Column: Why minorities are losing the retirement race
CHICAGO (Reuters) - The issue of retirement inequality has caught fire in Washington, D.C., and a report issued this week throws a new log on the flames.
The report zeroes in on the appalling gap in retirement security among racial groups in America. The National Institute on Retirement Security (NIRS), a non-profit research group, found that workers of color - especially Latinos - are far behind whites by every measure. They are significantly less likely than white workers to be covered by a workplace 401(k) or defined-benefit pension. Tossing non-workplace accounts into the picture - individual retirement accounts, Roths, SEP IRAs - the report finds that two-thirds or more of black and Latino households have no retirement savings at all.
The report comes on the heels of a legislative proposal from progressive Democrats to address retirement inequality through an expansion of Social Security benefits. They want to increase benefits for everyone by 10 percent, but would target additional increases to retirees in the low and middle end of the income distribution, most of whom rely on Social Security for nearly all their retirement income.
Senator Tom Harkin (D-Iowa) has introduced legislation, which got a boost recently when Democratic rock star Senator Elizabeth Warren (D-Massachusetts) embraced it. While the plan has no chance of success in the current Congress, Warren's support added considerable visibility.
Expanding Social Security looks like a fool's errand to Democratic moderates and Republicans, who point to the program's growing outlays and projected shortfalls. Warren's embrace of the expansion plan drew a sharp attack last week from Third Way, a Democratic think tank that bills itself as centrist.
But expanding Social Security is feasible. Most of the proposals floating around Washington begin by gradually phasing out the cap on wages subject to the payroll tax ($117,000 in 2014) and raising payroll tax rates over a 20-year period. Some advocates also would like to see a surtax on annual incomes over $1 million. They would also give Social Security permission to invest part of its trust fund in equities to produce higher long-range returns.
And our private pension system has public costs of its own. The tax-deferred treatment accorded to 401(k)s, IRAs and traditional pensions costs the federal government billions in revenue each year (so-called tax expenditures). Just how much depends on whose math you accept - and the numbers are disputed hotly in Washington. But the Congressional Budget Office says deferred taxes for pensions will cost roughly $140 billion this year. Meanwhile, 84 percent of the value will go to the top 40 percent of income-tax payers.
The NIRS report on race follows a study released in July documenting the wide gaps in savings accumulation by income groups. The earlier report found wide disparities between households that have retirement accounts and those that don't - and median retirement account balances of just $12,000 for all near-retirement households (with household heads age 55 to 64). "No matter how you slice the numbers, that number shows that the retirement system is in real trouble," says Nari Rhee, manager of research at NIRS and author of both reports.
The new report - based on data from the U.S. Bureau of Labor Statistics and the U.S. Federal Reserve - hammers home how retirement inequality plays out across racial lines. Its findings vary significantly from the usual estimate you hear - that about half of American workers participate in workplace retirement plans. Indeed, the Employee Benefit Research Institute, a non-profit research group, reports that 53.5 percent of full-time, full-year workers participated in a plan in 2012. But among all workers, the participation rate was just 39.4 percent.
The NIRS report widens the lens to look at all workers and households.
Here are some of the most striking findings:
- Workers of color, especially Latinos - are significantly less likely than white workers to be covered by an employer-sponsored 401(k) or defined-benefit pension. Among workers age 25 to 64, 38 percent of Latinos have coverage, compared with 54 percent of black and Asian employees - and 62 percent of white employees. The worst gaps are in the private sector. Latinos are 42 percent less likely than whites to have access to a job-based retirement plan in the private sector, but just 12 percent less likely in the public sector.
"It really has to do with labor market dynamics," says Rhee. "Minorities are less likely to work in industries that offer retirement benefits - with the exception of blacks, who have relatively high representation in public-sector jobs. Latinos are taking a double hit - they have less representation in public-sector jobs, and their private-sector employment tends to be concentrated in low-wage jobs."
- The gap persists outside workplace plans. NIRS also measured ownership of any retirement account - 401(k)s, IRAs, SEP IRAs and Roths. A large majority of black and Latino working-age households - 62 percent and 69 percent, respectively - do not own assets in a retirement account, compared with 37 percent of white households. Among all black households, only 25 percent have more than $10,000 in retirement savings, and only 19 percent of Latinos have more than that.
The average retiree receives more than that in a single year from Social Security - $15,120 last year. Contrasts like that show why the solution to the retirement crisis among minorities lies with Social Security, not private savings.
(The opinions expressed here are those of the author, a columnist for Reuters.)
(Follow us @ReutersMoney or here. Editing by Douglas Royalty)