Wage inequality will lead to retirement inequality, Urban Institute finds, adversely affecting lower-income individuals in particular.
The uber-liberal think tank took a hard look at the issue, noting that, “People who experience high wage inequality during their working years are likely to experience high retirement income inequality, because Social Security benefits are tied to lifetime earnings, and people’s ability to save for retirement depends on how much they earn.”
Although wage inequality has thankfully slowed in recent years, the forces driving it persist, the authors claim, and a higher minimum wage would mitigate, but not eliminate, its effects.
“The investigators project wage inequality based on recent trends in the growth of the education premium—the hourly wage gap between college-educated workers and those with less education—which has been one of the most significant and persistent drivers of wage inequality.”
The results show that the effects of rising wage inequality reverberate into retirement. If the hourly wage gap between college and high school graduates continues to grow, projections reveal the following for people ages 67 to 75, according to the Institute:
- Lifetime earnings in the top fifth of the distribution would rise 2 percent in 2045, 5 percent in 2065, and 8 percent in 2085, relative to projected levels under the baseline when the education premium does not change.
- Annual retirement incomes in the top fifth of the lifetime earnings distribution would rise 3 percent in 2045, 5 percent in 2065, and 7 percent in 2085.
- In the bottom fifth of the distribution, lifetime earnings would fall 2 percent in 2045, 5 percent in 2065, and 9 percent in 2085.
- Annual retirement incomes in the bottom fifth of the lifetime earnings distribution would fall 3 percent in 2045, 6 percent in 2065, and 13 percent in 2085. These losses exceed the percentage decline in lifetime earnings, despite Social Security’s progressive benefit formula that replaces a larger share of preretirement earnings for people with limited lifetime earnings than for those with more lifetime earnings.
- The inequality of retirement income would rise over time, pushing the Gini coefficient .03 points higher than under the baseline in 2085.
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
I assume your source took into account the way Social Security is structured, to provide a higher return to those with lower lifetime earnings, through two “bends” in the curve.
The underlying point about wage inequality stands, but at least SS provides a bit of mitigation.
Those who seek to raise wages and lower income inequality for future generations should look into Henry George’s ideas, starting with a book of essays entitled “Social Problems.” It is online. 135 years old, and at the same time, quite timely in 2018. See chapter descriptions at wealthandwant.com