What does it mean to be middle class in America? By one definition, it’s a function of your household’s annual income.1 Another definition focuses on a household’s wealth.2 A commonly discussed definition, which finds a lot of support in the federal tax code, is that home ownership is central to middle-class status in America.3
Any reasonable definition of “middle class” almost certainly includes the ability to retire --- that is, to voluntarily stop full-time work and still have sufficient resources to sustain your pre-retirement lifestyle or something like it.4 Certainly, many Americans expect to retire without losing their places in the middle class. We may not all share the vision of retirement that is common in our parents’ generation: migrating to southern climes and taking up residence in a 55+ community with golf courses, swimming pools, and card rooms. But most Americans who earn incomes that put them in or near the middle class want and expect have the freedom to choose whether to work or recreate, to spend time with family rather than with co-workers, and to focus on caring for themselves physically, emotionally, intellectually, and spiritually instead of investing in a business, a job, or a career.
If middle-class American life means working hard, supporting your family, helping your children to do better than you, and living by the rules, then retirement is supposed to be the reward when your work is done.
Why We Are Worried About Retirement
The importance of retirement to middle-class status in America is one of the reasons so many people are worried about the state of Americans’ retirement savings. Simply, many Americans do not have enough money saved to supplement their expected Social Security benefits with sufficient retirement income to continue their lifestyles after retiring. A surprising percentage of Americans approaching retirement age have no retirement savings at all. The recent pandemic-related economic downturn and the unemployment, business failures, and market volatility it caused have heightened concern about the adequacy of many Americans’ retirement savings.
Social Security ensures that retirement will not cause most Americans to slip into poverty, but Social Security was never supposed to provide enough income to ensure our place in the middle class. In fact, most Americans who live middle-class lives before retirement would view a standard of living supported only by Social Security benefits as something like dropping off a financial cliff. It is this concern --- falling out of the middle class --- that is central to so many Americans’ retirement worries. They expect a reward for decades of work. They worry they will end up with something much worse.
The Alliance for Lifetime Income surveyed more than 1,200 Americans between the ages of 56 and 75 in April 2020 for its Retirement Reset Tracker study.5 The study found that only one-third of respondents were very confident they will have the income to cover all of their expenses in retirement. For those lacking great confidence, half or more identified the reasons as losses in the stock market, uncertainty about how much health care and medicine will cost in retirement, Social Security not covering enough retirement expenses, uncertainty about having saved enough money, and uncertainty about how long they will live.
The Pension Gap and the Middle Class
According to the Alliance’s Retirement Reset Tracker, a majority of those who expressed great confidence in their ability to cover their expenses in retirement had a source of protected lifetime income for retirement to supplement Social Security: a pension (53%) or an annuity (27%). Protected lifetime income is regular, reliable “checks,” like Social Security benefits, that continue for the rest of your life. The large majority of Americans without protected lifetime income are left to figure out how much they can spend in a month or a year of retirement while leaving enough for the future, even though they can’t know how long that future will last.
Protected lifetime income from pensions used to be more common for workers in middle-class jobs. In 1975, about 32 percent of employees in the United States had private-sector pension plans for representing about 29 percent of the total U.S. civilian labor force. In 2016, the most recent year for which the U.S. Department of Labor has data, slightly more than 9 percent of active private-sector employees representing slightly less than 9 percent of the total workforce had pensions.6
The effects of this pension gap show up in the Alliance’s Retirement Reset Tracker. As pensions become more and more rare for the next two generations of future retirees, and unprotected households are more and more common, Americans’ uncertainty about their ability to cover their expenses in retirement will rise. And therein lies the threat to the American middle class.
The wealthy never needed or sought pensions. They could rest assured they would be able to support themselves in retirement by drawing down funds from typical investment and bank accounts. Sadly, the poor, whether working or not, often did not have access to pensions, just as many lack access to employer-provided retirement plans today. This massive pension gap was felt most intensely by the millions of Americans fighting to stay in the middle class. The lost expectation of an employer-provided stream of retirement income that would last for the rest of their lives stokes the retirement worries among middle-class Americans. It should not be surprising that as pensions have declined, anxiety around retirement has risen.
Reducing Retirement Worries in the Future
It would be nice to report that pensions are making a comeback, but the evidence is lacking. To the contrary, the debate around pensions in Washington, D.C. policy circles has been focused on how to help struggling multi-employer pensions plans avoid insolvency7 and how to ensure sufficient funding to address the massive actuarial deficit at the Pension Benefit Guaranty Corporation, the federal government’s insurer of private pension plans.8
There is some good news. Congress recently enacted the Setting Every Community Up for Retirement Enhancement (SECURE) Act. The SECURE Act will make it much easier for employers to include annuities in the 401(k) defined-contribution retirement plans they offer to their employees/plan participants. Like pensions, annuities provide protected lifetime income. As more and more employer plans make annuities available, employees will be better able to protect themselves --- and reduce their retirement worries --- by building a stream of reliable retirement paychecks for themselves using an annuity.*
These changes to employer-provided pension plans are going to take time. Plan participants will need to express their interest in annuities to their plan sponsors and plan administrators to encourage those changes. Yet, in the absence of a return to pensions that doesn’t appear to be coming, annuities may be the best chance for Americans to retire with a substantial and lasting portion of their household income guaranteed, family wealth protected, and sufficient money to keep their homes, if that’s what they choose to do.
Ultimately, that’s why retiring with sufficient retirement income is a necessary part of any definition of being middle class in America. It’s a definition that allows middle-class families to satisfy all the other definitions, as well.
*What is an annuity?
Annuities are long-term, tax-deferred vehicles designed for retirement. Variable annuities involve risks and may lose value. Earnings are taxable as ordinary income when distributed and may be subject to a 10% additional tax if withdrawn before age 59 ½. Optional benefits are available for an extra charge in addition to the ongoing fees and expenses of the variable annuity. Guarantees are backed by the claims paying ability of the issuing insurance company.
Annuities are not for everyone. And, it’s important to remember that these products are meant to be long-term vehicles designed for retirement, so there are restrictions in place to discourage you from withdrawing all of your money at once or taking withdrawals before age 59 ½. However, most annuities do allow for exceptions based on specific circumstances such as a terminal illness or other emergencies.
Investing involves risk, including possible loss of principal.
The opinions and forecasts expressed are those of the author and individuals quoted and should not be construed as a recommendation or as complete.
1. Rakesh Kochhar, Pew Research Center, “The American middle class is stable in size, but losing ground financially to upper-income families”, September 6, 2018
2. Edward N. Wolff, National Bureau of Economic Research, “Household Wealth Trends In The United States, 1962 to 2016: Has Middle Class Wealth Recovered?”, November, 2017
3. Jenny Schuetz, Brookings, “Renting the American Dream: Why homeownership shouldn’t be a prerequisite for middle-class financial security”, February 13, 2019
4. Richard V. Reeves, Katherine Guyot, and Eleanor Krause, Brookings, “Defining the middle class: Cash, credentials, or culture?”, May 7, 2018
5. Alliance for Lifetime Income, "COVID-19 Retirement Reset Tracker Report", May, 2020
6. Author’s calculations using an average of employment and labor force size during the subject years from the U.S. Bureau of Labor Statistics’ Current Population Survey, as reported here, along with data about “active participants” in defined-benefit pension plansfrom the U.S. Department of Labor’s Employee Benefits Security Administration, available here (Table E-7).
7. S.2254 - Butch Lewis Act of 2019
8. U.S. Government Accountability Office, “High-Risk Series: Substantial Efforts Needed to Achieve Greater Progress on High-Risk Areas”, March 6, 2019