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Studies Spotlight Racial, Ethnic Gaps in Retirement Savings

Black and Hispanic workers lag in access to workplace savings plans

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Black and Hispanic workers have significantly less access to employer-sponsored retirement plans than do white counterparts, exacerbating economic inequity and hampering the ability of people of color to build financial security later in life, according to researchers. 

Among private sector employees ages 18 to 64, more than 53 percent of African Americans and about 64 percent of Latinos do not have access to a workplace retirement plan, compared with about 42 percent for white workers and 45 percent for Asian Americans, a July 2022 report from the AARP Public Policy Institute found. 

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The racial and ethnic disparities are “very dramatic,” says David John, an AARP senior strategic policy adviser and coauthor of the study on U.S. workers’ participation in retirement plans. 

The report encompasses both “defined benefit plans,” such as traditional, employer-funded pensions that offer guaranteed benefits, and “defined contribution plans” such as a 401(k) or a 403(b), in which tax-deferred employee contributions and, often, matching employer contributions are invested in stocks and bonds. Most retirees will need some form of retirement savings to supplement their Social Security benefits, the report notes.

Prior AARP research has found that Americans are 15 times more likely to save for retirement when they have a workplace plan and 20 times more likely to do so if contributions are automatic. Such options are especially important for people of color, who studies show depend disproportionally on Social Security for their retirement income and are less able to rely on family wealth transfers such as inheritances for financial support in later life.

Black and Hispanic workers “need to save more on their own for retirement to overcome this inequality in intergenerational wealth,” Dania Francis, an assistant professor of economics at the University of Massachusetts Boston, said at a recent panel on racial inequalities in retirement savings sponsored by the university’s Pension Action Center. “And yet we see that workers of color are often earning lower wages, making it harder for them to bridge that gap.”

Income gap increases retirement gap

Recent research has focused on defined contribution plans as they have become the dominant form of employer-sponsored savings — only 15 percent of private sector workers are covered by defined benefit plans, according to the U.S. Bureau of Labor Statistics. 

Preliminary data from a team of economists from MIT, Harvard, Yale and the U.S. Census Bureau shows wide racial and ethnic disparities in contributions to 401(k) and 403(b) plans, even among coworkers with access to similar plans and savings incentives.

White employees contribute significantly more to workplace retirement accounts than Black and Hispanic workers, and African Americans are more likely than white coworkers to take early withdrawals, according to the research, which has yet to be published.

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“Once you add the tax incentive [to contribute] and the employer match, the gap with Blacks and Hispanics is even larger,” Taha Choukhmane, assistant professor of finance at the MIT Sloan School of Management, said of the team’s findings at the Pension Action Center panel.

Because Black and Hispanic workers earn considerably less, on average, than white workers, those that do have access to a retirement savings plan still get less return, John notes. “Saving 5 percent of a lower income results in lower balances than the same proportion of a higher income,” he says.

Financial literacy also plays a role, says Rodney A. Brooks, a personal finance columnist for AARP’s Senior Planet and author of the books Fixing the Racial Wealth Gap and Is One Million Dollars Enough?: A Guide to Planning for and Living Through a Successful Retirement

“I’ve talked to so many Black middle-class families who talk about how there was never any discussion about finances from their parents,” Brooks says. “That’s not a knock against their parents — their parents didn't know either.”

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States step in to boost savings

AARP has advocated for various vehicles to give workers greater access to savings options. One key priority John cites is expansion of state-facilitated retirement savings programs.

These programs, sometimes called auto-IRAs, typically require private-sector employers of a certain size (for example, with at least five employees) that don’t offer a workplace retirement savings option to enroll employees in a state-sponsored program.

Sixteen states and two cities have implemented auto-IRAs or similar savings programs or are in the process of doing so. Legislators in more than 20 states introduced bills this year to establish or study such programs, John says.

“Increasing people’s retirement security starts with making it easier for them to save,” he says. “AARP recognizes that the essential first step is enabling everyone to have a retirement savings program at work.”

Another tool is the retirement savings contributions credit, a tax break for low-income and middle-income workers who contribute to a retirement account. The “Saver’s Credit,” as it’s known, has been around since the early 2000s but is often overlooked, John says, in part because it requires filing a little-known IRS document, Form 8880, along with the 1040 tax return.

“Most people who qualify for the credit fail to do this,” John says. “In the revised 1040, there is no mention of the Saver’s Credit or the [8880] form, unlike certain other types of credits. One has to know about the Saver’s Credit in advance to know to file the form.”