Retirement inequality hitting many hard

Peter and Maria Hoey for The Boston Globe

Almost everyone will retire, but it’s mostly the rich who are planning for that day. The middle class, the poor, minority groups — many of them don’t even have retirement accounts, much less substantial savings.

The 401(k) revolution, with its promise of portable, tax-advantaged investment accounts for all, has inadvertently brought the scourge of inequality into the world of retirement savings. Today, retirement inequality is actually worse than income inequality.

What bridges this gap, and holds many seniors’ lives together, is Social Security. Without it, nearly half of all seniors would be living below the poverty line.

But our great common safety net isn’t what it used to be. Over time, it has gotten stingier — paying out later and less. And that means tomorrow’s retirees might find themselves in a triple bind: living longer, with little-to-nothing in savings, and shrinking support from Social Security.


Income inequality, meet retirement inequality

It’s not that overall retirement savings are falling. People are saving more than ever before. But the bulk of that savings is stashed away in a small number of accounts, held by the fortunate few who make big salaries and are good savers.

Among workaday families, retirement piggy banks tend to be quite small. Half of all families in the United States have less than $5,000 in retirement accounts, according to an analysis by the Economic Policy Institute, a nonpartisan think tank focused on the needs of low- and middle-income workers. Only about one in five families can boast $100,000 or more — still not much to last through decades of retirement.

And while you might assume these numbers are held down by young families just beginning to sock away funds, median retirement savings for families led by someone 55 to 61 years old is still just $17,000.

So if overall retirement savings are up, but most families have precious little to show for it, then who’s doing all the saving? The same people who are earning all the money — only more so.


Take families in the top fifth of the income ladder. They represent 20 percent of the US population, collect 63 percent of all income, and hold 74 percent of the retirement savings.

Now, consider their peers in the middle of the income ladder. They, too, represent 20 percent of the population, but they only get 10 percent of income and control a bare 5 percent of all retirement savings.

Dare to look any further down the ladder, and you find virtually no savings whatsoever.

Why should retirement savings be distributed this unevenly? It’s partly a consequence of the shift from old-style pension plans to 401(k)s and similar vehicles that allow people to put pretax dollars into investment accounts.

Pension plans promise a set payout at retirement, and they don’t require as much active involvement. With a 401(k), employees control contribution levels and make investment decisions; with a pension plan, the company mostly takes care of these decisions.

When pensions ruled the retirement world, they enrolled a more economically and racially diverse group of employees. 401(k)-style accounts are more widely available, but low- and middle-income workers don’t seem to be funding them aggressively.

To put some flesh on that reality, consider that about 60 percent of black families and 75 percent of Hispanic families don’t have retirement accounts.


Social Security: It’s not what it used to be

Most American families might have little in the way of retirement savings, but that doesn’t mean they’ll end up living in poverty. Social Security is there, with regular payments that amount to more than 40 percent of the peak income of middle-class families and more than 80 percent of the earnings of lower-income households, according to the Congressional Budget Office.

But Social Security has gotten less generous over time. Each new generation is asked to cover a little bit more of its own expenses. And those born after 1960 face a cut of a different kind. They won’t be eligible for full benefits until they turn 67, whereas earlier cohorts could count on them beginning at 65 or 66.

One perverse effect of raising the eligibility age is that it hurts poor people most. That’s because the poor don’t live as long as the rich; if they have to wait until 67 to start collecting benefits, they might not get as much back, proportionally, as wealthier seniors can.

As a consequence, today’s Social Security is actually less progressive than it used to be, feeding more benefits to long-living high-earners and fewer to early-dying low-earners. And that means it does less to curb inequality.

Most distressing, all this assumes that we prop up Social Security before the trust fund runs dry. Otherwise, the cuts will be deeper and far more damaging. Economically, this shouldn’t be too difficult. Even a modest payroll tax increase would go a long way, but it requires some hard-to-find political will.


The optimistic case: Retirees can keep working

If retirement savings are insufficient, and Social Security becomes less generous, today’s seniors still have one more option: Keep working.

There’s no law requiring people to retire. And something like 20 percent of today’s seniors rely on earned income to help cover their monthly expenses.

This is one reason seniors have actually seen their incomes go up in recent years. A lot of today’s seniors are relatively young, baby boomers just crossing the 65-year-old threshold. And they’re not ready to say goodbye to their working lives.

According to a survey from the nonpartisan Employee Benefit Research Institute, more and more people expect to go on working after 65. Many want to continue into their 70s.

Trouble is, stuff happens. And when you’re in your 60s or 70s, unexpected health issues can quickly derail any plans to keep the nose to the grindstone. Nearly 50 percent of people end up retiring earlier than planned, according to the institute. Know how many retire later than they expected? Around 5 percent.

So while retirees can certainly benefit from staying in the workforce, they can’t count on it. Odds are they will start drawing down their retirement savings long before they expect.

What can be done?

Small tweaks could make a big difference to the welfare of tomorrow’s retirees.

To begin with, the failures of the 401(k) era have to be faced head-on. That doesn’t mean going back to old-style pension plans — they, too, have big weaknesses, including locking people into their jobs. But the limitations of tax-advantaged retirement accounts have become abundantly clear: They disproportionately benefit the wealthy and barely ever reach those most in need of savings support.


One possible fix would be for more states to create publicly managed plans that could cap fees and attract workers whose firms don’t provide their own retirement options.

Perhaps the time has come, though, to stop trying to find a newer, better plan to help retirees. The simpler approach might be to strengthen Social Security. That includes not just shoring up the trust fund but also increasing payouts, particularly for low-income Americans.

A few years ago, this idea would have seemed quixotic — bucking a bipartisan consensus that entitlements like Social Security needed to be cut. But that version of Washington Beltway common sense has suddenly collapsed. And Democratic politicians like Elizabeth Warren, Bernie Sanders, and Hillary Clinton have all accepted the idea that Social Security should get bigger, not smaller.

And in a world of partisanship, rancor, and gridlock, the call to boost Social Security has one big advantage: It would be good for retirees, who are a potent political force. A plan that combined immediate benefits for today’s baby boomers with a long-term strategy for expanding benefits could potentially win support from baby boomers at the peak of their political interest. And that might make all the difference.

Evan Horowitz digs through data to find information that illuminates the policy issues facing Massachusetts and the United States. He can be reached at evan.horowitz@globe.com. Follow him on Twitter @GlobeHorowitz.