How the 401(k) Ruined Everything

I’m still thinking about The Guardian’s series on Millennial economics, starting with Ester Bloom’s analysis from yesterday:

Maybe We Should Start Diverting Social Security to Millennials

Millennials, as we now know, have less disposable income than retirees. But Ester wisely commented that you can’t think of “Millennials” as an economically equitable unit: “minority Millennials are even more disadvantaged relative to their white peers.”

ThinkProgress reports that it’s the same for people approaching retirement:

The majority of black and Hispanic families have no retirement account savings at all, even among families nearing retirement age, compared to less than a third of white families. Even those families that do have savings stored up have far less: the median white family has $73,000 socked away, compared to $22,000 for people of color.

What’s to blame? The 401(k).

Before the 401(k) boom, black and white workers used to have similar rates of participation in retirement accounts. But that’s now changed, with black families falling behind.

The same has been true for gaps between the rich and less well off. Nearly 90 percent of families in the top fifth have retirement accounts, versus less than 10 percent of those at the bottom. The wealthiest families are 10 times as likely as the poorest to have a retirement account.

Here’s how the 401(k) ruined everything:

• Prior to the early 1980s, many workers—“most American workers,” ThinkProgress claims—had pension plans that paid out after retirement.
• Then companies started switching to 401(k)s, which made workers responsible for funding their own retirement while simultaneously not guaranteeing a payout. (You can estimate 8 percent returns, but investments by their very nature are unpredictable.)
• Sure, some companies will give you a 401(k) contribution match, and that may be the only “free money” you ever get in your life, so you had better take it if you can. But ThinkProgress reminds us that a lot of people can’t afford to contribute anything to their 401(k)s, employer match or not.
• Also, a lot of jobs don’t have 401(k)s. Freelance gigs don’t. Many service jobs don’t. I’ve been working full-time at one job or another since I graduated from college in 2004, and I’m not sure I’ve ever been eligible for a 401(k). I did have a 403(b) for four years, when I worked at the think tank. That’s it.

(I should add that there may very well have been retirement contribution options at the various temp agencies that employed me, the same way that you become eligible for one day of vacation after you work for six consecutive months, but I don’t recall any—and when I checked those agencies’ websites, I couldn’t find any 401(k)-related information.)

So there you go. If you put the burden of retirement savings on the individual, the individuals with the least money—disproportionally, people of color—will contribute the least to their own retirement because that’s how math works.

And inequality continues to grow.

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