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  • EPI: 401(k)s Are Failing American Workrs, Increasing Inequality
    Updated On: Apr 07, 2016

    By JoAnne Powers, March 7, 2016

    A new report from the Washington, D.C.-based Economic Policy Institute looking at inequality in retirement demonstrates how the shift from pensions to 401(k)s has failed the majority of American workers. EPI Economist Monique Morrisey:

    [Monique Morrisey]: “We’re moving toward a retirement system that magnifies inequality, rather than reducing it or just reflecting it. We’re used to the idea of inequality. It’s not news. We’ve learned to expect it. But what is surprising is that we used to have a fairly egalitarian retirement system and we don’t anymore.”

    The EPI report shows that the rise of inequality hasn’t been random. Some groups have fared a lot worse than others:

    [Monique Morrisey]: “While I think that 401(k)s have failed Americans, the at-risk groups have done worst. Lower-income, black, Hispanic and less-educated and single Americans in particular have really not done well by 401(k)s.”

    Originally viewed as a supplement for traditional pensions, it’s now been a quarter-century since participation in 401(k)s surpassed that of pensions, but most Americans have little or nothing in these accounts:

    [Monique Morrisey]: “The amount of income that seniors are getting is six times as much from pensions as from 401(k) accounts. What’s more, the pension benefits are much more evenly distributed than the distributions from 401(k)s and similar plans. So I think we have a big problem.”

    Morrisey describes the how the parts of America’s retirement system have been changing for the worse:

    [Monique Morrisey]: “Across groups, if you look at how much people are getting from Social Security, it’s very equal. Compared to what people put in, it tends to reduce inequality and reduce poverty in old age. It’s very effective at that…but we’ve been shrinking social security. Starting in 1983, we started cutting social security benefits. That was, in retrospect, a mistake. Pensions, by and large, don’t magnify or reduce inequality, they simply reflect it, but at least they’re not making the problem worse. And then you have 401(k)s, which are highly, highly unequal. By any measure, 401(k)s are more unequal than income. For the most part, they just replaced pensions and then in the new millennium we’ve actually seen a decline in the share of workers that get anything at all.”

    While industry has moved for decades to replace defined-benefit pensions with defined-contribution 401(k)s, and then eliminated even those, Morrisey says when 401(ks) are available they are simply not very appealing to workers:

    [Monique Morrisey]: “They’re risky, they’re high cost, and they’re really hard to understand. Many workers are getting no tax breaks from these plans. There’s no tax benefit for them. They may not be getting much help from employers. Meanwhile they might have to pay a penalty if they want to access this money. So the same people who’ve seen their wages stagnating, most people don’t really want to be managing their own retirement, and paying the bulk of the costs.”

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