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Are Disappearing Employer Pensions Contributing to Rising Wealth Inequality?

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Are Disappearing Employer Pensions Contributing to Rising Wealth Inequality?

Federal Reserve Board,

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A fundamental shift in US retirement platforms has critical implications for Americans’ future. 

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According to the US Congressional Budget Office, the richest 10% of Americans control about three-quarters of national wealth, while the bottom half owns just 1%. Economists John Sabelhaus and Alice Henriques Volz explore one possible factor in this gap: the state of US pensions and retirement assets. As employers have turned from defined benefit plans to defined contribution plans, workers must rely more on their savings to fund retirement. Anyone interested in the issue of economic disparity will discover fascinating details in this illuminating report.

Summary

For decades, US workers could count on their employers to provide a critical part of their retirement planning: the defined benefit (DB) pension plan, which provided a continuous source of income after employees ceased their careers. With the arrival of the 401(k) and 403(b) models, firms shifted to defined contribution (DC) approaches, which let employees invest over time in financial assets to fund their retirement. Under this formula, workers shoulder a greater share of their pension planning. Economists note that from 1989 to 2016, employers converted&#...

About the Authors

John Sabelhaus and Alice Henriques Volz are economists at the Board of Governors of the Federal Reserve System.

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