Crisis, Retirement Inequality is Nearing an Apocalypse

I've likely inflamed just with my title. So be it.

The Economic Policy Institute (EPI) earlier this week released an article by Monique Morrissey on the State of American Retirement Savings. It's subtitle is "How the shift to 401(k)s has increased gaps in retirement preparedness based on income, race, ethnicity, education, and marital status." It is stunning.

I've been saying for at least this decade that we have a retirement crisis. Despite protestations from those who favor self-sufficiency over employer and government-provided programs, the crisis looms larger. I wrote about this summer. But, as a full-time consultant working with clients who require that I place their needs first, I simply don't have time to do the research that the think tanks do. So, I often rely on the work that they have done. Regardless of the source, my considered opinion is that all of the data are sound whether the think tanks are right-leaning, left-leaning, or centrist. 

What I quibble with are the conclusions. 

More than half of Americans being on track to retire is not a favorable prognosis. It's especially not favorable when the modeling underlying that statement assumes constant, and perhaps unachievable, returns on investments and constant rates of deferral to 401(k) plans. We're asking a populace that is largely under-educated about financial and investment matters to instantly become great investors. We're also asking them to save for their retirement (including retiree health and long-term care) above all else -- no blips allowed. You lose your job? Keep saving. You pay for a child's wedding? Keep saving. You pay for an unexpected medical expense? Keep saving.

Is that practical? Of course it's not.

The EPI study has presented us with 20 charts. Each has a headline which, in my opinion (understanding that yours may be different) fairly depicts the data it shows. Here are a few of the more eye-catching ones (indented notes after the headlines are mine and should not be attributed to or blamed on EPI)::

• Retirement plan participation declined even as baby boomers approached retirement
• A smaller percentage of workers are now participating in employer-sponsored retirement plans than were 10 years ago. With the rise of the gig economy, this rates to get worse.
• The share of families with retirement savings grew in the 1990s but declined after the Great Recession
• Fewer than 60% have retirement savings. Period. How are the rest to ever retire?
• Retirement savings have stagnated in the new millennium
• Despite that savings of those above the age of 55 have increased fairly dramatically, those for the entire working population have barely moved suggesting that the runup in equity markets over the last decade has done little for most of America.
• Most families—even those approaching retirement—have little or no retirement savings
• This is frightening. In any age range, median (meaning half are better off and half are worse off) retirement savings are well beneath $50,000 ... in total.
• More people have 401(k)s, but participation in traditional pensions is more equal
• We'll return to this later, but this suggests that poorer people and minorities are less likely to make use of 401(k)s. Identifying the root cause is a highly charged issue and cannot be done with certainty, but identifying this as a sign of a problem is clear.
• High-income families are seven times as likely to have retirement account savings as low-income families
• Most black and Hispanic families have no retirement account savings
• Single people have less, but retirement savings are too low across the board
• The data show that single women, in particular, lack retirement savings. But, even among married couples, levels of retirement savings are abysmal.
• 401(k)s magnify inequality
• Those out of the top 20% when stratified by income represent a disproportionately low level of savings account balances.

I said I would return to the statement that participation in traditional pensions is more equal. It seems clear that this is because in most cases, an employee becomes a participant in a pension not through an affirmative decision to do so, but as part of his or her employment. It doesn't require an income disruption. It's not more difficult to participate when you have an unexpected expense.It's not easier for the wealthy to participate, nor for men nor ethnic or racial majorities. 

Yes, pensions have a horrible stigma attached to them right now. Many public pensions are horrifically underfunded and potentially place their sponsors (cities, states, etc.) in grave financial danger. The same could be said about some of what are known as multiemployer plans (that's a story for another day) except that their sponsors are, generally speaking, employers that employ very specific types of employees. 

For the rest of the populace and potential plan sponsors (employers), sponsorship of traditional pensions has waned considerably. About 18 months ago, I explained why. 

Before we write them off completely, however, let's look at what pensions do. According to the EPI study, participation is somewhat equal. They provide lifetime income protection, the single greatest fear of people nearing retirement. They can be part of the employment covenant.

And, thanks to the Pension Protection Act of 2006, they need not bring with them the cost volatility that has maddened CFOs across the country.

The data in the EPI study and not simply their interpretations absolutely scream that more than income inequality, retirement inequality is the looming personal financial crisis. Congress will bat this around and try to make it a partisan issue. But, it shouldn't be. It's a people crisis. It's a dire crisis. It needs a fix and the fix is available, but it needs to get started.