Mind the (Wealth) Gap

Slowly, surely, increased employment among non-white Americans, coupled with broader coverage under employer-sponsored, individual account retirement savings plans that deploy automatic features will, ultimately, reduce racial retirement savings and household wealth gaps.

Again, once more, we encounter the myth of widespread coverage of defined benefit pension plans (DB plans). This time, the myth is sensationalized by comparing disparate groups of workers and highlighting differences by race and ethnicity.¹ The author suggests you tweet the following:

• Just as the demographics of the labor market changed, the quality of retirement benefits fell, contributing to a widening racial wealth gap, and
• Retirement savings accounts are a poor substitute for DB pensions.

Neither statement is complete – making each less than fully accurate. A different author, writing just four days earlier, offers different statistics suggesting significant progress in retirement preparation.²

The Gap
Professor Weller positions the timing of improvement in workforce participation among non-white workers as a contributing factor in the wealth gap because today’s private-sector employer is less likely to offer access to a DB pension. Of course, where a plan sponsor offers a DB pension today, workers are eligible to accrue benefits based on the plan’s formula and vesting rules, regardless of race or ethnicity.

So, apparently, Professor Weller is arguing that lack of access to a DB pension for today’s workers, regardless of race or ethnicity, should be compared to the accrued and vested benefits of terminated vested and retired workers who once participated in a DB pension, or to today’s workers who once upon a time participated in a DB pension that was frozen or terminated.

All rewards are earned by workers. Retirement benefits are not a gift. Where an employer allocates a portion of the worker’s compensation to a retirement plan, savings, or DB pension, there is no dispute that those workers will be predisposed to accumulate greater wealth than those where 100% of compensation is received as wages.

However, Professor Weller’s assertion that: “… Retirement savings accounts are (always) a poor substitute for DB pensions. … “ is inaccurate.³

Here is a simple example. Professor Weller cites DB pension coverage in 1989. At that time, DB pensions typically included a 10-year vesting requirement (until Tax Reform Act of 1986 changes for plan years starting after December 31, 1988). Since the median tenure of American workers has consistently been less than five years for the past five decades, a super majority of workers who were covered in a DB pension prior to 1989 were not vested. Suggestions that we once had widespread DB coverage, where all plans were non-contributory, used a generous formula based on final average pay, offered immediate eligibility and vesting, early retirement subsidies, and post-retirement cost of living adjustments is a myth. For comparison, at that time, the typical vesting requirement for an individual account retirement savings plan was five years or less.

Here is a second example. Many DB pensions are underfunded - leading to curtailment of pension benefits even where a participant is vested.⁴

Professor Weller concludes that: “… Making those retirement benefits, especially retirement savings accounts, work a lot better than they do now will have to be second key step towards building wealth for nonwhite households. …”

We agree and PSCA annual survey data confirm there have been significant changes and improvements.⁵ Experience shows that individual account retirement savings plans can be as effective as a DB pension.⁶

Let’s Go to the Tape!
Andrew Biggs confirms that some of the data don’t support claims of an impending retirement crisis: “… The things that should be going up are going up, including the share of Americans with retirement plans, the size of our retirement-plan contributions, total retirement savings, retirees’ incomes, and retirees’ satisfaction with their financial security. And the things that should be going down — like poverty in old age and dependence on Social Security benefits — are going down. …”

He cites the following:

• From 1979 to 2016, average incomes for working-age households rose 64% above inflation. Over that same period, average household incomes for retirees grew 104% above inflation. Put another way, in 1979 the average retiree household’s income was equal to 73% of working-age households’ incomes. By 2016, retiree incomes were equal to 91% of working-age households’ incomes, despite retirees facing a lower cost of living, being more likely to have paid off their mortgages, and having smaller households to support. 
• From 1980 to 2016, Social Security benefits received by middle-income retiree households increased by about 50% above inflation, but their private retirement-plan benefits rose by over 150%. 
• From 1990 to 2012, the share of retirees with incomes below the poverty threshold plummeted from 9.1% to 6.9%. 
• Nearly 8 in 10 retirees confirm they have “enough money to live comfortably.” 
• In 2016, 75% of Americans age 65 or older reported having enough income to at least maintain their pre-retirement standard of living, versus only 61% of retirees in 1992. 
• Back in 1973, when participation in private-sector defined-benefit pensions peaked at just 39% of the workforce, total retirement plan assets were equal to 55% of total employee wages and salaries. Today, with 61% of private-sector workers participating in a retirement plan, total retirement savings have increased nearly seven-fold to 375% of employee wages. 

Racial and Ethnic Wealth Gaps
Professor Weller confirms his belief that DB pensions are superior because individual account retirement savings plan: “… rely on employers voluntarily offering them and workers voluntarily participating in them, they often fall short in helping workers get close to a secure retirement. Workers often do not participate in them, contribute too little to them, experience too much financial risks with them and withdraw too much from them during their working years. …”

That may have been true in the past, but not so much today. In fact, studies that look at individual account retirement savings plan behavior based on race show that the ever-increasing adoption of automatic features has started to “close the retirement savings gap.”⁷

¹C. Weller, How The Decline Of Pensions Furthered The Racial Wealth Gap, Forbes, 7/24/19, Accessed 7/26/19 at: https://www.forbes.com/sites/christianweller/2019/07/24/how-the-decline-...
²A. Biggs, Opinion: Fears of a retirement crisis are overblown — and these numbers prove it, MarketWatch, 7/21/19, Accessed 7/26/19 at: https://www.marketwatch.com/story/fears-of-a-retirement-crisis-are-overb...
³J. VanDerhei, How Much Would It Take? Achieving Retirement Income Equivalency Between Final-Average-Pay Defined Benefit Plan Accruals and Automatic Enrollment 401(k) Plans in the Private Sector, Employee Benefit Research Institute, 2/7/19, Accessed 7/26/19 at: https://www.ebri.org/docs/default-source/ebri-issue-brief/ebri_ib_473_db...
⁴J. Towarnicky, Make Retirement Plans Great Again? 12/11/18, Accessed 7/26/19 at: https://www.psca.org/blog_jack_2018_56 See also: I’m Dreaming of a … Well Funded Pension, 12/6/18, Accessed 7/26/19 at: https://www.psca.org/blog_jack_2018_55
⁵PSCA, 40 Years On, 401(k) Contributions Climb to Record Levels, 12/11/18, Accessed 7/26/19 at: https://www.psca.org/News_2018_61stAS See also: J. Towarnicky, What’s the Story, Part 1, 12/18/19, Accessed 7/26/19 at: https://www.psca.org/blog_jack_2018_58
⁶J. Towarnicky, Tomorrow’s Retirement, Alarming or Amazing? 4/26/19, Accessed 7/26/19 at: https://www.psca.org/blog_jack_2019_27 See also: Retirement in America - Individual Account Retirement Savings Plans ARE Good Enough! 7/5/18, Accessed 7/26/19 at: https://www.psca.org/blog_jack_2018_33 See also: DC Plans: Can Everybody Win? 10/20/17, Accessed 7/26/19 at: https://www.psca.org/blog_jack_2017_11
⁷J. Towarnicky, Financial Independence is the Greatest Civil Liberty! 04/10/19, Accessed 7/26/19 at: https://www.psca.org/blog_jack_2019_22