Income inequality is going to hit tomorrow’s retirees hard

////Income inequality is going to hit tomorrow’s retirees hard

Income inequality is going to hit tomorrow’s retirees hard

One of the mysteries of personal finance has been the disconnect between the income inequality afflicting the working public and the claims by fiscal conservatives that most people’s retirement lifestyles will be perfectly comfortable.

A recent post on the Squared Away blog of Boston College’s authoritative Center for Retirement Research solves the mystery. There is no disconnect between income inequality for the working class and what they’ll face in retirement: A flood tide of income inequality is awaiting today’s workers when they do retire, and we’re standing on the edge of the water.

The post is based on the center’s conclusion that 56% of all low-income households face the risk of being unable to maintain their pre-retirement standard of living once they stop working. For middle-income households, the figure is 54%, but for high-income households, it’s only 41%. In other words, fewer than half of all middle- and low-income households will be able to maintain their lifestyles in retirement, but nearly two-thirds of high-income households will.

The center posits several reasons for the mismatch. One is the rise of defined contribution retirement plans such as 401(k) plans, which have supplanted traditional defined benefit pensions for millions of workers, especially in the private sector.

Because defined contribution plans require workers to set aside part of their income for the future, it’s a bigger burden on low- and moderate-income families, which have less disposable income than their affluent colleagues. They’re also more likely to see their household finances upended by divorce, layoffs and unexpected medical bills.

Lower-income workers find it harder to work later in life, possibly because their options tend more toward physical work rather than desk jobs. That problem is compounded by an increase in Social Security’s normal retirement age to 67 (for those born in 1962 or later) from 65 (for those born in 1939 or earlier). The change means that workers taking retirement at age 65 will either have to wait before receiving their full Social Security benefits, or accept a lower monthly benefit at 65.

The change places an added burden on lower-income people because their life expectancy is shorter on average than wealthier retirees. The downsides of this well-documented trend include that spouses taking spousal benefits in middle- and low-income families could face a cut in their family benefits at an earlier age than better-heeled families.

“Just as the wealth and income gap between the well-to-do and working people is growing,” the center’s blog post observes, “so too is retirement inequality.”

The challenge facing today’s workers as they move into retirement shouldn’t be a surprise. After all, it’s unlikely that households suffering from increased income inequality throughout their working lives would suddenly find themselves on equal footing with wealthier workers once they retire.

Yet fiscal and political conservatives have waged a long campaign to persuade policymakers that the “retirement crisis” is a myth. They dispute the prospects of a deterioration in the standard of living for millions of future retirees by observing, among other things, that retirement assets held by Americans are at an all-time high. Andrew Biggs of the American Enterprise Institute, one of the leading torch-bearers of this argument, observed in 2015 that Individual Retirement Account balances and benefits due from traditional pensions and Social Security had risen from 2.7 times total personal incomes in 1996 to 4.1 times in early 2015.

Read more at The Los Angeles Times