Pension Coverage and Retirement Security

Much attention has focused on the shift in the private sector from defined benefit to defined contribution plans, primarily 401(k)s. Often forgotten, however, is that, at any given moment in time, only about half of private sector workers are covered by any sort of employer-sponsored plan. This lack of coverage has two implications. First, a substantial proportion of households – roughly one-third – ends up with no pension coverage at all during their entire worklife and must rely exclusively on Social Security during retirement. And, even under current law, Social Security will provide less in the future relative to pre-retirement earnings than it has in the past. Second, with median job tenure of about four years in 2008, many employees move in and out of coverage so that they end up with inadequate 401(k) balances. This brief proceeds as follows. The first section describes the extent to which private sector workers are covered by any retirement plan. The second section explores the implications of the lack of universal coverage. The third section discusses policy initiatives to improve coverage. The key finding is that, absent a government initiative, pension coverage is unlikely to increase, which – coupled with declining earnings replacement under Social Security – means that many future retirees will end up with inadequate incomes.