NEW YORK – A report by the Washington-based National Institute on Retirement Security that found a significant racial disparity in retirement savings among working-age households appears to be setting the stage for introducing “income redistribution” concepts into the next round of debate over cutting Social Security benefits.
What appears to be taking shape in Washington is an argument that 401(k) plans are a tax advantage enjoyed disproportionately by the rich. Meanwhile, cuts contemplated to Social Security to reduce future unfunded federal budget liabilities would be disproportionately disadvantageous to the poor.
“A large majority of Black and Latino working-age households – 62 percent and 69 percent respectively, do not own assets in a retirement account, compared to 37 percent of white households,” according “Race and Retirement Insecurity in the United States,” a paper published this week by Nari Rhee, Ph.D., for the National Institute on Retirement Security.
While emerging research on retirement savings has not resulted in calls to curtail 401(k) plans, the argument is not out of the question in a political environment in which economic outcomes are increasingly judged for their racial or class fairness
WND has reported the federal government, with continuing Obama administration annual budget deficits in the range of $1 trillion, have contemplated forcing holders of tax-qualified retirement insutruments – including 401(k)s, IRAs, and annuities – to invest a portion of their retirement savings in U.S. government Treasury bonds.
In September, WND reported that cash-strapped Poland confiscated half of its citizens pension funds by requiring pensioners to transfer approximately half their retirement savings to a state-guaranteed, government-run pension fund.
Poland’s move followed a similar move by the Mediterranean island-nation of Cyprus in March when the government confiscated 10 percent of all bank accounts. Cyprus sought to raise 6 billion euros to meet a condition set by international bankers, including the International Monetary Fund as a condition of finalizing a proposed Eurozone bailout.
In November 2012, WND reported the Obama administration was exploring a creative way to finance continuing trillion-dollar annual federal budget deficits by forcing private citizens holding IRA and 401(k) accounts to buy Treasury bonds.
The report by the Washington-based National Institute on Retirement Security noted:
- Three of four African-American households and four of five Latino households age 25-64 have less than $10,000 in retirement savings, compared to one of two white households:
- Among near-retirees, the per-household average savings balance among African American, Latino and Asian households ($30,000) is one-forth that of white households ($120,000); and
- Across age groups, African American, Latino and Asian households with at least one earner are half as likely as white households to have retirement savings equal to or greater than their annual income. Just 19 percent of African American, Latino and Asian households have at least one earner with savings equal to or greater than annual income., compared to 41 percent of white households.
Despite stressing racial differences, the report concluded Americans of all races are facing a retirement crisis.
“All racial groups are inadequately prepared, and the majority of households in every racial group face a large shortfall in retirement assets compared to what they will need in order to maintain their lifestyle, or even meet basic expenses,” Rhee wrote.
“For instance, while whites have fared significantly better than other groups in terms of access to employer-sponsored retirement benefits and overall retirement savings, the median account balance of $29,000 for near-retirees represents a tiny fraction of the 8-11 times annual income that some financial experts recommend in order to maintain their standard of living.”
Still, the National Institute on Retirement Security report concluded the retirement crisis was particularly severe for “households of color” headed by African-Americans, Asians and Latinos.
The report ends with a plea to restore planned future cuts in Social Security benefits designed to increase the age when benefits may be claimed. Instead, Social Security benefits should be increased, the report urges, especially because of the retirement-income inequality faced by minority households.
“The wide racial gap in retirement savings is part and parcel of the broader problem of racial inequality in household wealth in the United States,” Rhee wrote. “While there is a significant earnings and income gap between people of color and whites, the wealth gap is even wider – and growing. In turn, the growing racial divide in retirement wealth contributes to worsening inequality in overall household wealth. With little else to depend on besides Social Security when they retire, people of color are especially vulnerable to economic hardship and reliance on public assistance in old age.”
Disappearance of ‘defined benefit’ plans
Leftist economic analysts focused on the racial equality of retirement savings have reason to be concerned about the demise of defined contribution retirement plans in America.
The New York Times report of the National Institute on Retirement Security study stressed that employers nationwide have been moving in the past few years from plans that pay fixed retirement benefits to 401(k)-style retirement plans in which employees generally assume the risk.
“Such public employee pensions, which typically pay a fixed benefit for life, have been of particular help to African Americans, who make up a disproportionate share of government workers,” Michael A. Fletcher wrote in the New York Times. “Similarly, trimming retirement benefits will disproportionately hurt the retirement prospects of black workers, even as they struggle with lower housing values and homeownership rates than whites.”
WND reported last week a federal bankruptcy judge ruled Detroit can proceed to negotiate reductions in city worker pensions since federal bankruptcy law trumps state constitution provisions that were designed to prevent the pensions of municipal employees from being cut in a Chapter 9 filing.
Increasingly, the political left is spinning the available economic data to attack 401(k) plans, known generally as “defined contribution” plans, because the “fixed” payment includes the amount contributed, not the amount of retirement benefits paid, as has traditionally been the case with “defined benefit” plans.
A booming U.S. retirement savings market
Concerns about racial inequality have also intensified with an acknowledgment that retirement savings in the U.S. are at an all time high, largely because of the increase of 401(k) plans and the bull market in stocks taking the New York Stock Exchange to over 16,000 recently.
The Investment Company Institute, a trade organization generally representing mutual funds, together with the American Benefits Council and the American Council of Life Insurers, reported this month that Americans currently have a record amount of money saved for retirement of $20.9 trillion in total, not including Social Security benefits.
The study found that in 1975, 21 percent of retirees, including former employees and their spouses, were receiving income from retirement plans sponsored by a private employer. Among retirees with private-sector retirement plan income, the median annual income per person in 1975, expressed in 2012 dollars, was $4,800, while comparable figures for 2012 showed 32 percent of retirees were receiving income from private-sector retirement plans, when the median annual income was about $6,300.
The study emphasized that Social Security forms a strong foundation for a “pyramid” of retirement resources, with higher income-replacement rates for lower-earning households. Social Security replaces 70 percent of lifetime earnings for the lowest-income quintile, compared to 47 percent in the second quintile.
In a study by the left-leaning Economic Policy Institute earlier this year titled “Retirement Inequality Chartbook: How the 401(k) revolution created a few big winners and many losers,” Monique Morrissey, an economist with the group, and Natalie Sabadish, a research assistant, argued 401(k) programs have contributed to retirement-income inequality in the U.S.
“Retirement-income inequality has grown in part because most 401(k) participants are required to contribute to these plans in order to participate, whereas workers are automatically enrolled in defined-benefit pensions and, in the private sector, are not required to contribute to these plans,” Morrissey and Sabadish wrote.
The authors said that, therefore, “higher-income workers are much more likely to participate in defined-contribution plans.’
“In addition, higher-income workers have more disposable income and a higher investment-risk tolerance, receive larger tax breaks, and are more likely to work for employers that provide generous matches. Thus, even if participation had not grown more unequal, disparities in retirement preparedness would have grown with the shift from defined-benefit to defined-contribution retirement plans.”
Morrissey and Sabadish concluded with a plea to retain Social Security as a means of helping workers harmed by the perceived unfairness of 401(k) plans.
“The existence of a retirement system that does not work for most workers underscores the importance of preserving and strengthening Social Security, defending defined-benefit pensions for workers who have them, and seeking solutions for those who do not,” Morrissey and Sabadish said.