Two topics that are near and dear to my heart are inequality and retirement. Inequality is an obvious one…I’m writing a blog about it. And I really want to retire. Just kidding!! Actually, I also spent five years as a researcher at Boston College’s Center for Retirement Research. Recently, I had an issue brief come out through The Center that touches on both these topics. It was about racial inequality in retirement wealth.
As I pointed out a few months ago, the income gap between black workers and white households has been shockingly persistent. For example, in the 1970s, black households made about 38 percent less than their white counterparts. Today, that number is 42 percent. Yeah, it got worse. But if you think that gap is big, then you ain’t seen nothing yet. Because the issue brief found that the wealth gap as workers approach retirement is much bigger than the income gap. And the only thing that saves the day is Social Security.
Measuring Retirement Wealth Inequality
People often describe retirement wealth as a “three-legged stool.” The first and most important leg is Social Security. The second leg is employer-sponsored retirement plans — mostly 401(k)s, but also traditional pensions. And the third leg is other savings and housing wealth.
Social Security is the most important leg, since most households are covered. By comparison, only about two-thirds of households approaching retirement have any money in retirement plans, and they typically don’t have very much. Very few have any other savings aside from their homes. In other words, for many people, it’s just a one-legged stool. And you know what they say about one-legged stools — “they suck.” I swear, I’ve heard people say this.
The question we wanted to answer was just how much worse the retirement situation was for black households than white ones. To do that, we looked at the 2016 Health and Retirement Study (HRS), which surveyed households age 51-56. The HRS asked households questions regarding wealth held in 401(k)s, other financial accounts, and homes. And, using data on workers’ earnings history, we were able to determine how much these households had “saved” through Social Security and any pension that they might have. This last part was a little complicated, because people typically think of Social Security and pensions as providing future income instead of as wealth. But rest assured, we did a careful job of calculating these amounts (see here for a more complete description).
Once we added up all these sources of wealth, we had an all inclusive measure of retirement wealth.
Documenting Retirement Wealth Inequality
Let’s start by looking at this all inclusive measure. Figure 1 shows the result. In 2016, the typical 51-56 year old black household had 55 percent less retirement wealth than the typical white household. Thus, retirement wealth is slightly more unequal than income. But, in the introduction to this blog I said — and I quote — “you ain’t seen nothing yet.” That seemed to imply things were way worse. Was I exaggerating? Never.
Figure 1. Total Retirement Wealth for 51-56 Year Old HRS Households, 2016
The only reason these numbers look even remotely close to each other is the presence of Social Security. If we performed the calculation again, except removed Social Security, we would get Figure 2. And Figure 2 is bad. How bad? Figure 2 shows that if we exclude Social Security wealth, black households approaching retirement have 86 percent less wealth than white households. Why? Because white households have nearly 7 times as much wealth in employer-sponsored retirement plans and nearly 6 times as much wealth in housing.
Figure 2. Retirement Wealth Excluding Social Security for 51-56 Year Old HRS Households, 2016
Conclusion and Why this Matters
Inequality in wealth is almost always more extreme than inequality in income. The reason is simple. Wealth inequalities accumulate over a lifetime, income inequality reflects a single point in time. Years of lower income mean black households are less likely to be able to save and thus miss out on valuable interest. Because of educational inequality, black workers are less likely to have really good jobs and thus access to retirement plans in the first place. Making matters worse, black households also face discrimination in housing markets, meaning even if they can save by buying a house, they are shunted into lower values ones. Many things work against the accumulation of retirement wealth.
But, Social Security — which covers almost every worker with a benefit formula that is relatively more generous for lower income people — bridges the gap. Recognizing this point is important, since the program is under financial strain. If nothing is done, in 2035 the Social Security Trust Fund will run out, and benefits will need to be cut by about 21 percent. And, many options to fix this problem involve benefit cuts as well. So, as we consider our options as a society, it is important to remember that the Social Security program is very important to many people, and especially groups that have been historically disadvantaged.
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