Education and Contributory Pensions at Work: Disadvantages of the Less Educated

There is long-standing concern about the mechanisms that lead to differential accumulation of retirement resources. As defined contribution (DC) plans have become the most common employer pension for US workers over recent decades, economic resources later in life increasingly depend on participating in voluntary, contributory pension instruments during working life. Using the Survey of Income and Program Participation linked to W-2 tax records containing respondents' annual contributions to DC retirement plans, we examine how participation in and contributions to DC plans among eligible US workers differ by education. Our analysis clarifies two central pathways associated with educational disparities in DC retirement plans. First, we disentangle the effects of education that operate via a labor market pathway, showing that a worker's earnings level is, by far, the most influential labor market factor associated with participation and contribution amounts. Second, we show an important independent effect of education on not only the decision to participate, but also how much money to set aside when participating, net of earnings and structural position in labor markets. Supplementary analyses using data from the Survey of Consumer Finances corroborate the importance of non-labor-market mechanisms for understanding the education gap in workplace retirement savings plans. Together, our results bring to center stage the importance of education in the process of stratification in retirement wealth formation and long-term financial security. Less educated workers face multiple disadvantages in the accumulation of retirement resources in the context of growing income inequality and changing employment institutions.