America's Hidden Retirement Crisis is Racial
A new study finds blacks and Latinos have far less in savings than whites. How to close the gap.
A troubling new study, Race and Retirement Insecurity in the United States, reveals that America’s retirement crisis is particularly dire for blacks and Latinos.
“If nothing changes, the future for people of color is frightening,” author Nari Rhee, research manager for the nonprofit National Institute on Retirement Security (NIRS), told me.
(MORE: The Retirement Crisis Facing Blacks and Latinos)
Rhee’s report comes on the heels of other recent surveys from financial services firms and consultants with their own scary stats documenting the general lack of retirement savings among blacks and Latinos.
Striking Racial Differences for Retirement Saving
Among the key findings in the Race and Retirement Insecurity report:
- Workers of color (Latinos especially) are much less likely than whites to be covered by employer-sponsored retirement plans. Only 38 percent of Latino employees age 25 to 64 and 54 percent of blacks work for organizations with such plans; 62 percent of white employees do.
- Blacks and Latinos are far less likely to have dedicated retirement savings than white households of the same age. Roughly two-thirds of black working-age households (62 percent) and Latinos (69 percent) don’t have retirement accounts; 37 percent of white households don’t.
- Three out of four black households age 25 to 64 and four in five Latino households have less than $10,000 in retirement savings. One in two white households are in that camp.
- Among near-retirees, the average retirement savings balance among households of color ($30,000) is one-fourth that of white households ($120,000). “It wasn’t surprising to me that there was a pretty significant amount of racial disparity in retirement savings," Rhee told me. "What was surprising was how much worse it was for older households.”
One slight caveat about the study: It’s based on 2010 data, so the numbers don’t reflect the recent run-up in stock prices and housing values.
“Obviously, there’s been an improvement in retirement account values since then," said Rhee, "and, with the economy growing, more people are saving.” But she said she doubted that updated numbers would be much higher for minority households in general, because so many of them are still not offered retirement plans at work.
(MORE: How to Make Your Retirement Money Last)
That brings me to the key question: What's behind the huge retirement savings gap between blacks, Latinos and whites?
It’s complicated. But here are five reasons based on the NIRS study and other surveys I’ve seen:
5 Reasons for the Disparities
1. Minorities disproportionately work for employers that don’t offer retirement plans. According to NIRS, blacks and Latinos are less likely than whites to be employed in industries and occupations that provide high wages and workplace benefits, including retirement plans. They’re also more likely to hold part-time jobs, where retirement plans are not offered.
2. Blacks and Latinos tend to earn less than whites, which means they have less money to put into retirement accounts. Age/sex adjusted earnings per person for people of color are currently 30 percent below those of non-Hispanic whites, according to The Business Case for Racial Equity, a just-released report by the Altarum Institute and W.K. Kellogg Foundation. And according to the 2012 study by the benefits consultant Aon Hewitt, 401(k) Plans in Living Color, African-Americans who contributed to 401(k)s in 2010 put in 5.6 percent of their income; for Hispanics it was 5.9 percent; whites set aside 7.2 percent.
3. People of color are less likely than whites to contribute to available 401(k) plans. The Aon Hewitt study found that just 68 percent of African-Americans and 66 percent of Hispanics participated in their employers’ retirement plans in 2010, compared with 79 percent of whites. The disparity, said Rhee, is partly because people of color tend to be less likely to work at their organizations long enough to qualify for the plans.
4. Minorities who contribute to employer-sponsored retirement plans are more likely than whites to tap them before retirement. Roughly 36 percent of black participants in 401(k) plans (also called defined-contribution plans) and 31 percent of Hispanics have either made withdrawals from them, cashed out their balances when leaving their firms or taken out 401(k) loans, according to HelloWallet, a financial services consultant. By contrast, 25 percent of white workers have.
The Aon Hewitt study said that about 6 in 10 African-Americans and Hispanics who leave their jobs cash out their retirement savings entirely, compared to less than 4 in 10 whites.
5. Blacks and Hispanics tend to be more conservative investors than whites, which can inhibit their returns, according to Prudential and ING. Prudential’s 2013 report, The African American Financial Experience, said that 10 percent of African-Americans own mutual funds and 13 percent own individual stocks, compared to 20 percent and 23 percent of the general public, respectively. The ING Retirement Research Institute’s 2012 study, Retirement Revealed, said 44 percent of Hispanics are conservative investors vs. 34 percent of the overall U.S. population.
In her Forbes piece about the ING study, "Why Latinos Aren't Saving for Retirement," my Next Avenue colleague Kerry Hannon wrote: “Based on my reporting, for some Hispanic workers, language barriers and a lack of Spanish-speaking financial advisers” help explain why many haven’t saved much for retirement. She also noted that it’s not unusual, in Latino culture, to assist aging parents financially or contribute to a child’s education before saving for retirement.
How to Close the Retirement Gap
When I asked Rhee what she thinks could be done to reduce the racial retirement preparedness gap, she made two suggestions:
More employers should offer retirement plans, she said. In Australia, Rhee noted, employers are required to do so. As I wrote in a previous Next Avenue blog post about Australia's retirement system, by law, employers there must contribute 9.25 percent of earnings for virtually all employees age 18 to 70.
Rhee also believes the U.S. government should expand the Saver's Credit, a tax incentive that encourages low- and middle-income Americans to put away money for retirement. In 2013, married couples with incomes up to $59,000 and singles with incomes up to $29,500 qualify for a tax credit of 10 to 50 percent of their contributions to IRAs, 401(k)s and other employer-sponsored retirement plans (with a contribution limit of $4,000 for couples and $2,000 for singles).
“We offer a lot of incentives for high-income savers," Rhee pointed out, "but not enough for low-income savers.”
And if neither of those happen?
“We’ll see increased pressure on adult children who have to take care of their parents. We’re already starting to see that,” said Rhee. “This is a pressing issue to make sure workers avoid a tremendous strain on their families and on the public sector as they retire.”