America’s Self-Employed Workers Are Ill Prepared for Retirement

Although nontraditional work has existed in the American economy for decades, its visibility has increased with the advent of online “gig” workers. Today, an independent worker might be a programmer on a temporary contract, a freelance writer, a substitute schoolteacher, or a driver for Uber or Lyft.  

Independent workers generally don’t have access to retirement plans or health insurance through their employers. Little additional data exist, however, to indicate whether they have coverage through a second job or a spouse’s workplace retirement plan. Researchers also don’t have a clear understanding of how many workers without pension coverage actually want it. These gaps in knowledge point to the need for more and better data.

To start answering some of these questions, The Pew Charitable Trusts turned to the University of Michigan’s Health and Retirement Study (HRS), which follows Americans age 50 and older as they retire and age. The HRS is a rich source of data on demographics, work history, income, and assets. It also includes data on whether a spouse or partner participates in a workplace retirement plan. We looked at three categories of workers: self-employed workers in single-person firms (the “solo self-employed,” about 8.6 percent of workers); self-employed workers in multi-person firms (about 8.3 percent); and the remaining workers, who are in traditional employer-employee relationships.

Multi-person self-employment arrangements, including legal, medical and other practices, may be sufficiently large to suggest long-term stability. Consequently, self-employed workers in different work circumstances might have different levels of earnings and retirement readiness.  We tested this hypothesis by examining income, participation in workplace retirement plans, and assets accumulated in retirement savings plans.

Both types of self-employed workers ages 50 to 64 were more likely to be male, white, and well educated, and this did not vary with firm size. Men were more likely to be employed in multi-person firms; women were more likely to be in solo self-employment. Self-employed women were much more likely to be part of a couple than were self-employed men or traditional workers. These results raise the question of whether a spouse or partner’s employment might provide a cushion against effects of self-employment such as income fluctuations.

Overall, many self-employed workers near retirement, no matter the firm size, appear to be less prepared for retirement than workers in traditional employment relationships.

The HRS data suggest that those who are self-employed in single-person firms may be more likely to face financial insecurity in retirement than other workers, including those who are self-employed in multi-person firms. Only about 13 percent of the solo self-employed participated in retirement savings plans at their current jobs, compared with almost three-quarters of traditional workers. Those who did participate generally had lower balances than other workers. Some explanation for these results may lie in the study’s findings that members of this group had a more precarious financial situation than other workers: They had the lowest median total household incomes, work hours, and hourly and weekly wage rates of all workers. This group also had the highest household poverty rates of all workers.

Self-employed workers in multi-person firms do the best of all—surpassing traditional employees—on measures related to earnings. About 29.9 percent participate in retirement savings plans at their current job, a lower share than for traditional employees, but higher than those who are self-employed in single-person firms. When they do have on-the-job retirement savings plans, their average balances are higher than those of all other workers.

The study found little evidence that spousal retirement savings help compensate for independent workers’ own lack of savings. Both groups of self-employed workers were more likely than traditional workers to be married. The spouses of independent workers in single-person firms were slightly more likely than other spouses to participate in their workplace retirement savings plans, but their defined contribution balances were generally lower than those of traditional workers. The spouses of independent workers in multi-person firms were more likely than other spouses to be self-employed, which may help explain their lower participation in workplace retirement plans—although, when they do have on-the-job retirement savings plans, their average balances are higher than those of all other spouses.

This study suggests that the self-employed are not a uniform group in terms of earnings, work hours, and retirement readiness. Firm size seems to play an important role in financial security and retirement readiness, with those who are self-employed in single-person firms performing less well on important measures than other workers.

Alison Shelton is a senior research officer for The Pew Charitable Trusts’ retirement savings project.