Retirement income gap between rich and poor
If life were a race to accumulate assets and savings, the winners would be crowned in retirement. With a lifetime to stockpile resources, some seniors' wealth outshines the gross domestic product of small countries. Case in point: Retired movie producer David Geffen, worth $6 billion according to Forbes.com, surpassed Bermuda's 2012 GDP of $5.5 billion.
At the other end of the spectrum, more than 9 percent of those age 65 and older lived in poverty as recently as 2012. This year, living in poverty means an annual income of $11,670 or less for a single person and $15,730 for a household of two.
Compared with all other age groups, the 65-and-older crowd has the dubious distinction of having the most pronounced income gap, according to a Bankrate analysis of a measurement of income inequality known as the "Gini Index."
The good news is that since 2002, the population of low-income seniors has declined while the ranks of the highest earners swelled.
What's behind the vast retirement income gap between rich and poor? Conventional wisdom puts the blame for any financial shortcomings squarely on the shoulders of the individual. But research shows that the inequality in retirement income is more than just a function of the zeal with which one saves.
Income inequality just one factor
With the exception of Social Security, income in retirement is largely a result of the savings an individual was able to stockpile while working. Relatively few workers still receive pensions from their employer. Large disparities in retirement income are the expected outcome, says Jack VanDerhei, director of research at the Employee Benefit Research Institute.
"Even if everyone was, in essence, putting in the same percentage of compensation, which we know is not true, mathematically we would have to end up in a situation where those in the higher income quartile the longest period of time would by definition have a larger overall prosperity in terms of retirement income," he says.
But inequality in savings and income isn't just a result of uneven compensation in dollars. The income disparity between the haves and have-nots in retirement is a little bit more complicated.
Richer people save more
Not surprisingly, wealthy households tend to save more than less-prosperous folks.
"Employees with larger incomes tend to contribute a larger percentage of their salaries than do the lower incomes," VanDerhei says.
On its face, it appears that rich people simply have sterling savings behavior compared to the lesser-compensated masses, but that may not be the case.
"If you already have a lot of money you inherited from your parents or you are just simply wealthy, there is no reason not to take advantage of the tax breaks for 401(k)s and IRAs. It does not mean that you are saving more," says Monique Morrissey, an economist at the Economic Policy Institute. "These tax subsidies do not necessarily induce new savings; they are simply a way for high-income or wealthy people to pay less tax.
"So some of what we see in terms of the inequality does not reflect anything that normal people would consider part of our retirement system, but rather a tax shelter," she says.
That's not by accident; that was the purpose of 401(k) plans when they debuted circa 1980. As the primary vehicle for most people to save for retirement, the 401(k) may actually widen the retirement income gap between rich and poor.
"The tax incentive structure for retirement savings rewards higher-income wealthy folks. It does not offer nearly as much benefit for lower-income households," says Nari Rhee, manager of research at the National Institute on Retirement Security, or NIRS.
That's because our progressive tax system imposes higher taxes on high-income earners and lower taxes for others. People paying a high tax rate in peak earning years have a strong incentive to stick as much income as possible into a tax-deferred account. The money goes in pretax today; as withdrawals are made in retirement, it will likely be taxed at a lower rate.
"The lower income households basically do not get the tax incentive to save the way that higher income households do," says Rhee. "People might argue it is a little backwards, because it is really the lower income households who need more incentive to save because they have more pressure on their income than higher-income households do."