NCPA - National Center for Policy Analysis

Many Workers' "Pension Wealth" is No Higher Than Similar Workers' Pensions in 1983

February 22, 2002

According to New York University economist Edward N. Wolff, two-thirds of American households have not increased their retirement wealth from pensions at all since 1983 -- compared with households led by people of comparable ages in that year -- or have experienced a drop in the value of their pensions.

Wolff's study assigns a value to traditional employer-provided defined benefit pensions, which provide workers a fixed amount based on longevity and salary -- provided they work for the same employer long enough to qualify.

Many employers have shifted to so-called defined contribution plans that allow workers to save their own money in tax-advantaged retirement plans invested in stocks or bonds. Such plans can provide higher returns and are portable -- but expose workers to the risk of bad investment decisions.

  • Specifically, in 1998, 65 percent of all American households headed by a person between 47 and 64 had either the same pension wealth, adjusted for inflation, as households headed by people in that age group did 15 years earlier, or even less.
  • For the median household, retirement wealth fell 13 percent from 1983 to 1998.
  • Households that had more pension wealth than 80 percent of all others increased their retirement wealth by 19 percent.
  • And households in the 95th income percentile experienced a rise in pension wealth of 176 percent in 15 years.

There are several factors that explain the falling pension wealth of many workers. One is that workers, particularly lower and middle income earners, were either too conservative in their investments, opting for the lower returns of bonds over stocks, or took too much risk, say by investing solely in their employers' stock.

By contrast, workers near the top of the income ladder made large contributions early and saw their assets compound rapidly over time.

Source: Jeff Madrick (Cooper Union), "Economic Scene: A Bull Market and a Boom in 401(k)'s Must Mean Fat Pensions. Think Again," New York Times, February 21, 2002.


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