By Alice Henriques & John Sabelhaus
During recent decades, the US employer-sponsored retirement system has undergone a major shift from primarily defined benefit (DB)-type plans to primarily defined contribution (DC)-type plans. Furthermore, in the past decade, participation in employer retirement plans has fallen, particularly for younger and lower-income families. In light of this, there is growing concern that wealth accumulation through employer-provided pension plans is falling short, especially for the bottom half of the income distribution. However, focusing only on employer-sponsored pensions provides an incomplete picture; it has left the public pension, Social Security, out of the discussion. Social Security provides near universal coverage and calculates benefits progressively, leaving lower-income households with much higher replacement rates relative to their pre-retirement income. Claims to future Social Security benefits are a key component of retirement wealth, and thus failure to include Social Security leads to a biased assessment of the overall distribution of retirement wealth.
In this note, we first present trends in participation in employment-related retirement plans, and then provide analysis for one birth cohort, nearing retirement age, of the impact of Social Security on retirement wealth. We use the triennial Survey of Consumer Finances (SCF), analyzing the distribution of retirement wealth from a lifecycle perspective. In particular, we divide each survey-year sample into ten-year birth cohorts born between 1920 and 1990, and then sort households into income groups based on the intra-cohort distribution of “usual” income. Each birth cohort is observed up to nine times, at three year intervals, between the 1989 and 2013 surveys. This lifecycle approach provides a dynamic perspective on retirement plan participation and retirement wealth accumulation.
This analysis presented here paints a troubling picture of below-trend participation in the employer-sponsored pension system for younger households and lower-income households. However, when we factor in Social Security wealth to lower-income households’ balance sheets near retirement, their retirement readiness, measured by the ratio of retirement assets to usual income, greatly improves in comparison to higher-income households, and the apparent distributional differences are all but eliminated. This underscores the importance of the Social Security system in stabilizing income replacement rates for the most vulnerable Americans.

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