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.