Shift from pensions to 401(k) plans mirrors wealth shift to top percentile

September 13, 2021
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Although income inequality has been a hot topic of discussion in recent years, there also is significant inequality in the ownership of financial assets. This inequality can reduce retirement security for certain groups of people, according to a new report from the National Institute on Retirement Security.

Related: Access, participation and income: Retirement plan coverage in the U.S.

The report details two shifts that have occurred: that of the larger societal shift where more financial assets are held by a smaller group of people, and the shift in the retirement industry from a system of defined benefit pensions to that of defined contribution plans.

“These shifts and the resulting increase in economic inequality have weakened retirement security for the middle class,” the report says.

Over the past 40 years, the United States has shifted from a retirement system built around the collective pooling of assets in pension plans to one focused on individual ownership of assets in 401(k)s. This fundamental change mirrors larger societal trends that have placed more of the burden of addressing life’s challenges on the individual.

“A retirement system built around the individual ownership of financial assets cannot successfully provide retirement security if the bottom half of near-retirees only owns 2 to 3 percent of their generation’s financial assets,” the report said. “Furthermore, this system of individual retirement savings amplifies the broader societal trends that are pushing more income and wealth toward the top.”

Researchers analyzed data from the Federal Reserve’s Survey of Consumer Finances to examine financial asset ownership by net worth, generation and race. Among the key findings:

Inequality in the ownership of financial assets both persists and deepens over time. The top 5 percent of baby boomers by net worth owned a greater percentage of that generation’s financial assets in 2019 (58 percent) than in 2004 (52 percent).

Inequality in the ownership of financial assets also is consistent across generations. In 2019, the top 25 percent by net worth of millennials, Generation X and baby boomers owned three-quarters or more of their generation’s financial assets.

Financial asset ownership also is highly concentrated among white households. Again, in 2019, white households in all three generations owned three-quarters or more of their generation’s financial assets. Ownership is especially concentrated among white households in the top 25 percent of net worth.

Both mean and median financial assets were significantly higher for white households in 2019 than for Black or Hispanic households.

“The ownership of financial assets in the United States is vastly unequal,” the report concluded. “Ownership is highly concentrated among those at the top of net worth and among white households. This stark inequality undermines the premise of an approach to retirement savings based on the individual ownership of assets within various employer plans or tax structures.

“Thus, the United States has seen retirement security for many working families deteriorate in recent decades as collective sources of retirement income, such as Social Security and pensions, have been allowed to weaken, while defined contribution plans have dominated the private sector.”

Researchers identified several possible solutions to the problem: expand Social Security, protect pension plans, ensure all workers have access to a retirement plan.

It adds, “And the tax treatment of retirement savings must be reformed to encourage saving regardless of income. Accomplishing these reforms would lead to more secure retirements and would promote a strong, broad middle class.”