Are Low-Wage Workers Destined for Low Income at Retirement?

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Abstract

Low-wage workers find it difficult to save for retirement. Without savings, they will have to rely on Social Security and pensions. Yet these income sources are based on earnings, which means that low-wage workers will have lower Social Security and pension benefits than higher-wage workers. This brief assesses whether boomers with low earnings between ages 22 and 62 are destined for low income at age 67. We find that nearly two-thirds of this group will end up with low income at retirement, but more than one-third will manage to defy the odds and escape being among the lowest-income older Americans.

Introduction

Americans are bombarded with messages urging them to save for retirement, but low-wage workers often find it difficult or impossible to put money aside. Family budgets are already stretched thin paying for basic needs. In 2007, 11.3 percent of working-age adults between 18 and 54 were poor (U.S. Census Bureau 2007a). A full-time worker making minimum wage could expect to earn just over $12,000 before taxes—well below the federal poverty level of $21,027 for a family of four (U.S. Census Bureau 2007b).

So, are low-wage workers destined for low income at retirement? For most of them, the answer is yes. Without savings, low-wage workers will have to rely on other sources of retirement income, such as Social Security and pensions. Yet these sources of retirement income are based on earnings. The Social Security benefit formula replaces a greater share of earnings for low-wage workers than for higher-wage workers, but low-wage workers will still have lower benefits than their higher-wage counterparts. Pension formulas generally do not provide higher replacement rates to low-wage workers, but the real problem for workers is that many low-wage jobs do not provide defined benefit pensions. Low-wage workers are also less likely to have access to defined contribution pensions and, if offered them, are less likely to participate than higher-wage workers.

But the relationship between lifetime earnings and retirement incomes is often complicated by individual and family circumstances that can change throughout a person’s life. Therefore, the answer to our question is not always a simple yes.

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