DB Plans and Social Security Are Wealth Equalizers

The market wealth concept measured in household surveys, including both the Survey of Consumer Finances (SCF) and the Panel Study of Income Dynamics (PSID), excludes major assets that are crucial to retirement, according to recent research by experts with the Federal Reserve.

Jeffrey Thompson, a vice president and economist in the Federal Reserve Bank of Boston Research Department, and Alice Henriques Volz, a principal economist in the microeconomic surveys section of the Division of Research and Statistics at the Board of Governors of the Federal Reserve System, say market wealth understates the financial well-being of families with defined benefit (DB) pensions, as well as those who rely, or will rely, substantially on Social Security in retirement.

Social Security benefits represent the single largest source of retirement income for more than 60% of retired households, according to the Social Security Administration. And, for a large number of households, it is—or will be—the sole source of income in retirement.

Thompson and Volz add that because of the extremely broad coverage of the program and the progressivity of the benefit structure, Social Security wealth (SSW) accrues relatively more for lower-income households, including Black and Hispanic households. In addition, the exclusion of DB pensions from market wealth omits a form of wealth particularly important to Black families, the researchers say in their report, “A New Look at Racial Disparities Using a More Comprehensive Wealth Measure.”

DB Plans As a Retirement Savings Equalizer

Using data derived from the SCF, the Employee Benefit Research Institute (EBRI) reported that not every race/ethnic group is amassing similar levels of wealth within individual account retirement plans such as 401(k)s. According to EBRI’s analysis of the SCF data, just over half of families had an individual account-style retirement plan in 2019 (50.9%). However, the likelihood of having a retirement plan is significantly lower for families with Black/African American family heads than for families with white, non-Hispanic heads. Specifically, 57.2% of the latter and 34.9% of the former report owning some type of individual account savings plan.

EBRI reported that the discrepancy is even greater for families with Hispanic heads. The data shows fewer than half as many (25.5%) families with Hispanic heads reported having retirement plan assets compared with families with white, non-Hispanic heads.

Other studies have found that 401(k)s have increased retirement savings gaps among demographic groups, while DB plans offer more equality.

And when the Federal Reserve researchers looked at participation in employment-based retirement plans, they found that data from the SCF indicates DB plans have the least disparity in participation rates by race. Nearly 18% of white and Black families, among families with heads ages 40 to 59, were headed by workers enrolled in DB plans in 2019, as were 12% of Hispanic families.

Thompson and Volz add that the decline in DB plan participation was sharp through the 1990s, but DB participation among Black and Hispanic families has held steady since 1998. “The large DB participation gaps by race that were present in the late 1980s have nearly vanished,” the research report says.

The Comprehensive Wealth Measure

The Federal Reserve researchers contend that, “To the extent that the presence of Social Security or DB plans causes families to save less in defined contribution [DC] accounts or other savings plans, market wealth is not just incomplete but also skewed.” The researchers say that the presence of both DB pensions and Social Security will cause some households, particularly low-income households, to save less for retirement than they otherwise might.

Although DB plans are less common today than they were 30 years ago, the assets held in DB plans remain substantial—representing about 15% of aggregate household wealth—and are of particular importance for Black families, according to the study report. Among Black families, average DB wealth is almost twice as large as the average wealth from all non-retirement sources. By contrast, among white families, average DB wealth is less than half as large as average non-retirement wealth. The researchers note that this is due in part to Black workers being heavily represented among public-sector jobs, where DB pensions remain relatively common.

Social Security is also an important factor for measuring wealth equality, Thompson and Volz say. SSW exceeds projected market net worth for half of white families and for two-thirds of Black and Hispanic families, the report says. Combined wealth, which includes SSW and DB pension wealth as well as the projected market wealth, is also distributed more equally than market wealth within racial groups.

Looking at this bigger picture of wealth, the study found that average combined wealth was $1.6 million for white families in 2019, which is 60% greater than the average of $1.02 million represented just by market wealth. For Black families, combined wealth was nearly three times as large as market wealth, on average, and for Hispanic families, it was more than twice as large. Average Black wealth climbs from $186,000 to $524,000 once DB pensions and SSW are included; among Hispanic families, average wealth rises from $255,000 to $609,000.

Average wealth among Black and Hispanic families is substantially lower and has a different composition than that of white families; however, adding non-market components to the calculation substantially raises average family wealth for all races, the researchers point out.

They contend that combined wealth is arguably a superior concept for assessing issues of resource adequacy generally and racial disparities in wealth, but they concede that it does have certain shortcomings. “Because DB pension wealth (generally) and Social Security (by definition) cannot be accessed until retirement … the combined-wealth concept is not very helpful for understanding disparities in access to short-term or ‘emergency’ resources,” the report says.

Thompson and Volz conclude, “The powerful equalizing roles of DB pensions and Social Security highlighted here are further motivation for maintaining their fiscal health.”

The study report can be accessed from here.