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Think Income Inequality Is Bad? Retirement Inequality May Be Worse.

The savings gap is a looming crisis, and states aren’t sure how to help.

retirement savings
For years, salon owner Luke Huffstutter, of Portland, Ore., wanted to offer his employees a way to save for retirement. Costs  were too steep for the small company, though, and few employees took the initiative to set up 401(k) plans on their own.

But last summer, Oregon launched a retirement savings program that automatically enrolls employees in Roth IRAs, the first such state-sponsored program in the nation. Huffstutter signed up, and most of his 38 employees are now enrolled. “When we made it easy, they all jumped on board,” Huffstutter says. “The fact that they’re saving, and never were before, is a huge deal.”

Across the country, a large portion of American workers lack any retirement account or haven’t saved nearly enough to retire. An updated index published by the Center for Retirement Research at Boston College indicates half of working-age U.S. households risk being unable to maintain their pre-retirement standard of living once they stop working. Attention has shifted to how state governments and some localities might step in, despite Congress rescinding a rule that made it easier to establish savings programs. 

In recent years, rising home values and stock market gains have led to slight savings improvements for American households overall. Over the longer term, however, an increasing number of workers will face financial challenges in retirement, with the share of working-age households unprepared having climbed about 20 percentage points since the late 1980s. A range of factors drive this trend: a higher Social Security retirement age, longer lifespans and lower interest rates. “Lots of people will end up without retirement income other than Social Security,” says Alicia Munnell, the center’s director.

The outlook is particularly bleak for those on the lower rungs of the income ladder. A steady shift away from guaranteed pensions to defined contribution savings plans has contributed to more savings inequality over the long term. Escalating housing costs and stagnant earnings for many lower- and middle-income families are further squeezing their retirement accounts. Meanwhile, wealthier households are reaping the benefits of climbing investment values.

All of this explains why the latest data from the federal Survey of Consumer Finances reflect solid savings growth for the most affluent families with the top 20 percent of household incomes, but flat retirement savings for everyone else. Vast disparities are also found across demographic groups. When the average liquid retirement savings of white families is compared with that of African-Americans and Hispanics, the gap has widened fivefold over the past 25 years, according to the Urban Institute. Young people, too, haven’t amassed the same wealth their parents did at comparable ages.  

The Urban Institute’s Signe-Mary McKernan says that savings and wealth discrepancies are more critical than often-cited income inequality. By one measure, she found racial wealth inequality, or assets minus debts, to be three times worse than income inequality. Disadvantaged groups are less likely to own homes. Many aren’t offered retirement plans through employers, or they participate less frequently. 

Inadequate retirement savings carry serious long-term implications for governments as well as citizens. They create an expanding cohort of residents who have to rely on government services or who might, for instance, miss property tax payments because they can’t pay other bills. “It matters not only for families and individuals, but for their cities and communities,” McKernan says.

The single biggest hurdle for many is access. By most estimates, about half of private-sector workers aren’t offered plans through employers. They tend to be in low-wage jobs, or working for smaller companies uncomfortable with the administrative costs of retirement plans.

Interest in the issue has mounted in state legislatures. Most have debated or are considering bills to improve access to retirement savings plans, with nine states enacting legislation, according to the Pew Charitable Trusts. “State and local initiatives may offer the best hope to boost retirement savings,” McKernan says. 

The state that’s furthest along is Oregon, which began rolling out the first phase of its OregonSaves retirement plan last year. OregonSaves is a public-private partnership overseen by the state treasury department. All employers who don’t offer their own retirement accounts are required to participate in the program, regardless of workforce size. Employees choose from a limited menu of three investment funds to make options simple and avoid confusion. Contributions to Roth IRAs are then deducted from workers’ paychecks, with no fees paid by employers.


Employees are automatically enrolled unless they opt out. Extensive research by behavioral economists concludes that this auto-enrollment component is crucial in nudging workers to save and allowing plans to build up large pools of participants. A similar but recently terminated federal program, known as myRA, didn’t automatically enroll participants, and few signed up. OregonSaves is working better. About 70 percent of employees in the first wave of registered businesses chose to stay in the program rather than opt out. “When we move from a place where around half the people are saving to where most are saving for retirement, it changes the dynamic dramatically,” says Lisa Massena, executive director of OregonSaves.

Congress attempted to block states from facilitating their own plans last year when it repealed an Obama-era rule exempting plans from regulations outlined in the Employee Retirement Income Security Act. It’s possible that some plans could face legal challenges as a result. But in an editorial in the Benefits Law Journal, editor-in-chief David Morse wrote that legal arguments against state-sponsored automatic IRAs were “easily brushed aside.” The rollback doesn’t appear to be stopping states from forging ahead, either. OregonSaves is not contingent on the rule change as its authorizing legislation was passed in 2015, before the exemption was approved.

Another challenge state-sponsored plans must confront is that program costs will rise faster than revenues as investment returns gradually accumulate. The Oregon program charges participants 1 percent of annual assets, but other programs could be forced to levy higher fees to cover the costs.

Programs sponsored by local governments remain fairly limited. San Francisco has promoted a savings program that provides cash incentives if participants meet savings requirements. The Seattle City Council recently approved a city-facilitated defined contribution program for those without plans through private employers. 

More states will soon launch their own programs, and it’s always possible that Congress may revisit the issue at some point and offer a federal solution. Regardless, though, demand for retirement savings options, particularly among large numbers of low-income workers and those in the expanding gig economy, is only going to keep increasing. 

Mike Maciag is Data Editor for GOVERNING.
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