Using data from 1989 through 2019, the paper examines how changes in retirement wealth, including those stemming from the shift from defined benefit to defined contribution plans, affect measures of wealth concentration.
By Nadia Karamcheva and Victoria Perez-Zetune.
Family wealth inequality in the United States has risen over the past several decades, as documented by researchers using a variety of methods and data. Much of family wealth is in tax- preferred, employer-sponsored retirement plans—typically either a traditional defined benefit (DB) plan or the now more prevalent defined contribution (DC) plan. Because retirement wealth is generally less concentrated than other types, changes in the distribution of retirement wealth and in the type of retirement assets could affect overall wealth inequality.
Using data from the Survey of Consumer Finances and the Financial Accounts of the United States from 1989 through 2019, we examine how changes in retirement wealth, including those stemming from the shift from DB to DC plans, affect measures of wealth concentration. We account for the fact that unlike DC plans, in which workers own their account balances, DB plans promise workers a stream of annuity income in retirement. Workers’ expected retirement wealth in DB plans is subject to projections of life expectancy, inflation, interest rates, and plans’ ability to pay promised benefits.
Accounting for DB and DC wealth lowers the Gini coefficient in 2019 from 0.88 to 0.83 and reduces the share of wealth held by families in the top 10 percent of the distribution from 80 percent to 72 percent. We estimate that the shift from DB to DC retirement coverage modestly affected wealth concentration overall. Between 1989 and 2019, that shift accounted for about a fifth of the increase in the Gini coefficient and a fifth of the increase in the share of wealth held by families in the top 10 percent of the wealth distribution. We find evidence that retirement wealth varied markedly by socioeconomic characteristics. Overall, estimates of retirement wealth and its effect on measures of wealth concentration are marginally sensitive to alternative modeling choices.