Personal Finance

Retirement incomes will become more unequal, study finds  

Key Points
  • Rising wage inequality will follow Americans long after they stop bringing home a paycheck. 
  • Income for retirees is expected to increase for the wealthy, and fall for low-income earners. 
Jose Luis Pelaez, Inc. | Getty Images

If income inequality continues to grow, so too will the gap between wealthy and struggling retirees.

That's the takeaway from a new report by the Urban Institute, a progressive think tank in Washington, D.C., and funded by the Department of Labor, which analyzed how rising inequality will shape the landscape of American retirement.

"People have this perception that with Social Security, retirement income is more protected from earnings inequality, when in fact that's not the case," said Damir Cosic, a research associate in the Income and Benefits Policy Center at the Urban Institute.

Social Security benefits, along with defined contribution plans and other retirement savings options, generally are tied to previous earnings, which are increasingly a story of imbalance.

People who fall near the bottom of income distribution, after factoring in inflation, have actually seen their wages decline over the past few decades, according to the institute. Meanwhile, the share of earnings going to the top 0.1 percent swelled by more than 400 percent between 1971 and 2001.

Things are likely to get even worse if current forces persist.
Damir Cosic
research associate, Income and Benefits Policy Center at the Urban Institute

The researchers simulated an experiment to understand how inequity in earnings reverberates into retirement.

A lot, it turns out.

People aged 67 to 75 in the top fifth of the income distribution will see their income increase by 3 percent in 2045, 5 percent in 2065 and 7 percent in 2085, the researchers found.

On the other hand, those aged 67 to 75 in the bottom fifth of the income distribution will see their income fall by 3 percent in 2045, 6 percent in 2065 and 13 percent in 2085.

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Many retirees today are already finding it hard to get by. The average monthly Social Security payment is $1,404, and more than 40 percent of single adults receive more than 90 percent of their income from that check, according to the government.

Meanwhile, debt among older people is on the rise. In 2016, the average debt in families in which the head of the household is age 75 or older was $36,757. That is up from $30,288 in 2010, according to a recent report by the nonprofit Employee Benefit Research Institute in Washington.

The actual effects of increasing inequality on retirement are likely to be even higher than the institute's estimates, Cosic said, because he and his colleagues accounted for only one of the drivers of the divide: the so-called education premium, the fact that degrees are more in demand, while people with less schooling are seeing their paychecks shrink.

To be sure, that effect is severe. In 2065, people who fall between the ages of 67 and 75 who only have a high school degree will have seen their income fall by 8 percentage points, compared with a 16 percentage point increase for those who completed college.

But in addition to employers' demand for high-skilled workers, income inequality is projected to worsen under globalization, rapid technological advances, automation and the loss of employees' bargaining power, according to Cosic. Therefore, he said, "things are likely to get even worse if current forces persist."

Over the researchers' simulation period, the average retirement income grew only half as fast as the average lifetime earnings.

That that income would get reduced further is striking.
Damir Cosic
research associate, Income and Benefits Policy Center at the Urban Institute

That's in part because they forecast Medicare premiums will steeply increase. In addition, they estimate the average income from defined benefit pensions will drop substantially, since the share of employers that offer such plans is dwindling.

Cosic said these findings are a warning sign, as low-income people, before and after retirement, are already suffering.

"That that income would get reduced further is striking," he said.

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