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Best New Ideas in Retirement: Black and Hispanic households are way behind when it comes to retirement savings — here’s how that could change

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Pamela Capalad, the Brooklyn-based founder of the financial-planning and coaching firm Brunch & Budget, takes a novel approach with her clients, many of whom are 30-something millennials and include both people of color and white people: She talks about the racial wealth gap.

This is because many of the firm’s clients of color “play the comparison game,” Capalad said, including worrying they’re falling behind peers in saving for retirement. But a lot of the prevailing metrics for savings, debt and retirement, she argued, are “rooted in white supremacy and systemic oppression.” Once clients are given this context, “they are both relieved and motivated,” Capalad said.

“They are relieved to understand how the financial system has been designed to penalize and take advantage of them and their families, and most importantly, that it’s not their fault they are behind,” she said. “They are further motivated to learn how the system works so they can find ways to make it work for them, and also start to develop an understanding of how the system needs to change.”

Capalad is not alone in wanting to acknowledge and close this gap. With heightened awareness of racial disparities in the U.S. due to 2020’s police-brutality protests and a pandemic that disproportionately ravaged communities of color, retirement-security experts say there may now be greater determination to pursue real solutions for closing the racial retirement wealth and security gap — not to mention better means to address it.

The typical Black household and typical Hispanic household in 2016 had 46% and 49% of the average white household’s retirement wealth, respectively, according to Boston College’s Center for Retirement Research — a disparity that would be even higher without Social Security’s progressive benefit formula, which helps lower earners. People of color are more likely to have lower earnings, and they face higher poverty rates in old age.

A trio of factors drives a racial wealth gap in retirement, said David John, a senior strategic policy advisor at the AARP Public Policy Institute: “It’s a matter of financial health, it’s a matter of access, and it’s a matter of income,” he said. 

For example, almost half of the private-sector workforce lacks access to a workplace retirement-savings plan, and Black and Hispanic families are less likely than their white counterparts to have access to and participate in employer-sponsored retirement plans. 

Low- and moderate-income workers who lack retirement accounts through an employer like a 401(k) “probably aren’t saving for retirement at all,” John said; very few who don’t have payroll deduction through work have opened an IRA on their own, and “even fewer are contributing to one regularly.”

“Low- and moderate-income workers with a retirement program at work are saving, but because their pay is lower, a contribution of 5% of income produces a smaller dollar amount going into their retirement account than if the same level of contributions came from a higher income worker,” he added. “This means that growing wealth for this income group will be slower than for some others, but at least the payroll deduction savings program is helping to reduce the racial wealth gap.”

Individuals also need an emergency fund, John said, and if their only source of money in a crisis is their retirement account, withdrawing it will mean they can’t amass the same kind of balance, or take advantage of compounding. Emergency savings is merely one piece of household wealth, another source of enormous racial disparities due to a history of redlining and housing and lending discrimination in the U.S.: While white families in 2019 had a median household wealth of $188,200, for example, Black families had $24,100 and Hispanic families had $36,100.

Kilolo Kijakazi, a former Urban Institute fellow who has researched economic security and the racial wealth gap, told MarketWatch that structural racism in the labor market — meaning policies, programs and institutional practices that facilitate white workers’ social and economic wellbeing while creating barriers to minority workers’ wellbeing — is “a critical factor” contributing to racial wealth disparities in retirement. She pointed to inconsistencies in wages and benefits, as well as factors like occupational segregation and hiring discrimination that persist to this day.

And Teresa Ghilarducci, a labor economist at the New School for Social Research, says the country could have predicted today’s retirement gap across race, gender and class lines 40 years ago, when “employers and Congress shifted all risks of saving for retirement — inflation, poor investment decisions, financial crises, recessions, job loss, longevity, and wage stagnation — on individual workers by allowing and encouraging do-it-yourself pensions [401(k)] and IRA.” Congress cut Social Security by raising the retirement age, she added.

“Just that structure alone meant that people who lived longer, who had stable jobs their whole lifetime, who had jobs that steadily raised their pay over their lifetime; people who had enough education or family background to invest well, people who could discern financial predators from professionals who were truly qualified to handle their money, [could] do better in an individual, self-directed financialized world,” Ghilarducci said.

Meanwhile, people who endure lots of economic shocks and lack a well-regulated, well-monitored pension plan “were going to lose out,” she said. Because Black and Latino Americans are often relegated to lower-paying jobs, she said, “we would predict that their income security at retirement would be a lot less.” 

With that said, the racial retirement wealth gap would be far wider if it weren’t for Social Security, which is universal and automatic, said Geoffrey Sanzenbacher, a research fellow at Boston College’s CRR. It’s also progressive, meaning it provides a larger relative benefit to lower-income people than to higher-income people. 

‘More of a determination’ to fix the problem — and new political possibilities

Protests last summer over the death of George Floyd and many other unarmed Black Americans killed by police — against a backdrop of outsized COVID-19 illness and mortality in Black, Latino and Indigenous communities — drew attention to the nation’s historical injustices against people of color. 

One positive consequence, John said, is that many people are now focusing on “what it means to be Black or Asian or Latino in the United States, and what the repercussions are” — including on the economic front. The awareness has been there for decades, especially among academics and some activists, he said, but “what we’re seeing now is more of a determination to deal with the problem.”

Sanzenbacher agreed. “That combined with Democrats taking back the Senate and White House — I think there will be a will to get some of these things done,” he said.

Some experts are also heartened by President Biden’s embrace of policies they believe would reduce the retirement wealth gap. Kijakazi noted two in particular: caregiver credits and Social Security minimum benefits. 

Biden during his campaign proposed a $5,000 tax credit for unpaid caregivers, as well as Social Security credits for those who care for loved ones. In an analysis of one caregiver-credit proposal, Social Security Administration projections showed that in 2050, 33% of Black workers would receive higher benefits, compared to 20% of white workers. (Black Americans are particularly likely to be their grandchildren’s primary caregivers, according to the Urban Institute, “which can interfere with paid work, raise spending needs, and reduce retirement savings.”)

The president has also backed raising Social Security’s minimum benefit — a policy dating back to the 1970s aimed at providing “adequate benefits to long-term low earners” — to at least 125% of the poverty level for people who worked at least 30 years. “No one who has worked for decades and paid into Social Security should have to spend their retirement in poverty,” says his campaign website.

Another Biden campaign promise that “has a great potential to close the racial wealth gap” is lowering the Medicare eligibility age to 60, Ghilarducci said. This broadly popular proposal will go a long way toward helping older Black Americans, she said, since they are more likely to get pushed out of the labor market before reaching the current Medicare eligibility age of 65. Older nonwhite workers have lost their jobs at higher rates during the pandemic, and many left the labor force for good.

If older people who lose their jobs can get into health insurance earlier than age 65, Ghilarducci added, they can have the comfort of looking for a different, better job and staying afloat — without getting sicker or drawing down whatever assets they have.

“That will have unintended consequences on closing the racial wealth gap,” she said. “It wasn’t pitched in that context, but I can just see in the data that that’s going to help workers who lose their job before 65 not go into debt.”

It’s possible that the Democratic-controlled Senate can lower the Medicare age through the budget-reconciliation process, which requires only a simple majority. Even if such a bill needed a supermajority of 60 Senate votes to pass, Ghilarducci said, “it’s conceivable that 10 Republicans may find it to their advantage” to increase their appeal among the coveted voting bloc of older Americans. But reports suggest that hospitals are likely to push back at the prospect of more patients’ care being reimbursed at Medicare’s lower rates.

Biden’s presidency could also revive some old ideas. A national-level IRA “is a great example of something that never got the momentum to actually get done,” Sanzenbacher said. Former president Barack Obama repeatedly proposed auto-IRAs in his budgets to help Americans sock away money for retirement, though “there was never the legislative will to get it done,” he said. 

In 2015, Obama launched a federal retirement-savings program called myRA through the Treasury Department, “but it had really low contribution limits and wasn’t automatic,” Sanzenbacher said. A 2016 analysis by the Annie E. Casey Foundation suggested the adoption and expansion of myRA could reduce the racial wealth gap for Black and Latino Americans. The Trump administration ended the program in 2017.

The role of financial professionals

Even as many people of color say they feel prepared for retirement, they report lower use of mechanisms that help facilitate retirement security, according to a January 2020 survey by Allianz Life.

Cecilia Stanton Adams, Allianz Life’s chief diversity and inclusion officer, suggested the respondents’ confidence could arise from “different cultural values that shape their decision making.” Breadwinners in communities of color are often expected to support multiple generations while also saving for retirement, she said in a statement, potentially contributing to a disconnect between perception and reality.

The survey also found that only 32% of people of color reported working with a financial professional. These professionals have an opportunity to serve communities of color through education, outreach and support in building retirement strategies, Adams told MarketWatch, but the financial-services industry must also represent increasingly diverse markets in order to best serve them. 

That means attracting, retaining and promoting people of color, she said. “You want someone that you really connect with, and oftentimes that might mean identifying someone who looks like you and understands your culture.”

While the financial-services industry remains overwhelmingly white, the number of Black and Latino CFP professionals rose by 12.6% between 2019 and 2020, according to the CFP Board

Certified financial planner Lee Baker of Apex Financial Services in Atlanta, who recalled seeing very few people who looked like him when he entered the field, says he “wholeheartedly” believes this increase will translate to reducing the wealth gap, even if progress may be slow.

“An existing client [recently] discussed the impact our relationship has had on him not only around investing, but financial planning more broadly — for example, having a year of expenses saved,” Baker told MarketWatch. “As a result of doing this, he has been able to help other people in the community because he had the capacity to safely do so.”

Some financial professionals cater specifically to people of color, whom they see as an underserved market. 

Capalad of Brunch & Budget, for example, said people of color make up more than half the firm’s 97 one-on-one clients and all 48 members of its group financial-planning workshops. The firm talks to clients about automating their retirement; treating homeownership as a legacy purchase to build generational wealth, rather than a “starter home”; making sure debt paydown isn’t preventing them from saving for retirement; building a separate “family savings fund” into their budget to help out family members; and leveraging “authorized user” status to help clients or their family members improve credit scores.

And Zaneilia Harris, the president of Harris & Harris Wealth Management Group in the Washington, D.C., area, works primarily with high-earning African-American women who are senior-level executives or business owners pulling in at least $1 million in revenue. Among other strategies, she pushes clients to aggressively save through their 401(k) in addition to outside investments; avoid relying on a broken Social Security system; and negotiate for the salary they deserve and a well-rounded compensation package, given the “built-in pay gap between women of color and white men.”

“These women — they’re saving; they’re trying to take advantage of every opportunity to solidify their retirement so they can live the way they want and give the way they want,” Harris said. “Black women are smart, and they make a lot of sacrifices for their family.”

How retirement-security experts would fix the problem

While the momentum may be fresh, many of the best policy ideas for solving the racial retirement wealth gap have been around for years, experts say.

Broadly speaking, these ideas include expanding access to retirement accounts, providing assets to go into those accounts, strengthening a beleaguered Social Security system, and addressing root causes such as racial wage disparities.

Universal access to retirement accounts is “being discussed more and more,” said John, who initially proposed the auto-IRA idea in 2006. Absent a national policy to provide universal access, California, Oregon and Illinois have launched their own Roth-style auto-IRA programs. CalSavers, OregonSaves and Illinois Secure Choice require employers without an existing retirement-savings plan to automatically enroll with the state-administered program, from which employees can opt out. 

Colorado, Connecticut, Maryland and New Jersey are gearing up to launch their own programs, and other states are also considering the idea.  

“Those are certainly going to disproportionately cover workers of color,” Sanzenbacher said. “State IRAs already exist; you could see them existing at a national level too.”

As for providing assets to go into those accounts, some experts have backed baby bonds, a proposal to give every American newborn a federally funded savings account seeded with $1,000 that would become accessible on the child’s 18th birthday. “It is building a better foundation that could ultimately lead to better retirement outcomes, and maybe higher retirement assets,” said Gary Koenig, the vice president of financial security at the AARP Public Policy Institute. 

Retirement experts have also proposed reforming the Saver’s Credit, a tax break for lower- and middle-income Americans who contribute to retirement plans. Under the 2021 Saver’s Credit, married couples making less than $39,500 will get a tax credit of 50% of their retirement contribution; those making $39,501 to $43,000 will get 20%, and those making $43,001 to $66,000 will get 10%. Couples making more than $66,000 get nothing.

A refundable Saver’s Credit may also serve as a greater incentive to save in the first place, Sanzenbacher added, “since savings now becomes more valuable.”

Revamping Social Security — including by increasing the minimum benefit and addressing the program’s long-term shortfall — can also make a dent in the racial wealth gap, experts say. “[It] will basically help to ensure the wealth gap doesn’t get worse,” Sanzenbacher said.

But it’s also important to tackle root causes of the gap, Kijakazi said, such as labor-market discrimination and occupational segregation. For example, addressing discrimination in the labor market would hopefully result in greater access by workers of color to employer-sponsored benefits — like healthcare, retirement-savings plans and paid leave — that are “wealth escalators,” she said. 

Addressing occupational segregation, which disproportionately keeps workers of color and women out of occupations that provide these benefits, would be “a huge help” for them to build wealth while they’re working, Kijakazi added.

Certified financial planner Anna N’Jie-Konte, the founder of Dare to Dream Financial Planning, works with millennial women of color, many of whom are the first generation in their families to have reached upper-middle-class status. She encourages clients to save aggressively for retirement in a diversified way, including through brokerage accounts, because she believes “women of color have to be more strategic.”

Because about 80% of her clients anticipate they will need to support family members who are “undersaved or underresourced” for retirement, N’Jie-Konte added, she often recommends they establish a separate investment account dedicated to family support — a “family emergency fund” to which they contribute a couple thousand dollars per year, and which grows long-term. 

“It’s at least able to help them [have] a buffer between their immediate finances and needs that might come up,” she said. 

“We have a longer lifespan [than men], so that means we need more money and we need it to last us longer,” she said. “We’re not necessarily in line to have an inheritance — that’s traditionally not our lot in life, unfortunately — so we don’t necessarily have a leg up in terms of our overall assets. We’re standing on our own two feet.”

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