Inequality is hitting retirement savings, too

Since the Great Recession began in 2008, both retirement plan coverage and the wealth levels of the bottom half of America's workforce have declined. That's what a recent report from researchers at the Federal Reserve Board found, and it's sure to add fuel to ongoing debates about the viability of our retirement system and income inequality in the U.S.

The Fed researchers examined data from their own triennial Survey of Consumer Finances (SCF) for 1989 through 2013, which show how retirement savings and wealth are accumulated over time for different generations. More specifically, the SCF measures work-related pensions, personal retirement accounts and earning histories with demographic, income and balance-sheet information.

For the country in aggregate, the total amount of accumulated wealth as a percentage of total personal income nearly doubled between 1989 and 1999, but since then, this percentage has fluctuated widely due to volatility in the economy. By 2013, it was barely above 1999 levels.

This is disturbing because the population as a whole has aged and is closer to retirement in 2013 compared to 1999, so ideally the ratio of wealth to income should have climbed. In addition, looking solely at aggregate wealth levels hides the fact that certain population groups experienced major setbacks in the Great Recession.

The starting point for the Fed analysis is to measure participation in a retirement plan of any type. The report shows the percentage of all workers covered by any type of retirement plan increased slightly from 1989 to 2007, from a little more than 60 percent of workers to just under 70 percent, but the numbers have declined slightly since 2007.

Looking at all households with a member of working age between 25 and 59 reveals a similar picture: The percentage of workers covered by a retirement plan of any type has fluctuated between a little less than and a little more than 80 percent between 1989 and 2013.

While these statistics might imply that not much has changed over the years, looking at the bottom half (defined by income) of the workforce reveals a very different picture. In 1995, for instance, 54 percent of this group was covered by some type of retirement plan. But by 2013, that had dropped to 44 percent. This decline was most pronounced for younger workers.

In addition, the type of retirement plan that workers participated in has changed dramatically in the period, with the prevalence of traditional defined-benefit plans declining significantly for workers at all income levels. This shift hurt low-income workers the most because higher-income workers were more likely to accumulate significant savings in a defined-contribution plan. In addition, higher-income workers are better able to manage their own savings -- a skill that the shift to defined-contribution plans requires.

When looking at savings levels, the Fed analysis analyzed the ratio of savings to income over time to address the effect of inflation when comparing savings levels over long periods of time. The Fed analysis documents some worrisome results for young workers (those in their 20s and 30s): The bottom half and the next 45 percent of this part of the workforce, as measured by income, is falling behind levels of prior generations of younger workers.

In addition, middle-age families (those in their 40s and 50s) in the bottom half of the income distribution are falling behind prior generations of middle-age workers. This is especially troublesome at a time when Social Security benefits have also declined.

The challenge for the bottom half of the workforce is that many spend all their current income to meet daily living expenses, with no money left over to save for retirement. We can debate endlessly whether they could do a better job managing their income so they could find some money to save for retirement, but the bottom line is, most of these workers are strapped by high living expenses and are bombarded by persuasive media and advertising messages to spend all their money.

Given our consumer society, it should be no surprise that many low- and middle-income workers don't have much money left over to save for retirement.

Policy options to improve retirement savings for the bottom half of the workforce include:

• Mandate a minimum level of retirement contributions for all workers, as Australia does now. This could be done at the federal level or on a state-by-state basis (some states are currently considering this).
  
• If don't like a mandate but you acknowledge it's difficult for lower-income workers to save, you could support improving Social Security benefits for lower-income workers. Given Social Security's precarious funding status, this would require a tax increase, also an unpopular move.
  
• Continue to remove barriers and increase incentives for employers to voluntarily sponsor retirement plans and for workers to voluntarily decide to save money for retirement. While such actions can help, we've had a voluntary system for a few decades now, with evidence that a significant number of workers are being left behind.

Some analysts cite the Fed report as justification to scrap the current system that provides tax advantages to employer-sponsored retirement plans such as 401(k) plans. But this system appears to be roughly working for about half of the working population, which leads some to say: "Don't break a system that is working for half the population -- let's just work to improve the current system for the rest of the workforce." Is the glass half full or half empty?

It's also important to recognize that if workers don't save sufficient amounts for retirement, many will need to work later in their lives, into their 70s and beyond. This will also require significant adjustments for workers and employers alike.

As a society, we face some tough choices regarding the retirement security of the most vulnerable members of the working population. But that shouldn't be justification for doing nothing. America needs to address the reality of large numbers of people living longer with modest financial resources.