Employers Can’t Provide Retirement Plans- Let’s Stop Pretending They Can

Retirement plan coverage situation has been falling for 20 years even before the COVID – 19 recession. At least one out of 4 employers are dropping their contributions to 401(k) plans so we expect the share of the population with a retirement plan will fall even further. Even when the economy was doing well at the end of 2019; only 36% of workers age 25-64 had a retirement plan at work (a fall in coverage rates from 41% in 2015.) Other scholars have noted the decline but our numbers are the most recent from the annual Bureau of Labor Statistics. 

Take a moment for this fact about falling retirement coverage to sink in. Most workers between the ages of 25 – 64 do not have a 401(k) – type plan or a traditional pension at work. They are left on their own to save and manage their plans. The voluntary system was never robust, but we keep pretending that relaxing regulations and giving more tax breaks will incent employers to sponsor a plan. Now we are left with self-interested advisors and tax breaks worth $250 billion of which 70% go to benefit the top 20% of earners and less than half the workforce with a retirement plan at work. More and more older workers will only depend on Social Security for the rest of their life.

What’s the explanation for the big decline in employer retirement plan coverage rates? Misplaced expectations. We should have never expected dynamic, mostly nonunion, American employers to be reliable sponsors of what workers need.

Workers with the most employer retirement coverage are those in unions, 64.8% of union members have a retirement plan at work compared to 33% of workers who aren’t in a union.

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And socio-economic class matters. Only one out of four workers in the bottom 50% of the income distribution have a retirement plan at work, compared to 49% in the top 10%. Surprisingly, those in the top ten percent have lost the most coverage. In 2015, 60% of the top earners had a work-place retirement plan, by 2019 that share had fallen to 49%. There is not much difference between men and women.

The vast majority of workers don’t stay with one firm their entire lives. Providing a savings plan for their workers is an especially ridiculous expectation for small employers where coverage rates are already very low.

If every worker had an employer that contributed 3% of their salary in a retirement plan at work it would cost employers $192 billion a year. Right now employers spend only $73 billion per year for retirement contributions. Much of the deficit is among employers with less than 100 workers. Less than 10% of workers working in firms with less than 10 people have a retirement plan at work.

The COVID-19 recession prompted Congress to stimulate small business and subsidize their continuation. $130 billion was not used by the sector. If all workers working in firms with less than 100 employees were covered in a retirement plan at work it would cost $59 billion more out of the total payroll of about $2.4 trillion and a less than half of the money left on the table.

​The failure of our current system stems from relying on employers to voluntarily provide coverage. In the crucial years before retirement, older workers have their last chance to shore up retirement savings before exiting the labor force. Congress should mandate retirement plan coverage for all workers just like they mandate Social Security coverage.

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