Middle Americans' Retirement Wealth Fell as Stock Market Soared, New Study Reveals Boom a Retirement Bust for All but the Richest; Next Retirees More Likely than Predecessors to Live in Poverty
A groundbreaking new study holds troubling news for millions of Americans now nearing retirement age. Retirement Insecurity: The Income Shortfalls Awaiting the Soon-to-Retire shows that despite the recent unprecedented stock market boom and rapid proliferation of 401(k) retirement plans, typical Americans now facing retirement will have to tighten their belts harder than previous retirees. More than 40% of households headed by someone between the ages of 47 and 64 will not be able to replace even half of their pre-retirement income once they stop working. Nearly 20% will have retirement income below the poverty line.
Retirement Insecurity, by New York University economist and wealth expert Edward N. Wolff and published today by the Economic Policy Institute, uses the most recent data to examine changes in Americans’ retirement wealth during the 1980s and ‘90s and finds that more retired Americans will have less to live on.
"In terms of retirement investment, what should have been the best of times turns into something closer to the worst of times when you look closely at what really happened to retirement wealth," explained Wolff. "In 1998, every group of near-retirees except those at the very top lost ground compared with their counterparts in 1983. The contraction of traditional defined benefit pension plans and their replacement by defined contribution plans appears to have helped rich, older Americans but hurt a large group of lower-income Americans."
Senator Jon Corzine, who took part in the news conference releasing the study, said, "As this study demonstrates, millions of Americans are ill-prepared for retirement. The study shows that America's seniors cannot afford the deep cuts in guaranteed Social Security benefits that President Bush's Social Security commission has proposed."
"By focusing only on Social Security, we’ve been trying to fix the part of the retirement system that’s not broken," said EPI President Jeff Faux. "The way we now go about providing for retirement just isn’t working for middle- and low-income Americans. It’s time to stop talking about shifting Social Security money to private accounts and start talking about how we can make sure that working Americans will have adequate pensions that will enable them to live decently in retirement."
The study’s specific findings include:
Living on less than half: Between 1989 and 1998, the share of households whose projected retirement income is less than half of their pre-retirement income rose sharply from a 29.9% share to 42.5%.
Worse news for African Americans and Hispanics: Among these households, the percentage that will have to live on less than half of their pre-retirement income shot up even higher, to 52.7% in 1998.
The shrinking middle: For households at the median, retirement wealth declined by 11% between 1983 and 1998.
Growing likelihood of poverty: The share of households facing the prospect of retirement income below the poverty line grew from 17.2% in 1989 to 18.5% in 1998.
Richest are the only winners: Only the very richest pre-retirees – those with net worth of $1 million and above – saw this wealth increasing between 1983 and 1998. All other wealth classes, including those with net worth between $500,000 and $999,999 are now in a weaker position heading toward retirement than their predecessors were in 1983.
Losing ground: For all groups of pre-retirees with combined retirement wealth of $999,999 or less, that wealth has shrunk between 11% and 32% since 1983.
Pension coverage stagnant: The share of near-retirement households with any pension coverage – whether traditional pension plans or defined contribution plans like 401(k)s – remained almost unchanged from 1983 to 1998, growing just 3.5 points to 73.7% coverage in 1998.
Social Security coverage expanded: The single bright spot for the one-quarter of Americans without private pension coverage of any kind is that Social Security coverage became virtually universal, rising from 82.4% in 1983 to 98.4% in 1998. The downward trend in retirement adequacy for Americans in the middle and below has gone unnoticed until now because of a tendency to look at average rather than median retirement wealth. While the median has been dropping, the average has been rising – fueled by a growing gap between the rich and the middle. Thus, the rising average provides a false picture that fails to reflect the growing unequal distribution of retirement wealth.
"The report reminds us that what is a serious problem for most Americans is a potential crisis for African Americans. Private pension wealth for African American households stands at 45 percent of whites, while African American social security wealth stands at 59 percent of whites, for people 47 years and older. The high value of social security wealth compared to the income of African Americans, which is 51 percent of white income for people 47 years and older, confirms the progressive job that social security does, compared to the disparity in private pensions. So, to help African Americans close the wealth gap, we must work on disparities in private pensions," said William Spriggs, an economist who is the Director of the National Urban League Institute for Opportunity and Equality.
"The huge growth in wealth for the very wealthy has, until this study, masked what has really been happening to retirement nest eggs for most Americans," said Christian Weller, an EPI economist who studies retirement and Social Security. "We need to take a fresh look at what we are doing to strengthen and expand pension coverage or millions of Americans will pay the price for our neglect."