Fourth, children born into low-income households are likely to remain low-income their entire lives – making them highly likely to rely excessively on Social Security in retirement. Although median household incomes have risen 49% since 1970, according to the Pew Research Center14, gains have not been uniformly enjoyed: Incomes for the top 5% of households rose 115% while incomes fell 15% for the bottom 20% of households.
This disparity in U.S. household income is well known. Less well known is the fact that income inequity is persistent, both throughout life and across generations. As a result, those born into low-income households are likely to stay low-income. (The reasons for this persistency are beyond the scope of this paper but amply documented by numerous academic studies.)
As a result, says Pew, upper-income families by 2016 had 75x more wealth than the lowest-income families – up from 28x in 1983. Indeed, the wealth gap more than doubled from 1989 to 2016.
Pew’s data show that the broadening of the wealth gap is causing the middle class to disappear: In 1971, 62% of U.S. households were in the middle class. By 2019, only 43% were in middle-class households. This has caused the ranks of the upper income households to swell, from 29% in 1971 to 48% in 2019. But this upward mobility wasn’t the experience of those in lower-income households: Throughout the past 50 years, the lower-income tier has remained steady. Indeed, 10% of U.S. households were low-income in 1970 and 9% still were in 2018.
Fifth, half of all U.S. workers have taken actions detrimental to their future retirement security, according to a 2020 study by Edelman Financial Engines.15 One in three workers have accessed money from their retirement accounts early and 60% say they will do it again. Another 16% are considering taking their first loan or hardship withdrawal.
Clearly, the ability to access retirement savings prior to retirement proves too tempting for millions of U.S. workers. Money spent prior to retirement is money not available to provide income in retirement – a huge weakness in the rules controlling today’s workplace retirement plans and IRAs.
It’s time, therefore, to introduce a new approach to retirement savings, one that doesn’t penalize hard-working Americans who are struggling with the costs of living, doesn’t make one’s ability to save for retirement dependent on where (or whether) they get a paycheck, doesn’t force them to miss millions of dollars in wealth accumulation by forgoing decades of compounding, doesn’t perpetuate their poverty merely because of their household income at birth, and prevents workers from acting against their own best interests by letting them access retirement savings prior to retirement.