The events of 2020 have highlighted the many inequities in American society such as racial biases and unequal access to health care. Both of these issues are exacerbated by a deep-seated history of financial inequality in America. This disparity is a sum of many parts - one of the important, and often overlooked, is the inequity in long-term retirement savings.
Long-term savings are important for security and empowerment, both before and during retirement. People with savings are more resilient to job loss or other economic shocks, are included in the financial system, and benefit from the growth of the stock market and the global economy.
The scope of income inequality in America – for people of color, for women – is not a new revelation. But the startling truth is that long-term savings and wealth are even more skewed than income. According to Brookings, white families have a median net worth ten times that of Black families ($171,000 vs. $17,150). The racial wealth gap is significant even for families with the same income. The World Economic Forum has calculated that while the gender pay gap is 10-20 percent, the gender pension gap is 30-40 percent.
Retirement is a long-term goal, and its problems require long-term solutions. There’s not a quick fix that would have immediate impact for the millions of Americans nearing retirement today. But we can make changes now to benefit future generations of Americans.
The American retirement system is based on a law that was enacted nearly 50 years ago. ERISA was the solution in a time before widespread use of technology, when most people worked for the same employer for decades, and when the “nuclear” family was considered the norm, with men making up the large majority of the workforce. In short, our retirement system reflects a time in American society that we’ve left far behind. Relative to countries that have built significant retirement systems over the last 25 years, such as Australia, Canada or the Netherlands, the U.S. trails considerably. We need a retirement savings system built for our children, not our parents.
Drawing from the success and failures of other countries, a 21st century retirement system should have the following key features:
First, it should be saver-centered rather than employer-centered. In today’s world, having the employer responsible for administration and decision-making of defined contribution plans for employees, who may stay only a short while, makes no sense. It’s as if a company required all employees to use the same bank and have the same type of mortgage. What’s more, employers do not want the costs and liabilities of administering such plans – that money would be much better off going to the saver.
Second, it should allow for competition among providers and, accordingly, choices for savers. Having a saver-oriented plan allows providers to consolidate offerings, give savers choice and lower fees. Australia has consolidated from thousands of small plans to dozens with billions in assets – and they have among the lowest fees in the world. When savers can choose among qualified fiduciaries, their money can grow through sophisticated and prudent management.
Third, it should operate under the oversight of strong regulation. It is critical to have focused, comprehensive regulation to oversee all aspects of these retirement savings plans and keep them current over time. Today’s system divides that authority among various governmental departments and agencies, and between the federal and state governments. American retirement savings are too important to not consider them holistically.
Finally, it should drive financial inclusion through the ownership of growth assets. Contributions from employers would go to individual accounts and spouses would divide those equally. Having an account with your name on it, adding to it over time, watching it grow, and making decisions on what to own is both empowering and good for the country. For years, the U.S. government has focused on home ownership to build wealth and connection with economic prosperity. Retirement savings – owned by people of all races and genders – means those people control their own financial future, can provide inheritances to their children, and are shareholders of companies, connecting the saver to companies and the communities they serve.
There are many steps to take to address the inequities in our society. Providing all Americans, not just a fortunate subset, access to retirement savings that they can invest and grow over time is one such step. By growing access to equities, we can begin to address inequity.
Sarah Keohane Williamson is CEO of FCLTGlobal, a non-profit organization that develops research and tools that encourage long-term business and investing.