Opportunity and Ownership: Retirement Savings

Low-wage jobs can be unstable, leaving families struggling to cope with employment gaps and financial emergencies that can strike without warning. About four in five low-income families are "asset poor," lacking enough liquid savings to live for three months at the federal poverty level without earnings. In this essay, McKernan and Ratcliffe suggest a cluster of policies that would improve financial markets and savings opportunities for low-income families across the life cycle.

People think of retirement security as balancing on a three-legged stool, with income from assets, private pensions, and Social Security as the legs. However, despite growing awareness about the importance of saving for retirement, many elderly people cannot rely on their financial assets. According to data from the 2004 Health and Retirement Study, lower-income adults age 65 and older rely less on income from assets and traditional defined-benefit pensions than their higher-income counterparts. Instead, older adults with lower income rely primarily on Social Security and public transfers for their retirement security.

A great way to assess how well adults have accumulated wealth is to look at their finances in the years shortly before they retire. We show wealth among households with an adult age 57–61 in 2004, using the Health and Retirement Study. This wealth snapshot highlights the extraordinary importance of Social Security, traditional pensions, and owner-occupied housing for typical near-retiree households today, which together comprise nearly four-fifths of wealth for middle quintile households on the verge of retirement.

This study examines retirement security between ages 67 and 80. Findings show that typical adults will experience a decline in projected wealth and income. More than two-fifths of retirees will have significantly less income at age 80 than they did at 67 (median income decline of $16,000 for current retirees and $23,000 for boomers). However, approximately two-fifths will have significantly more income at age 80 than at 67 (median income increase of $14,000 for current retirees and $17,000 for boomers). Some of the change in economic well-being is related to changing living arrangements, and marital, health, and work status.

Even the best-laid plans can go awry as people prepare for retirement. This brief shows that about 7 in 10 Americans in their 50s and 60s develop health problems and disabilities, lose their jobs, or lose spouses to death or divorce over a 10-year period. These shocks substantially erode retirement savings, especially for unmarried people cannot turn to their spouses for support. The findings highlight the limitations of the safety net when things go wrong in late midlife.