Washington Post, October 14, 2007: Low-Paid Means At Risk in Retirement

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By Martha M. Hamilton

The rich are different from you and me. They have more money in retirement.

And it may be that the gap between those who have lots of money for retirement and those of us with less will grow. In part, that’s because the rich are getting richer.

But there’s another element: Workers are depending on a system that may provide low- and moderate-income people with less money for their retirement.

“When people look out the window right now, the people retiring look pretty comfortable,” said Alicia H. Munnell, director of the Center for Retirement Research at Boston College. “We’re still in the golden age of retirement.”

More workers retire with traditional pensions today than will in the future. Some are even retiring with both traditional plans and 401(k)s or some other type of retirement savings on top of their Social Security. That combination can add up to a comfortable old age, especially if you also have retiree health insurance.

Even so, not everyone in the golden age of retirement is raking in the gold: In 2006, half of all Americans age 65 and older had annual incomes of less than $16,890, according to the Congressional Research Service. A quarter of all retirees depend on Social Security for 100 percent of their income.

While the traditional pension plan has its drawbacks, it tends to cover pretty much everyone at the workplace, including lower-paid workers. Now that type of plan is disappearing. In its place come defined contribution plans like the 401(k). But workers don’t have to participate in these plans.

And guess which workers most often choose not to put aside money for retirement? Lower-income workers often struggle just to meet the mortgage or pay the rent. Even if they do have money to save, the incentives are not as enticing for them as for higher-income workers, said Christian E. Weller, senior economist at the Center for American Progress. Because 401(k) plans reduce taxable income, a worker in top tax bracket gets 35 cents for every dollar saved. A lower-paid worker with a marginal tax rate of 10 percent gets 10 cents.

In 2001, only 13.7 percent of workers who earned $20,000 or less participated in 401(k) plans, compared with 67.1 percent of workers who earned more than $100,000, according to an analysis by Munnell and Annika Sunden, authors of “Coming Up Short: The Challenge of 401(k) Plans,” published by Brookings Institution Press.

The income gap in the United States has been growing since the 1970s. While those disparities are likely to translate into a wider gap in retirement, it should be offset to some extent by Social Security’s equalizing effect on retirement income.

Although changes need to be made to Social Security, it’s important to recognize how it has succeeded in reducing poverty among the elderly. One in three people age 65 and older was in poverty in 1960, according to the Congressional Research Service. Today, it’s less than one in 10. Social Security replaces a higher percentage of lower earning workers’ incomes than it does for higher-paid workers, which is one of its strengths.

Even so, poverty remains high for women, minorities, the less-educated and people over 80, the Congressional Research Service points out. Three-quarters of the elderly poor are women.

Lest you think this is an artifact of an earlier age when fewer women worked and is unlikely to include you or anyone you know and love, you should understand that women retiring in the future are still likely to be at a disadvantage, according to Timothy M. Smeeding, director of the Center for Policy Research at Syracuse University.

The proportion of female beneficiaries who receive benefits based on only their own earnings (as opposed to the earnings of their husbands) is expected to rise from 37 percent in 2000 to 56 percent in 2030. Even so, Smeeding notes, women are still more likely than men to give up their paychecks to take care of children or to care for aging parents, grandparents or siblings. They’re also more likely to move or change careers to accommodate their husbands’ career choices and to have their retirement timing determined by their husbands’ retirement dates. All those choices reduce retirement income.

Married women are the least likely to be poor, but the percentage of women who are married is falling, and more women are divorced or having families outside of marriage. Put it all together, and it spells a problem.

Some of the recent initiatives to make sure that more people have more money in retirement involve improving the 401(k) and other savings plans. Changes in the law have made it easier for employers to provide automatic enrollment in the plans — requiring workers to opt out rather than opt in, and to provide better investment advice and default investment choices. The theory is that the combination will increase participation in the plans and help participants to accrue more money for retirement.

Along those same lines, Sen. Hillary Rodham Clinton (D-N.Y.), in her campaign for president, proposed to spend $20 billion to $25 billion a year to create something 401(k)-like called an American Retirement Account, which would allow a worker without access to a workplace savings plan to save $5,000 a year with federal matching funds for low- and middle-income earners.

The changes so far in 401(k) plans have been good, but they may not be enough. For example, a still-unaddressed problem with retirement savings plans is that participants can cash out when they leave their jobs. That’s the flip side of one of the benefits of defined contribution retirement savings plans: They are portable and don’t require you to stay on the job for 30 years to maximize benefits. But often when people leave, they take the money and it evaporates.

And, of course, some people won’t save enough or invest wisely enough no matter what.

“We need another component to the retirement system,” Munnell said, a sentiment echoed by other academics and specialists in retirement financing. But the first step is to protect Social Security’s ability to do what it does now, which is to provide more economic security for the poorest retirees.

How do you feel about choices in your 401(k) plan? Are they too many or too few? If you’re willing to share your thoughts on the record, e-mail me

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