Sluggish Wage Growth Leads to Lagging Retirement Savings, Professor Says

Despite low joblessness, academic concludes, most work still fails to generate enough money for later years.

The link between low unemployment and wage gains is broken, according to New School economics professor Teresa Ghilarducci—and that has undermined retirement savings.

September’s employment report showed that average hourly compensation for private sector workers rose 2.9%, which was faster than the 1.7% rise in annual inflation, but nothing special. Meanwhile, unemployment is at a 50-year low. This persistent slow growth is evidence of continuing structural problems in the US economy.

The Economic Policy Institute calculates a target for wage growth based on the Federal Reserve’s inflation target of 2%, the current productivity growth trend, and the relative shares of national income going to labor and capital. Wages should grow by 3.5% to 4%, EPI finds, not including increases in labor’s overall economic share.

For retirement funds, “stagnant wages mean stagnant pension contributions,” said Ghilarducci, a noted scholar on retirement and labor issues, wrote in an email, following her latest published work on those subjects. All retirement savings, except for traditional defined benefit plans, are voluntary contributions and each dollar competes with all other expenses, she pointed out. Research shows that wages for typical workers, adjusted for inflation, declines after about age 45.

That fact means the so-called catch-up contributions—where people over 50 can put more into their tax deferred retirement accounts—is a benefit just for the privileged few who have high incomes that increase after age 50. Only those at the top 20% have enjoyed steady wage increases over the past 30 years, she said. 

At least, she went on, low unemployment rates permit some to make retirement plan contributions, and people are less tempted to take money out of their 401(k)s early.

“The only thing I worry about are in periods of low employment, workers go from job to job searching for higher wages and having to wait a year before they can join their company‘s 401(k),” she said. 

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