Do 401ks Contribute to ‘Income Inequality?’

People with a bachelor's degree save more

It's an election year, so the topic was inevitable.It's an election year, so the topic was inevitable.

Sociologists are getting in on the action, claiming that the shift to defined-contribution retirement plans, such as 401(k) plans, has led to an income and education gap in pension savings.

This gap could exacerbate future economic inequality, according to a report from the American Sociological Association (ASA).

“The movement towards voluntary, contributory employer pensions has increased the influence of socioeconomic factors, such as education and income levels, on retirement fund accumulation,” said study co-author ChangHwan Kim, an associate professor of sociology at the University of Kansas.

When defined-contribution plans are offered in workplaces, people with a bachelor’s degree or higher are 1.2 times more likely to enroll in them than high school graduates even after controlling for the effect of annual earnings, occupation, industry, firm size, and other characteristics, ASA claims.

Furthermore, people with a bachelor’s degree or higher save an average of 26 percent more annually to their defined-contribution retirement accounts than participating high school graduates even if both groups earn the same amount of annual income.

“These enrollment and savings decisions may not only be influenced by job factors such as a worker’s earnings level, but also by non-labor market mechanisms that may include a person’s amount of financial knowledge and his or her concern with planning for the future, of which less educated people may have lower levels,” Kim added.

The researchers examined workforce data from the 2004 and 2008 waves of the Survey of Income and Program Participation, matched to W-2 tax records, as well as the Survey of Consumer Finances and found evidence of an income and education gap in pension savings.

“When you have options, sometimes bad things happen,” Kim said. “You want to spend your money now, maybe to cover current necessities, but investing less for your retirement during your working years can have future costs that impact your retirement income security.”

A disparity in retirement savings could exacerbate inequality during retirement, a time in life when income inequality has historically been less prominent, Kim concluded.

“The findings suggest the importance of Social Security benefits moving forward, particularly for low earners.”

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