This blog post is part two in a series analyzing the recently released Survey of Consumer Finances from the Federal Reserve. The SCF is a triennial survey of American families that offers insights into income, wealth, debt, and savings over time. Today’s post explores the data on retirement account ownership.
Saving adequately for retirement helps pave the road to a comfortable and financially secure future. As part one of this series noted, the 2010 Survey of Consumer Finances (SCF) data show that in 2010, Americans prioritized the need for liquidity over saving for retirement for the first time since 2001. While precautionary savings allow families to plan for the short and mid-term, saving for retirement remains a critical long-term savings need. Indeed, despite the drop from first place, SCF data show that retirement ranked a close second in 2010.
While there are no policies in place to support precautionary savings at the federal level, the U.S. tax code is brimming with mechanisms that support retirement savings goals. However, these benefits are delivered in a way that overwhelmingly favor higher-income earners. As our Assets Report infographic shows, higher income people (those in the top income quintile) receive 80% of the tax benefits for 401(k) type plans. Low-income people don’t benefit from tax-based incentives to sock money away for retirement because of their lower marginal tax rates. Even if their workplaces offer a retirement savings plan (and many employers of low-wage workers do not offer such plans), they are less likely to have the disposable income to participate in a meaningful way. Combine these factors with the income volatility and uncertainty of a recession, and saving for retirement becomes a more distant goal than ever. The graph below illustrates the small percentage of people at the bottom of the economic ladder who have retirement savings accounts.
While nearly 100% of top income earners own retirement savings accounts to count on in old age, only about 11% of people in the lowest 20% of income earners have one. A disparity exists along racial lines too: 58.1% of white Americans had a retirement account in 2010 compared with just 34.4% Americans of color.
The value of retirement accounts (for those that own one at all) also vary widely. For example, the lowest 20% of income earners had a median of $8,000 saved in retirement accounts, while the highest 10% of earners had a median of $277,000 stashed away. White Americans had a median retirement account value over double that of Americans of color ($54,000 vs. $25,000 in 2010, respectively).
While these disparities point to broader structural inequalities that need to be addressed in a multitude of ways, there are some concrete ways to restructure the retirement savings system to better meet the needs of people of color, low-income workers, and others who currently lack access to the benefits of retirement account ownership.
A universal 401(k) system would be one great place to start. Creating a workplace retirement savings system that includes all workers would make substantial progress toward opening doors to saving and asset building for lower-income people. A version of this idea, or the "Automatic IRA," has been circulated in various iterations before Congress for over a decade. The Auto-IRA model would require employers that do not currently offer a retirement savings plan to automatically enroll their employees, thereby dramatically expanding the number of people with access to such an account. In a paper from last fall entitled Facing Up to the Retirement Savings Deficit: From 401(k)s to Universal and Automatic Accounts, Michael Calabrese argued that the Auto-IRA proposal does not go far enough to serve the bottom 60% of income earners. Accordingly, he offers several policy ideas to strengthen and improve the concept. These ideas include a progressive match for low-income earners, the inclusion of currently-unserved employees, a portable account structure that workers can carry with them to new jobs over a lifetime, an opportunity for employer contributions, and robust default settings to support adequate savings over time.
Ultimately, the SCF data show that many Americans see the importance of saving for retirement, but that a variety of barriers related to income, race, educational attainment, and access are impeding the ability of many to save for their retirement. A universal account structure that recognizes and addresses these barriers would be a good place to start. Living comfortably in old age should not be something only the rich can expect.