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How Big Is the Racial Retirement Security Gap?

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The earnings and wealth gaps between whites and minorities are enormous. How do these disparities translate to retirement preparedness?

A new report from the Center for Retirement Research at Boston College looks at trends in retirement security by race and ethnicity.

Before looking at retirement preparedness, the report first looks at the levels of wealth and earnings for white, black and Hispanic households.

In 2007, the median net wealth for whites was $183,100 compared to $39,000 for blacks and $59,300 for Hispanics. This gap increased further by 2016 with the median net wealth for whites at $132,100 compared with $18,300 for blacks and $24,400 for Hispanics.

According to the report, white households now hold roughly six times as much wealth and earn almost twice as much as minority households.

The report then assesses the retirement preparedness of today’s working-age households by using the National Retirement Risk Index (NRRI).

Retirement preparedness is typically defined as the risk of not being able to maintain a household’s pre-retirement standard of living — a risk the NRRI is designed to capture, according to the report.

The NRRI is calculated by comparing households’ projected replacement rates — retirement income as a percentage of pre-retirement income — with target replacement rates that would allow them to maintain their standard of living. These calculations are based on the Federal Reserve’s Survey of Consumer Finances, a triennial survey of a nationally representative sample of U.S. households.

Overall, according to the report’s analysis, retirement security has declined in the wake of the global financial crisis and ensuing recession. Despite an extended period of recovery, half of households ages 30 to 59 are at risk of inadequate retirement income compared with 44% in 2007.

The report then analyzes how the percentage at risk varies by race and ethnicity in 2016, and finds the gap here is smaller than the earnings and wealth disparities.

In 2016, according to the report, the share of whites at risk in retirement was 48% vs. 54% for blacks and 61% for Hispanics.

According to the report, the retirement gap is smaller simply because minorities have a lower pre-retirement standard of living to maintain.

“While considerable inequality exists in retirement preparedness, it is significantly less than exists in the distribution of wealth and earnings before retirement,” the report states. “The reason, though, is that minorities have a lower standard of living to maintain than whites.”

The report finds, though, that the pattern over time is “somewhat surprising” — with the retirement preparedness situation of blacks holding relatively steady and that of Hispanics deteriorating sharply.

From 2007 to 2016, retirement risk for all three groups increased, but the gap between whites and blacks narrowed while Hispanics fell further behind, according to the report. In 2007, the share of blacks at risk was 52% and 51% for Hispanics; comparatively, the share of whites at risk in retirement was 42%.

The data suggest that the deterioration for Hispanics reflects their buying housing in the wrong places at the wrong time.

While the decline in house values was about the same for blacks and whites, Hispanic households saw their median value drop by 41% between 2007 and 2016.

According to the report, the reason for the serious hit to Hispanics’ home equity is that the housing downturn had a distinct geographic pattern, with Nevada, Florida, Arizona and California experiencing the sharpest declines.

Overall, about 40% of all Hispanic households in the country resided in the hardest-hit states, compared with only 20% of white and black households.

The decline in housing values was only part of the damage done by the bursting of the housing bubble; the other dimension is homeownership. Homeownership rates in 2016 were lower across the board than in 2007 The declines, however, have been particularly large for black and Hispanic households; less than half of which now own homes.

Meanwhile, the steadiness in retirement preparedness for blacks is a function of falling earnings at the bottom of the income distribution and Social Security’s progressive benefit formula.

“Maintaining a low level of income with little wealth may not be that much more difficult than maintaining a high level of income with lots of wealth,” the report states.

A key reason is that Social Security boosts the replacement rates for low earners, which helps explain why the gap in the NRRI between blacks and whites has narrowed since the financial crisis and recession, according to the report.

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