According to a recent study from the Government Accountability Office, there has been an increase in the disparity between those who have sufficient funds for retirement and those who do not have the funds for retirement.
According to the findings of the study, the median retirement account balance for high-income families in 2019 was $605,000, which was nine times higher than the amount for middle-income households, which was $64,300.
This disparity is “significantly greater” than it was in 2007, when high-income families had a median retirement account balance that was around four times higher than middle-income households—aapproximately $333,000, while middle-income households had a total of $86,800, respectively.
In the meantime, the disparity between the median balances of families with high incomes and those with low incomes remained basically the same throughout the last decade, coming in at 15 times in 2019 and 16 times in 2007.
In terms of money, those with the greatest earnings brought in a median of almost $282,000, while those in the group with the lowest earnings made approximately $19,100. The emphasis of the study was on households headed by people aged 51 to 64.
According to the research, many of the differences may be attributed to differences in race and wealth.
When compared to homes of all other races, white households were shown to have a higher likelihood of having retirement account balances (63%), as opposed to only 41%. Between 2007 and 2019, white families also had continuously much larger median balances on an annual basis.
It should not come as a surprise that a correlation was found between greater salaries and higher rates of retirement savings. Low-income families contributed around 5% of their income, which was approximately $1,500, while high-income households contributed approximately 8% of their pay, which was almost $10,000. Employer contributions were considerably higher for families with high incomes as opposed to those with low incomes, with a median of $5,000 vs. $1,300, respectively.
There are more aspects of the system that all play a part in the discrepancy. There is a significant correlation between a household’s level of income and the availability of a workplace retirement savings plan.
According to the GAO’s analysis, people who have retirement plans are also more likely to benefit from the tax breaks associated with those plans. When compared to families with higher incomes, households with lower incomes are more likely to take early withdrawals from their retirement accounts and, as a result, pay greater taxes.
Some legislators in Washington, DC, have taken exception to the fact that rich investors are using Roth individual retirement plans as a tax avoidance strategy.
Sen. Bernie Sanders, an independent from Vermont, issued the following statement in response to the GAO report: “At a time when half of older Americans have no retirement savings at all, it is unacceptable that taxpayers are forced to spend billions of dollars subsidising the retirement accounts of the wealthiest people in America.” Sanders’s comments came in the form of a statement.
7 explanations for the inequalities in retirement savings
According to the findings of the study, the discrepancy in retirement savings may also be caused by a number of other reasons.
Employment tenure: An individual who is the head of their family and has spent an extra 10 years working at their longest employment is associated with a retirement account balance that is 37% higher. According to the findings of the study, the correlation between length of employment and amount saved is twice as strong for families with a moderate income as it is for households with a high income.
College education: When compared with heads of household who never attended college, those with at least some college education had retirement account balances that were 63% higher.
Children: When compared with homes of a comparable kind that did not have children, those with two children had balances that were around 40 percent lower.
When it comes to asset allocation, families with higher incomes tend to have more money invested in equities, which results in bigger long-term balance growth. When compared to families with lower incomes, those with higher incomes had a median proportion of their retirement accounts invested in equities that was 2.5 times greater.
Withdrawals: The study found that between 2016 and 2018, more than twice as many low-income households as high-income households took all of their money out of their retirement accounts when they left a workplace. This occurred between low-income households and high-income households. These employees have a tendency to cash out in order to meet expenditures related to mortgage payments, health insurance, or bad health; nevertheless, these withdrawals tend to erode assets and, as a result, impede the development of accounts over the long run.
Divorce: According to the study, low-income families have a much higher prevalence of divorce, widowhood, and separation, all of which are statuses that are usually linked with lower retirement account balances.
Unemployment: Households with lower incomes have a greater propensity to endure unemployment on a more regular basis, which results in smaller retirement balances. According to the findings of the study, however, even families with high incomes had a greater propensity to have their retirement account balances decrease during times of high unemployment.
The term “baby steps” may be used to generate wealth, although change may be more effective.
According to Teresa Ghilarducci, a labour economist and professor of economics at The New School for Social Research, low-income employees may take “baby steps to build some retirement wealth.”
“Never borrow from or liquidate an IRA or 401(k); save the maximum in an employer plan if you are among the lucky few who have one; open your own IRA with low fees and a 70 stock/30 bond portfolio,” she said. “Save the maximum in an employer plan if you are among the lucky few who have one.”
To put those who save for retirement on an equal footing, she emphasised that the most significant improvements must come from changes in policy.
“We will never have significant closure of the retirement wealth gap without bold reform for much higher Social Security benefits at the bottom and universal workplace savings plans,” said Ghilarducci. “We will never have significant closure of the retirement wealth gap in our lifetimes.”