How financial asset disparities undermine retirement securityNew research from the National Institute On Retirement Security measures societal shifts that have driven more wealth and income toward the top. Excerpts are provided below; read the report Stark Inequality: Financial Asset Inequality Undermines Retirement Security here.
The ownership of financial assets, much like the ownership of wealth broadly, is highly concentrated among Americans of high net worth. This stark inequality in the ownership of financial assets undermines the premise of a retirement system built around the individual ownership of financial assets in defined contribution (DC) accounts. The shift in the private sector from a retirement system structured around defined benefit pensions to one built around DC plans has corresponded with larger societal shifts that have driven more wealth and income toward the top. These shifts and the resulting increase in economic inequality have weakened retirement security for the middle class.
This research uses data from the Federal Reserve’s Survey of Consumer Finances to examine financial asset ownership by net worth, generation, and race. This research considers three generational cohorts: Millennials, Generation X, and the Baby Boomers. Millennials are assessed in 2016 and 2019, while Generation X and Baby Boomers are assessed in 2004, 2010, 2016, and 2019.
This report’s key findings include:
- Inequality in the ownership of financial assets both persists and deepens over time. The top five percent of Baby Boomers by net worth owned a greater percentage of that generation’s financial assets in 2019 (58%) than in 2004 (52%).
- Inequality in the ownership of financial assets is also consistent across generations. In 2019, the top 25 percent by net worth of Millennials, Generation X, and Baby Boomers owned three-quarters or more of their generation’s financial assets.
- Financial asset ownership is also highly concentrated among white households. Again, in 2019, white households in all three generations owned threequarters or more of their generation’s financial assets. Ownership is especially concentrated among white households in the top 25 percent of net worth.
- Both mean and median financial assets were significantly higher for white households in 2019 than Black or Hispanic households.
- A range of potential solutions exist to address this stark inequality including strengthening and expanding Social Security, protecting pensions, increasing access to plans for low-income workers, and reformingretirement tax incentives.
Over the past forty years, the United States has shifted from a retirement system built around the collective pooling of assets in plans like defined benefit pensions to one focused on the individual ownership of assets in defined contribution plans like 401(k)s. This fundamental shift in the U.S. retirement system mirrors larger societal shifts that have placed more of the burden of addressing life’s challenges on the individual. Unfortunately, the ownership of financial assets, much like the possession of wealth generally, is highly concentrated at the top among a relatively small share of Americans with high net worths. Financial asset ownership also is highly concentrated among white Americans.
A retirement system built around the individual ownership of financial assets cannot successfully provide retirement security if the bottom half of near-retirees only owns two to three percent of their generation’s financial assets. Furthermore, this system of individual retirement savings amplifies the broader societal trends that are pushing more income and wealth toward the top. This report examines the ownership of financial assets according to net worth through two dimensions: generation and race. It finds that these stark inequalities persist over time and across generations.
The Baby Boomer generation has exerted disproportionate cultural power in American life for decades, so it is fitting that this generation sparked this research. The first Baby Boomers reached age 65 in 2011, and it was their impending retirement that led some to predict a financial market collapse. This theory was faulty in at least two ways: one about the ownership of financial assets and another about how most Americans finance retirement.
Most Americans do not finance their retirement through the ownership of financial assets held in 401(k)s, IRAs, or other defined contribution accounts. Instead, Social Security remains the primary source of retirement income for the majority of older Americans. Especially for those lower on the income spectrum, Social Security may account for three-quarters of their income in retirement. Income from defined benefit pensions also remains important for a substantial number of older Americans.
The experience of Generation X largely mirrors that of the Baby Boomers. It is worthwhile to note that Generation X was the first generation to mostly enter the workforce after the shift from pensions to 401(k)s in the private sector. Generation X also is a somewhat more diverse generation than the Baby Boomers. While the percentage of Black Gen Xers remains around 15 percent, nearly the same as for Black Boomers, the percentage of Hispanic Gen Xers nearly doubles from the percentage of Hispanic Boomers.
In terms of the ownership of financial assets, Generation X sees many of the same patterns as did the Baby Boomers. In 2004, Baby Boomers were ages 40-58; Generation X reached the same point in their lifecycle in 2019 (ages 39-54). The top 25 percent of Boomers in 2004 owned 84 percent of assets, while the top 25 percent of Gen Xers in 2019 owned 89 percent. The top five percent of Boomers in 2004 owned 52 percent of their generation’s financial assets, while the top five percent of Gen Xers in 2019 owned 58 percent. If anything, Generation X is a more unequal generation than the Boomers when measured at similar ages
Millennials are the youngest of the three generational cohorts studied in this research. Like the Baby Boomers, they are a large and culturally powerful generation. Despite being the best educated generation in history, Millennials have had a rough start to their adult lives with the 2008 financial crisis, a weak job market affecting many Millennials early in their careers, and skyrocketing college costs and the associated debt. Despite these hurdles, there is evidence that Millennials are beginning to catch up with previous generations, at least before the COVID-19 pandemic and 2020 recession.
It may take years of further data to disentangle the impact of the COVID-19 pandemic recession on the financial lives and wealth of Millennials. Just before the pandemic shut down large sections of the economy, many Millennials finally were catching up with previous generations in terms of home ownership and other markers of financial health. Given the k-shaped nature of the recovery from the pandemic recession, it seems likely that some Millennials have continued the upward trajectory of their pre-pandemic lives, while others have been dealt yet another setback. One clear lesson from the two prior generations is that inequality in financial asset ownership deepens over time, and there is little reason to think the same won’t occur among Millennials.