David C. John is a Senior Policy Advisor at the AARP Public Policy Institute and a nonresident Senior Fellow at the Brookings Institution. J. Mark Iwry is a Visiting Scholar at the Wharton School and a nonresident Senior Fellow at the Brookings Institution. William G. Gale is a Senior Fellow at the Brookings Institution.
The US racial wealth gap has been a consistent feature of American life for centuries. Median wealth was $188,200 for White households in the 2019 SCF, compared to $24,100 for Black households and $36,100 for Hispanic households. The gap may have grown in recent years and is especially concerning as families approach retirement.
Given these patterns, it is not surprising that similar gaps arise in retirement wealth accumulation. Median retirement account balances in the 2019 SCF were $80,000 for White households compared with $35,000 and $31,000, respectively, for Black and Hispanic households. Similarly, 81 percent of Whites report having some retirement savings, compared to 64 percent of Blacks and 61 percent of Hispanics.
In our recent research, we examine how four policies could enhance retirement wealth, especially for minorities, and reduce racial inequity in retirement balances.
Dedicated Emergency Savings Accounts
Financial emergencies strike at all income, age, and educational levels, and they can have lasting consequences. A Pew study found that 60 percent of households reported having at least one financial shock in a 12-month period, and almost a third (32 percent) experienced two or more. The lasting effects where households found it difficult to meet their regular expenses after a shock especially hit Black, Hispanic, and low income households. However, these populations are also less likely to have savings. The Consumer Financial Protection Bureau (CFPB) found that 41 percent of Black households and 29 percent of Hispanic households reported having no emergency savings, compared with only 19 percent of White households.
Having emergency savings can reduce peoples’ need to use retirement assets prematurely. The CFPB study reported that 59 percent of nonretired people in 2021 who had no emergency savings took money from their retirement accounts over the previous year, compared to 27 percent of those who had emergency savings of less than a month’s income, and 9 percent of those who had emergency savings equal to or exceeding a month’s income.
Emergency savings totals alone are not a useful indicator of saving success. Using emergency savings can have lasting benefits. Low- to moderate income households having liquid savings of about one month’s earnings over a four-year study period were significantly less likely to experience extreme financial hardship, up to three years later.
How these accounts are structured, what features savers want to see in them, ways to improve participation, and recent federal laws making it easier for employers to offer emergency savings accounts are discussed in our new work, as detailed below.
Improved Access to Retirement Savings Accounts
Access to and participation in a retirement savings account is essential to retirement security, yet it has been estimated that almost 57 million Americans lack access to a payroll deduction workplace retirement savings plan. People of color and lower-income workers are especially disadvantaged, with 53 percent of Blacks and 64 percent of Hispanics lacking access, compared to 42 percent of White workers. Similarly, 79 percent of those earning $18,000 or less and 64 percent of those earning between $18,000 and $31,000 are not covered by a workplace plan.
In response to this pattern, several states have required employers to default their employees into state-facilitated AutoIRAs (automatic Individual Retirement Accounts), unless the firm offers a pension or retirement savings plan. State-facilitated AutoIRAs mainly serve lower-income workers who experience high levels of job turnover. While participation patterns by race and ethnicity are not available for all states, the largest, CalSavers, estimates that two-thirds of its potential users are people of color. One study modeling the effect of a universal Auto IRA with built-in emergency savings found that median household assets of workers who began to save in their 20s were projected to increase by 109 percent for Whites and 125 percent for Black/Hispanic households.
Improved Portability of Retirement Savings
US retirement savers can find it difficult to move their retirement balances from one employer plan or IRA to another. Black and Hispanic 401(k) and IRA savers are more likely to have small balances than are White savers, leaving them more prone to have their past employer plan accounts automatically rolled into IRAs. Unfortunately, such small IRAs are more likely to be abandoned, and retirement balances rolled over into IRAs when departing employees fail to respond to plan requests for direction are about 10 times more likely to be abandoned than are other account types.
In response, the SECURE 2.0 Act of 2022 included “auto-portability” provisions, giving employers statutory permission to rollover retirement savings balances under $7,000 to a new employer’s plan. As instructed by that law, the Department of Labor also has created an online lost and found facility that is beginning to help participants locate lost retirement benefits. These are good first steps, but additional reforms are needed to ensure that individuals find their lost or forgotten accounts more readily.
The Saver’s Match
One of the most important elements of SECURE 2.0 is the creation of a Saver’s Match, under which low-to-moderate income savers will receive up to a 50 percent match from the government of their own retirement plan contributions. Unlike the previous Saver’s Credit, the new match will be deposited directly into the individual’s retirement account or IRA, and every saver who qualities will be entitled to the credit, regardless of whether the saver had an actual tax liability.
Joint filers with incomes below $41,000 could receive a match in each contributing spouse’s account of up to $1,000 for that spouse’s contributions of up to $2,000, with joint filers earning between $41,000 and $71,000 receiving less as the credit phases gradually down to zero. The match will be considered a pre-tax contribution, to be taxed only when withdrawn from the retirement account; therefore, savers may not elect to have it deposited into Roth or Roth IRA accounts.
Conclusion
Each of these four reforms would increase household wealth and improve equality of outcomes for lower earnings, and implementing all four together would have an even greater effect. Nevertheless, these mechanisms will not erase the racial retirement wealth gap in America. Additional retirement system and labor market reforms will be needed for that, some of which are described in the new volume from the Pension Research Council.
Views of our Guest Bloggers are theirs alone, and not of the Pension Research Council, the Wharton School, or the University of Pennsylvania.
