It should come as little surprise that the amount a worker earns during their career has a direct impact on the amount they can save for retirement. The higher the earnings, the greater the retirement savings. The same is true for wealth: generally speaking, wealthier people have greater levels of retirement savings. So what happens to retirement security when levels of income earnings and wealth vary significantly by race and ethnicity? An issue brief from the Center for Retirement Research (CRR) seeks to answer that question.
White Americans, on average, earn significantly more and accumulate more wealth than either black or Hispanic Americans. According to CRR, in 2016, white workers earned 1.8 times what black and Hispanic workers earned: $67,200 versus $37,000 and $38,000 respectively. The wealth disparity among the three groups is even greater. White households in 2016 had a median net wealth that was 7.2 times greater than black households and 5.4 times greater than Hispanic households. These sharp earnings and wealth disparities have a real impact when it comes to retirement savings.
CRR uses a measure called the National Retirement Risk Index (NRRI) to determine levels of retirement preparedness. In 2016, 50 percent of all households ages 30-59 are at risk of experiencing a lower standard of living in retirement. This is lower than in the immediate aftermath of the Great Recession, but still higher than pre-recession levels. When the NRRI is broken down by race & ethnicity, the numbers diverge a little more. In 2016, 48 percent of white households, 54 percent of black households, and 61 percent of Hispanic households were at risk of falling behind in retirement.
There are two noteworthy points about these numbers. First, the number for black households is largely unchanged from before the recession: 52 percent in 2007 versus 54 percent in 2016. Why is this? Black households, unfortunately, tend to have lower income than other groups; therefore, they benefit more from the progressive structure of the Social Security formula which gives a higher replacement ratio to lower income workers. This is not discussed in the CRR issue brief, but it should be noted that black households participate in defined benefit pension plans at nearly the same rate as white households. This is a crucial element of retirement security for many black households because defined benefit pensions are the best path to a secure retirement.
For Hispanic households, the number at risk in retirement is noticeably higher in 2016 than in 2007: 61 percent versus 51 percent, respectively. This is because Hispanic households were greatly impacted by the housing crash and the resulting loss of home values. As part of its calculation, the NRRI assumes that households will take a reverse mortgage in retirement to add the value of their home to their retirement income. As a result, the loss of home value increases the number of households at risk according to the NRRI.
Hispanic households, in general, have lower levels of retirement savings than other groups. There are many reasons for this and next week we will discuss a recent report from the National Institute on Retirement Security (NIRS) that goes deeper into the question of Latinos and retirement security.
The sad truth is that many households in the United States struggle with retirement savings, but it is important to remember that different households are impacted in different ways. With so many working families already at risk of falling behind in retirement, it is critical that politicians protect defined benefit pensions, the most secure and reliable source of retirement savings. Gutting pensions will only exacerbate an already existing retirement security crisis.