Stark And Growing Economic Inequality Fuels Retirement Insecurity

Today, the U.S. retirement infrastructure largely is based upon individuals saving on their own for retirement during their working lives. For this type of system to work, Americans need to accrue a large amount savings by the time they retire. Unfortunately, most Americans aren’t amassing sufficient assets to maintain their current standard of living in retirement, while the share of financial assets among the wealthiest continues to increase.

Let’s look at Baby Boomers. Millions are retiring each year from the U.S. labor force, but the median amount of financial assets owned by Boomers is less than $50,000. This translates into about $160 a month in retirement income, which clearly won’t cover the bills.

A big driver of the problem is persistent financial asset inequality. Ownership of financial assets is highly concentrated among individuals with a high net worth. Those with the most financial assets continue to grow wealthier as the middle class falls further behind. This is the case not just for Baby Boomers, but also for Generation X and Millennials. 

A new analysis of the Federal Reserve’s Survey of Consumer Finances by the National Institute on Retirement Security details just how stark economic inequality is in America. The analysis calculates that in 2019, the bottom 50 percent of Baby Boomers owned a meager two percent of financial assets among that generation. Meanwhile, the top five percent of Boomers by net worth owned 58 percent of Baby Boomer financial assets.

The same economic inequality holds true for Generation X. The bottom fifty percent of Gen Xers held only three percent of assets for this cohort. Yet the top five percent have amassed 58 percent of the financial assets. 

Millennials were somewhat more equitable, with the top five percent owning 39 percent of financial assets. The bottom 50 percent owned eight percent of total assets. Millennials are a relatively young cohort, though, and inequality tends to increase as a cohort moves through its lifecycle.

The new analysis, Stark Inequality, also examines the role of race in financial asset ownership. Boomer, Gen X, and Millennial white households own the vast majority of financial assets, while Black and Hispanic households hold only a sliver.

In 2019, white households in all three generations owned three-quarters or more of their generation’s financial assets. Black and Hispanic households each owned less than ten percent of financial assets. This economic and racial disparity can be seen in the discrepancy between mean and median financial assets for each group. For all Millennials in 2019, the mean amount of financial assets owned was $49,999, but the median was only $10,300. Factoring in race is even more revealing, as the table below shows.

For white Millennials in 2019, mean financial assets were $63,318, while median assets were $16,050. For Black Millennials, the mean was $20,780 and the median was only $4,800, lower than the respective numbers for Millennials as a whole. Similarly for Hispanic Millennials, the mean was $21,783 while the median was $3,620. Similar discrepancies exist for Generation X and the Baby Boomers.

The reality is that most working Americans will continue to struggle to achieve retirement security because the ownership of financial assets is highly concentrated among the wealthiest.

Further complicating retirement is the fact that about half of workers don’t even have workplace retirement savings plans, which make it so much easier and frictionless to save. A lack of a retirement plan creates hurdles that limit a worker’s ability to invest and own financial assets, evidenced by the fact that about half of Americans do not own stocks. Broadening access to retirement plans would increase Americans’ ownership of financial assets and bring millions of workers into investment markets to help address financial asset inequality. 

Given this stark and growing economic inequality, what would improve Americans’ ability to have a financially secure retirement?

A major step in the right direction would be increasing access to workplace retirement savings plans that will enable more workers to own financial assets. Fortunately, some states are establishing state-facilitated retirement savings plans like CalSavers, Illinois Secure Choice, and OregonSaves. As of June 30, there were more than $276 million in assets just in the programs in these three states. Virginia enacted legislation in 2021 to establish an auto-IRA savings program and the New York state legislature has passed legislation that would amend their law to switch from a voluntary to a mandatory auto-IRA program statewide.

The private sector also is innovating with Multiple Employer Plans (MEPs) and Pooled Employer Plans (PEPs), which may increase access for employees at small businesses. The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 created PEPs and made it easier to establish a MEP. Both types of plans allow small employers to join together to offer a single retirement plan to their employees. These plans have the potential to enable small employers in a single plan to reach a scale that would give them the purchasing power to negotiate better services and lower fees for their retirement plan.

Finally, reforming tax incentives for retirement savings could bolster retirement security for lower and middle income families. Most of the $1 trillion in 401(k) tax incentives between 2020-2024 will go to those who have been saving. And given recent changes to the tax code, there is relatively little benefit to those least likely to be on track when it comes to retirement savings. The federal Saver’s Credit, which has the potential to help lower-income workers accrue retirement savings, is underutilized and suffers from several design flaws. Reforming and expanding the Saver’s Credit and promoting it more extensively could give a real boost to savings for workers who currently receive little to no tax benefit from saving for retirement.

Indeed, financial assets are not the same as retirement savings. But the current retirement system depends upon the individual ownership of stocks, bonds, and other assets to finance retirement. Without broader participation in user-friendly retirement systems, it will be enormously difficult for the bottom three-quarters of Americans to maintain their standard of living in retirement when they own a meager 12 percent of all financial assets.

With smart policy solutions, we can do better.