The Transformation of the American Pension System: Was It Beneficial for Workers?

5 Stagnation of Retirement Wealth in the 2000s

131 5 Stagnation of Retirement Wealth in the 2000s One of the main topics to be addressed in this book is retirement adequacy. A full picture of retirement resources would not be complete without a consideration of expected Social Security benefits and Social Security wealth (SSW). This chapter fills in that gap. We pick up the story from Chapter 4 by focusing on SSW, retirement wealth in general, and augmented wealth. As discussed in Chapter 1, over the last three decades traditional DB pension plans were largely replaced with DC pensions. We focused on two major issues in the previous chapter. First, has this transformation been beneficial to most U.S. households? Second, has it led to a rise or a decline in inequality? I find that mean augmented wealth (the sum of net worth, pension and SSW), after rising dramatically during the 1990s, showed much smaller gains in the new century. Moreover, median augmented wealth by age group was generally stagnant over the years 2001 to 2007. Furthermore , the inequality of augmented wealth showed an increase from 1989 to 2007, while the inequality of net worth remained unchanged. The next section of the chapter looks at time trends in SSW on the household level from 1983 to 2007. I then present summary measures on total (augmented) household wealth. After that, alternative pension wealth calculations are treated, followed by an update on pension wealth and augmented wealth to July 1, 2009, on the basis of changes in the stock market. The final section provides a summary and concluding remarks. SOCIAL SECURITY AND TOTAL RETIREMENT WEALTH I first look at how SSW compares to pension wealth. Is it greater or smaller than pension wealth—and, correspondingly, is it a more or less Wolff.indb 131 Wolff.indb 131 11/21/2011 9:18:14 AM 11/21/2011 9:18:14 AM 132 Wolff important source of retirement income than pension wealth? Has SSW grown faster or slower than pension wealth? Social Security wealth among all households averaged $165,300 in 2001 (see Table 5.1); this compared to an average pension wealth of $138,000. Thus, even as of 2007, SSW was a more important retirement asset than pension wealth. Median SSW in 2007 was $139,300—close to that of mean SSW—and eight times greater than median pension wealth.1 The fact that mean and median SSW were so close was due to a normal or nearly normal distribution of SSW. Mean SSW among middle-aged households was 26 percent greater than that among elderly households, and median SSW 39 percent larger. The greater SSW among middle-aged relative to elderly households largely reflected the higher lifetime earnings of the former. Mean and median SSW among young households was about 40 percent lower than among age group 47–64. This discrepancy was mainly due to the greater discount factor applied to future Social Security benefits among young earners (from the larger number of years left before retirement). During the 1980s, SSW gained less than pension wealth. Mean SSW among all households rose by 46 percent between 1989 and 2001, in comparison to an 80 percent gain in mean pension wealth, the sum of DB and DC wealth. Mean SSW gained 56 percent among middleaged households, 38 percent among young households, and 35 percent among elderly households. The increase in median SSW was very close to that of mean SSW—a reflection of both the low degree of inequality in SSW and the relative constancy in SSW inequality over time.2 The rise in SSW over these years reflected primarily increasing real wages, particularly in the late 1990s, and rising longevity. This was offset, in part, by the increase in the age (65 to 67) at which full Social Security benefits were received for persons born after 1938 and the rising share of minorities in the labor force, whose life expectancy is shorter than that of whites. In contrast to the 1990s, the years 2001–2007 witnessed almost no growth in SSW. Indeed, mean and median SSW fell slightly among young, middle-aged, and elderly households. This turnaround was largely attributable to the wage stagnation of this decade, as well as to the increasing age at which full Social Security benefits were received. Another factor was the increasing share of minorities in the workforce. Additional factors were the higher unemployment rates of the 2000s Wolff.indb 132 Wolff.indb 132 11/21/2011 9:18:15 AM 11/21...