We Could Fix the Retirement Race Gap. Here’s How.

The ongoing question of whether Americans are financially prepared for retirement has taken a sharp turn due to COVID-19. The pandemic is forcing older workers into involuntary retirement because of health risks and decreased job prospects. And, many of these workers may not have enough saved for their retirement years.

Minority workers are disproportionately affected

Ever since the pandemic hit, unemployment rates for older Black and Latinx workers have been higher than those of their white counterparts. The increase in involuntary retirement numbers could lead to reductions in Social Security income, savings and disruptions in employer-provided health care. At a time when many older adults struggle to make ends meet, Black and Latinx retirees are even more likely to lack resources to help them through their retirement years.

[Read: Should COVID-19 Change Your Retirement Plans?]

The racial gaps in retirement loomed large even before the onset of COVID-19. And current economic disruptions caused by the pandemic are likely to worsen the issue.

As individual stories across the country become more publicized, ideas and proposals are being introduced to help fight the retirement race gap. Consequently, citizens and employers can take proactive steps to narrow the gap, as well.

Why is there a retirement race gap?

The reason why people of color struggle so much with retirement savings boils down to one thing: accumulation of wealth. And there are some clear reasons for this:

• According to the National Retirement Risk Index (NRRI) and the Center for Retirement Research at Boston College, the typical Black household has 46% of the retirement wealth of the typical white home, while the Latinx household has 49%.
• Minority workers are less likely than whites to have jobs offering retirement savings programs like 401(k) plans. Even workers offered these accounts might not benefit, because tax incentives and individual retirement accounts (IRAs) tend to be structured as deductions. Such deductions, in turn, benefit higher-income taxpayers. “Due to decades of discrimination, minorities are much less likely to land jobs with retirement plans, build valuable equity in their homes or inherit wealth from previous generations than white Americans,” said Ben Dobler, a financial coach with Stewardship Financial Counsel.
• People of color are less likely to own homes than their white counterparts. Homeownership has a large impact on retirement savings; older adults are assumed to access home equity at retirement, either by selling their houses or taking out a reverse mortgage.

How Social Security could help

Social Security is considered a racial inequality leveler and an important financial asset across all incomes and walks of life. And some proposals are in place to strengthen the retirement cushion, especially among lower-income and minority Americans.

These proposals include increasing the percentage of full benefits a worker might receive at age 62 and increasing benefits for those who must enter and leave the labor force more frequently due to job loss or caregiving.

[From Trent: The Easy Path to Retirement] 

Another possible solution is to grant caregivers partial Social Security earnings credits if they have to leave the workforce to provide care for a family member. Additionally, updating survivor benefits for low-income, dual couples could be helpful, especially for those wage-earners who can lose up to half of their household incomes when their spouses die.

A proposal to secure funds at birth

Another solution proposed by economist Darrick Hamilton is “baby bonds.” Hamilton, executive director of Ohio State University’s Kirwan Institute, indicated that every child born in the United States would be provided with a government-funded account; those born into lower-wealth families would receive more contributions over time. The accounts would benefit from compound interest growth and could be used to make long-term investments like purchasing a house, receiving a debt-free education or starting a business. They could also be saved and converted into IRAs.

Such a program could cost $80 billion a year — roughly 2% of the annual federal budget, and less than one-tenth of Social Security’s annual costs.

Other ways to narrow the retirement race gap

While the above relies on government backing and support (which can be slow to come by), shining a spotlight on financial processes can help individuals reach a rewarding retirement. Gaurav Sharma, a FinTech advisor, says, “If you look at East Asians or Indians, the savings rate is much higher, compared to other groups.” The reason? Cultural factors and social group behavior.

[Read: The Best Roth IRA Accounts for 2020]

“This behavior can be taught, which is why I am the biggest proponent of financial literacy,” Sharma said. “While the income gap is still the biggest factor, the savings gap is something that we can help fix with financial education.”

Dobler acknowledged the uphill battles minorities face when it comes to saving as well, suggesting they could “take advantage of tax benefits like the Retirement Savings Contribution Credit, when possible.” Other potential solutions could involve the exploration of individual retirement savings accounts, such as IRAs and Roth IRAs, he added. Finally, “employers should make an effort not only to hire members of [minority groups] but also to offer high-quality benefits, including retirement savings plans, to all of their employees,” says Dobler.

Too long, didn’t read?

COVID-19 has thrown the retirement race gap into sharper focus. While wealth creation and retirement savings have been a consistent issue for people of color, strategies could be put into place to close that gap. Boosting Social Security and other societal funding nets, along with financial literacy and private sector assistance, could help older generations access more equitable opportunities after they retire.

Keep reading

• Will You Get Another 1,200 Stimulus Check?
• Should You Save For Retirement Before Paying Off Debts?
• Do Parents Qualify for Unemployment If Schools Are Closed? It Depends. 

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