Retirement Racial Wealth Gap Disproportionately Impacts Black, Hispanic Americans

Accumulating adequate income in retirement is especially difficult for Black and Hispanic families in the U.S., as the racial wealth gap and inequity in the housing market persists, according to research aggregated by the Wharton School of the University of Pennsylvania.

At Wharton’s 2023 Pension Research Council Symposium in March, Harvard University professors Karen Dynan and Doug Elmendorf argued that the sharp decline in the share of families who have defined benefit pensions is a major factor contributing to the racial wealth gap in retirement—since defined benefit plans have traditionally provided considerable income in retirement and did not come directly out of an employee’s paycheck.

The symposium, titled “Diversity, Inclusion, and Inequality: Implications for Retirement Income Security and Policy” was held in Philadelphia on March 30 and 31. Based on research presented at the symposium, the Wharton School published a journal article, “Closing the Racial Wealth Gap in Retirement Readiness.”

For families with white heads of household in their 50s, the Harvard professors found that median real wealth fell to roughly $172,00 in 2019 from $260,000 in 2000. In contrast, median real wealth for families with Black heads of household dropped even more significantly—to about $24,000 from $72,000 over the same time period.

“One might hope that families without DB pensions would save more themselves, but that is not the case,” the professors noted at the symposium. “The challenge of receiving adequate income in retirement is especially acute for many families with Black heads, as Black-headed families … are notably less likely to have defined benefit pensions.”

Racial Inequity in the Housing Market

Historic inequities have prevented Blacks, in particular, from building housing wealth. According to Larry Santucci—senior advisor and research fellow at the Federal Reserve Bank of Philadelphia—a 2016 survey found that 73% of white families owned their homes, with an average net housing wealth of about $216,000. By comparison, just 45% of Black families owned a home, with an average net housing wealth of only $94,400—less than half of the average white family.

Housing wealth comprises two-fifths of the net wealth of retirement-age Americans, according to Amir Kermani, a professor of finance and real estate at the University of California, Berkeley.

“About half of the Black-white gap can be explained by higher rates of distressed sales among Black homeowners,” Kermani and economics professor Francis Wong concluded in their presentation, “How Racial Differences in Housing Returns Shape Retirement Security.” “Closing the gap in housing returns would cut the Black-white gap in primary housing wealth at retirement in half.”

Social Security Insolvency Poses Threat to Racial Wealth Gap

“Retirement adequacy,” according to the Wharton School, is often defined as the ability to replace in retirement income equivalent to between 75% and 80% of pre-retirement income. For many households, retirement is mostly financed from pension accumulations, Social Security benefits and non-retirement assets, the Wharton School found.

This poses a problem, as an increasing number of employees will not have access to a pension, and Social Security is on track to reach insolvency by 2034, where payable benefits are projected to fall to 80% of expected levels.

While the median Black household earns 24% less per adult than the median white household, the latter has six times more marketable wealth—such as stocks, housing equity and bank accounts—than the former. But after taking Social Security wealth into account, the Black and white wealth gap is far smaller, reported Wharton finance professor Sylvain Catherine and Yale Law School professor Natasha Sarin in their paper, “Social Security and the Racial Wealth Gap.”

Catherine and Sarin found that Social Security wealth currently comprises 61% and 59% of Black and Hispanic households’ total assets, respectively, up from just 21% and 9% three decades ago.

“This is because the progressive Social Security benefit formula pays relatively higher benefits to lower-earning, versus higher-paid, workers,” the Wharton paper stated.

Catherine and Sarin warned that unless policymakers reform Social Security to address its looming insolvency, lower-income retirees and particularly Black and Hispanic households, will confront larger racial wealth gaps.

Debt Disproportionately Burdens Racial Minorities

Carrying debt into retirement is another factor that is undermining older Americans’ ability to accumulate wealth.

The researchers also found that, compared to an older adult in a majority-white community, an older adult in a community of color is more likely to have any type of delinquent debt, carry a higher balance of total delinquent debt and have a higher balance of medical debt in collections.

In a majority-white community, an older adult is more likely to have a higher balance of student loan debt and credit card debt, according to the research.

Policy Reforms That Could Help Close Gap

Beyond financial wellness programs and the SECURE 2.0 Act of 2022, which both aim to help employees’ retirement readiness and manage their personal finances, speakers at Wharton’s symposium identified several ways in which the racial retirement wealth gap can be narrowed.

Naomi Zewde, a professor in the department of health policy and management in the Fielding School of Public Health at UCLA, noted that several states and municipalities have launched Baby Bonds programs, often with more generous financing for lower-income families.

Baby Bonds set aside funds for babies born into poverty and help parents pay for their children’s education. These are federally funded, and parents and kids cannot access the money until early adulthood.

Retirement-friendly tax reform policies could also benefit minorities. According to “Tax Policy to Reduce Racial Retirement Wealth Inequality,” the typical white household has more non-Social Security retirement wealth ($176,000) than the typical Hispanic household ($35,000) and seven times more than the typical Black household ($24,300).

The authors of this study argued that racial inequities can be addressed by reorienting retirement savings incentives toward moderate-income families, taxing retirement income streams more equitably at the state level and ensuring taxation of real estate wealth in retirement.

Expanded access to emergency savings accounts and easier portability of retirement balances from employer to employer are also solutions mentioned to close the racial retirement wealth gap.

David C. John, senior strategic policy advisor at the AARP Public Policy Institute, and J. Mark Iwry and William G. Gale, both senior fellows at The Brookings Institution, found in their research that people of color and lower-income workers lack access to emergency savings devices, with 53% of Black workers and 64% of Hispanic workers in this situation, as compared with 42% of white workers.

“Having an emergency savings account and auto-enrollment in pensions are especially important for enhancing retirement preparedness,” the Wharton paper stated.