Karen Dynan is a Professor of the Practice at the Harvard Economics Department and Harvard Kennedy School; previously she served as Assistant Secretary for Economic Policy at the U.S. Treasury Department. Doug Elmendorf is a Professor at Harvard Kennedy School; he previously served as the director of the U.S. Congressional Budget Office.
Retirement security is becoming an increasingly pressing issue in the United States, as the nation confronts an aging population and a tight federal budget. When policymakers begin to address these challenges, it is crucial to understand how retirement security varies across different groups.
Our recent research focuses on racial disparities in retirement preparedness and how they evolved during the first two decades of the 21st century. Stark disparities in financial and nonfinancial wealth are well-documented, but to fully grasp retirement security, other critical resources such as Social Security and defined benefit (DB) pensions must also be considered. Using data from the Panel Study of Income Dynamics, we explore racial trends in retirement security and identify concerns that should inform future policymaking.
Persistent Gaps in Retirement Security
A first lesson from our analysis is that there are enormous racial wealth disparities as families approach retirement. In 2019, families with White heads nearing retirement had far more wealth than families with Black heads, across the board. Median wealth for White-headed families in their 50s was $172,000, or seven times the $24,000 held by their Black counterparts.
After factoring in Social Security and DB pension incomes, we showed that many middle- and high-income families nearing retirement in 2019 had income replacement rates estimated to fall below 60 percent. In other words, many of these families would be predicted to struggle to maintain their pre-retirement standards of living. The shortfalls were particularly acute for Black families, who had far less wealth and lower access to DB pensions than White families.
Our analysis also highlights concerning trends over the first two decades of the 21st century. For example, many families nearing retirement in 2019 had substantially less wealth than their counterparts in 2001 (see Figure). For example, median inflation-adjusted wealth for White-headed families in their 50s fell from $260,000 in 2001, to $172,000 in 2019, for a 34% decline. Meanwhile, wealth for Black-headed families in the same group dropped from $72,000 to $24,000, for a 67% decrease.
Figure:
Inflation-Adjusted Wealth at Different Points in the Distribution for Families with White and Black Heads in their 50s
Source: Dynan, Karen E. and Elmendorf, Douglas W., Changes in Racial Gaps in Retirement Security over Time (July 2023). Wharton Pension Research Council Working Paper No. 2023-14.
The long-term decline in DB pension coverage further exacerbated the decline in retirement security. Between 2005 and 2019, average projected retirement income replacement rates (including Social Security and pensions as well as the annuitized value of wealth) fell by about 9 percentage points for White families and 8 percentage points for Black families.
The Role of the Great Recession
Much of the deterioration in retirement preparedness can be linked to the Great Recession of 2007-2009. This period saw steep declines in homeownership, particularly for Black families. Between 2001-2019, homeownership rates fell by about 15% for White-headed families in their 40s and 50s, and by 25-35% for Black-headed families. This drop meant that fewer families benefited from the house price recovery starting in 2012.
Additionally, families that experienced long-term unemployment during or after the Great Recession lost wealth between 2007 and 2019, while those who avoided unemployment typically saw gains. Because families experiencing long-term unemployment typically had less wealth to begin with, their losses were especially detrimental. Black families were disproportionately affected, as they were twice as likely as White families to experience long-term unemployment (13 versus 6.5%).
Policy Considerations
Our results highlight several steps that policymakers can consider as they evaluate how to address racial disparities in retirement resources, along with more general concerns about retirement security.
To start, we showed that Social Security plays a critical role in reducing retirement insecurity, especially for families with low and moderate incomes, disproportionately the case for Black families. This implies that reducing Social Security benefits could exacerbate this group’s vulnerability. Moreover, reductions targeted at higher-income households could also increase their financial fragility as well.
Given that many families have low levels of non-pension wealth, a second constructive step could be to make it easier for families to save. Past research has demonstrated that workplace retirement savings vehicles such as 401(k)s, particularly those with automatic enrollment, are effective in helping families build retirement savings. Nevertheless, only two-thirds of American private-sector workers are offered 401(k)s and similar plans in the workplace. Initiatives to promote the establishment of such plans or substitutes could offer families of all races and ethnicities greater access to tools to build wealth during their working years.
Finally, as we showed, the Great Recession left lasting scars on household wealth, underscoring the need for policies to limit the fallout from economic downturns. Strengthening unemployment insurance, establishing foreclosure prevention programs, and implementing timely monetary and fiscal stimulus to return demand to full-employment levels can mitigate the long-term impacts of recessions. These measures are particularly important for vulnerable families, including many Black families, who are often hit hardest by economic shocks.
The 2020s Experience
Our empirical research stopped just before the COVID pandemic that began in 2020, but since that time, there have been some positive developments. Stimulus programs during the pandemic provided significantly more robust financial support to households than during the Great Recession, with expanded unemployment insurance, eviction moratoriums, and other policies helping many families weather the crisis.
Saving rates surged in 2020 due to these measures, and also due to reduced spending on activities curtailed by the pandemic. Families who owned homes or stocks also benefited from substantial capital gains. As a result, wealth increased materially across major racial and ethnic groups. For example, one study found that between 2019 and 2022, the typical Black family’s wealth grew by about 60%, compared with a 30% increase for the typical White family. Nevertheless, the racial wealth gap remains very large, as Black families started with far less wealth in absolute terms. Additionally, questions remain regarding how well families have fared in the face of high inflation and other economic pressures.
Concluding Thoughts
The racial disparities in retirement preparedness that we document present a substantial challenge for policymakers and for society at large. These wealth gaps, rooted in historical inequities and exacerbated by economic shocks, threaten the financial wellbeing of millions of Americans as we age. Yet with the right policies, it is possible to mitigate the effects of future economic disruptions and structural inequities, helping more families build a secure financial foundation for retirement.
Views of our Guest Bloggers are theirs alone, and not of the Pension Research Council, the Wharton School, or the University of Pennsylvania.
