The Income Gap Jeopardizing Retirement for Millions

Monique Louvigny, an event coordinator in the San Francisco Bay Area, economizes where she can. She drives a 10-year-old Prius, brings a thermos of coffee to work instead of patronizing a place with baristas, and takes advantage of a drive-through food pantry once a month.

Laid off at 57, “I kind of reinvented myself,” she said. She rebuilt her career as a freelancer, overseeing receptions and conventions for many companies and institutions, including the local de Young and Legion of Honor art museums.

But her income fell to less than $30,000 last year. “It’s erratic,” she said. “In January, I have 12 days of work.” In the summer, she might have only three or four.

Ms. Louvigny, 64, feels fortunate on two fronts. For health insurance, she has qualified for Medi-Cal, California’s Medicaid program. And two years ago, she paid off the mortgage on her condo in relatively affordable Vallejo. A housemate pays rent, which helps cover maintenance costs and rising condo fees.

“I think I can hang on for two years, workwise,” she said, and then she plans to begin receiving Social Security benefits at her full retirement age of 66.

Ms. Louvigny’s earnings place her in a category defined in a recent study in the journal Health Affairs as lower middle class for Americans nearing retirement. It’s a group that has steadily lost ground financially over the past two decades, with stagnating earnings and fewer economic resources than it had in the early 1990s.

Not only do such losses portend insecure retirement, but they also have disturbing implications for both health and life expectancy, the study and others have found.

The upper middle class, on the other hand, has fared distinctly better.

“There’s a lot of attention paid to the inequities between the very bottom and the top of income distribution,” said Jack Chapel, the lead author of the study, an economist and doctoral candidate at the University of Southern California. “We wanted to look at the middle class, where people are struggling.”

Drawing on data from the national Health and Retirement Study between 1994 and 2018, the researchers found “a bifurcation” among Americans in their mid-50s, he said.

In effect, they now divide into two middle classes: the more secure upper tier (which, in 2018, had on average more than $90,000 per person in annual resources, including income and the annualized value of home equity, retirement savings and pensions); and the increasingly precarious lower middle class. In 2018, people in that group had average annual resources of less than $32,000.

In the early 1990s, by contrast, “our lower-middle-class group had pretty comparable outcomes to the upper middle class” in measures of health and economic well-being, Mr. Chapel said.

No more. In two dozen years, the gap between them widened. Homeownership, for instance, declined by 5 percent in the upper middle class but declined by 31 percent in the lower middle class, only 54 percent of whom owned homes in 2018.

For those still working, earnings rose 27 percent in the upper middle class and fell 5 percent for lower-middle-class workers, adjusted for inflation. “They’re making less because they’re working fewer hours or at lower wages, or both,” Mr. Chapel said. They were also far less likely to have employer-sponsored health insurance.

Total financial resources projected over their lifetimes after age 60 — including earnings, savings, pensions, housing wealth and public benefits like Social Security — stagnated for lower-middle-class people, rising just 2 percent over 24 years to about $406,000.

But total resources reached about $975,000 for the upper middle class, a 26 percent increase. (For the wealthiest group, the comparable figure was nearly $3 million.)

Teresa Ghilarducci, an economist at the New School for Social Research whose studies have found similar results among middle-income Americans, pointed to one reason for the growing disparity. “The house has become a reservoir of debt,” she said. “Financial institutions have figured out how to extract wealth from homes with refinancing and second mortgages, and they’ve gotten more sophisticated.”

For most middle-income people approaching retirement, she said, the primary source of wealth isn’t home equity or retirement savings. It’s Social Security benefits.

One particularly stressed subset: older workers in physically demanding jobs. A report from the Older Workers Retirement Security Task Force, convened by the National Academy of Social Insurance, recently estimated that at least 10 million workers over age 50 belong in that category.

Those jobs include “a lot of service-related work requiring you to be on your feet all day,” said Joel Eskovitz, a member of the task force and an AARP policy director. “People in retailing, home health aides, janitors. And a lot of jobs connected with Amazon and other tech companies — warehouse work, deliveries.” Workers in these jobs are disproportionately Black, Hispanic and Asian.

Because “they’re not jobs that you can hold onto until deep into your 60s,” Mr. Eskovitz said, such workers often claim their Social Security retirement benefits early, at age 62. Doing so leads to “a significant reduction in monthly benefits and lifetime income” compared with waiting until full retirement age, now 67 for most beneficiaries.

The gap between the two middle classes also shows up in measures of health. Among the lower middle class, “there’s almost no decline in smoking,” Mr. Chapel said. “But the upper middle has cut smoking roughly in half.”

Those with lower income have more chronic health conditions and are far more likely to describe their health as fair or poor. (One exception: Obesity has risen dramatically for both income groups.)

That translates to differences in life expectancy, too. “Everyone is living longer, but the upper middle class is getting much more of a gain, and a higher proportion of their remaining years are quality years,” without serious health problems, Mr. Chapel said.

Between 1994 and 2018, life expectancy at age 60 increased twice as much for upper-middle-class men and women as for those in the lower middle class.

Even those whose slightly higher incomes technically place them in the upper middle class can feel insecure. “I just pray I get to keep my job at least until I hit 65,” Patricia Thompson, who is 62, wrote in a Facebook message.

She and her husband live in Hickory, N.C., where she earns $53,000 a year as an acquisitions editor for a small press and where her husband, 71 and retired, receives a $1,500 Social Security payment and draws $500 from retirement savings each month. That’s above the 45th percentile in total household income for a married couple.

But they are still paying off a mortgage and a car loan, and “I have no pension,” Ms. Thompson wrote. “I barely have savings because of student loans late in life. Where’s the safety net for people like me?”

“It really is a huge policy challenge, figuring out how to ensure different groups can live in dignity in retirement,” Mr. Eskovitz said.

At a time of discussion about raising the Social Security retirement age, policymakers and advocates have suggested a number of measures to bolster financial stability for lower earners and those who are prematurely pushed out of the labor force.

The Older Workers Retirement Security Task Force generated a long list of suggestions, including a “bridge benefit” for workers with physically arduous jobs, allowing them to receive partial Social Security payments early without locking them into reduced benefits for the rest of their lives.

Raising the cap on the income subjected to payroll taxes could improve Social Security’s solvency for everyone.

Mr. Chapel pointed to a new Labor Department program called RETAIN, which helps ill or injured workers return to their jobs and includes workplace accommodations, rehabilitation and retraining.

Ms. Louvigny thinks she will be OK, as long as she can keep working for a few more years and remains careful about her spending. “I try not to worry,” she said. “I do not allow those thoughts.”