Retirement Inequality – James Kwak – The Baseline Scenario

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The Economic Policy Institute put out a series of charts detailing inequality in retirement savings across several different demographic characteristics. The most obvious picture is that the shift to 401(k) plans has produced vast increases in retirement inequality across income groups.

Here’s one:

 

And that’s not just a product of increasing income inequality. As a percentage of income, the retirement savings gap has been increasing over time:

(Don’t be encouraged by the fact that all the lines are trending upward: that’s simply defined contribution plans, which are counted as retirement savings accounts, replacing defined benefit plans.)

These trends are entirely predictable. The most important determinant of lifetime retirement savings accumulation is the amount you are able to save during your working years. Someone who makes $200,000 can’t just save five times as much as someone making $40,000. In today’s world, the person making $40,000 often can’t afford to save anything, while the person making $200,000 can save the full $17,500 tax-deductible amount (and she is more likely to have an employer match as well). In the process, of course, the high-income person is also claiming about $6,000 in cash subsidies from federal and state governments, while the low-income person gets nothing.

Who would ever have designed such a system? Oh, of course: the people making a lot of money who can maximize their tax deductions. (And the asset management firms that skim a percentage of everyone’s money off the top.)