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Saving for retirement is no easy feat. For people of color in the United States, it’s just another reminder of the yawning racial wealth gap.
Experts recommend individuals save 15% of their annual income to fund a viable retirement. With company pensions all but a distant memory for most Americans, the burden of saving and investing this figure is on individuals.
It’s no surprise, therefore, that the retirement savings of more than 75% of Americans fall short of what’s needed, and more than one-fifth of Americans aren’t saving at all, according to data from the National Institute on Retirement Security (NIRS).
For Black Americans and other people of color, these hurdles are even higher. Institutionalized racism eats away at the earnings, savings, home values and overall wealth of Americans of color, which means severe financial insecurity in their retirement years.
What Is the Racial Retirement Wealth Gap?
The racial retirement gap refers to the economic inequalities Black Americans and other Americans of color face as they plan for retirement. This dimension of the larger racial wealth gap puts people of color at high risk of economic insecurity when they retire.
In 2016 (the latest data available), half of all U.S. households were at risk of falling short in retirement, according to the National Retirement Risk Index (NRRI). The NRRI is a calculation from the Center of Retirement Research (CRR) at Boston College, and is based on the Federal Reserve’s Survey of Consumer Finances. Fifty-four percent of Black Americans, and 61% of Latinos, shared that risk—compared to 48% of whites.
You cannot simplify the problem by saying people of color don’t save enough for their golden years. Understanding the systemic racism faced by Americans of color throughout their working lives is crucial to solving the racial retirement gap.
Think of the racial retirement gap this way: Systemic racism has depressed each category that makes up the overall net worth of Black Americans—and overall net worth helps determine your level of retirement security. Here’s how Americans of color have fallen behind, from earning less than white Americans, to having significantly less home equity.
Black Americans Receive Lower Lifetime Earnings
Institutionalized racism means that employers get away with consistently paying Americans of color significantly less than their white counterparts.
Black workers made 14.9% less than their white counterparts in 2019, according to the Economic Policy Institute’s (EPI) Wage Report. This gap has grown significantly, up from 10.2% in 2002.
Obtaining an education—even in the case of advanced degrees—doesn’t close the wage gap, either. The EPI report found that white workers are paid more than Black and Hispanic workers at almost every education level. For example, white workers with a college education earn an average hourly wage of $35.90—Hispanic workers with the same education level earn $30.35 in comparable wages, and Black workers earn $27.81. EPI notes that Hispanic workers are consistently paid more than Black workers—Hispanic workers with the same education level earn $30.35 in comparable wages, and Black workers earn $27.81.
And while race is a big factor in wage inequality, gender exacerbates the gap further. The average woman in the U.S earned 81.6 cents to every dollar men earned in 2019. The gender wage gap is even wider for women of color. Black women in 2018 were paid 62% of what non-Hispanic white men were paid.
Americans of Color Have Lower Savings and Investments
Since Black Americans and people of color are paid significantly less than their white counterparts, they have fewer opportunities to build their savings and invest.
The National Institute of Retirement Security (NIRS) finds a stunning gap in household savings between white Americans and Americans of color. People of color nearing retirement age have average savings of $30,000, a mere one-quarter of the average saved by white households ($120,000).
“While there is a significant earnings and income gap between people of color and whites, the wealth gap is even wider—and growing,” reads the NIRS report. “In turn, the growing racial divide in retirement wealth contributes to worsening inequality in overall household wealth.”
Black Americans Have Less Home Equity
Home equity is a major source of retirement income in the NRRI, since it assumes households access home equity at retirement by taking out a reverse mortgage.
According to CRR, Black Americans had a median home net value (the value of your home, minus how much you owe on it) of just $49,000 in 2016. For Hispanics, median home net value was $65,000, while for white Americans it was $86,000. The CRR notes that home prices have been volatile since 2000, negatively impacting all races—although Hispanic households saw their median home net value drop the most—41%—from 2007 to 2016.
Homeownership rates declined from 2007 to 2016, but Black and Hispanic households have seen the largest decline. CRR points out that less than half of Black and Hispanic families own their homes.
The Urban Institute reports that income and lower credit scores also contribute to the racial homeownership gap. Lower income makes it harder for Black households to afford down payments on homes and low credit scores make it harder for Blacks to obtain mortgages. Only 21% of Black households have a FICO score above 700, compared to more than 50% of white households.
How Can the Racial Wealth Gap Be Addressed?
Fixing institutionalized racism won’t happen overnight. And some of the suggestions for how Black Americans can close the wealth gap—like going to college to increase earnings, or buying homes to increase wealth—won’t solve the problem.
“…the wealth gap is the product of centuries of inequality and racism that has grown too large to be impacted significantly by individual actions, achievements or choices,” writesDion Rabouin, markets editor at Axios.
Instead, big ideas are needed to fix a big problem. Forbes staff members Jeff Kauflin and Janet Novack recently reported that initiatives like improving access to capital for Black-owned business, reparations for descendants of slaves, Baby Bonds, partial student debt forgiveness and incentives for emergency savings could help narrow the gap.
These initiatives could help Americans of color build their assets in the absence of inherited wealth, which they are less likely to receive than white Americans.
Action Needed in Washington, D.C.
There has been buzz in Washington about how to invest in, and help develop, Black communities and communities of color. In July, Senate Democrats proposed a $350 billion plan to fight systemic racism. The Economic Justice Act would provide billions in funding for child care programs, health care access, job training, capital for small businesses, homeowner tax credits and more in underserved communities.
“Long before the pandemic, long before this recession, long before this year’s protests, structural inequalities have persisted in health care and housing, the economy and education,” Senate Democratic Leader Chuck Schumer (D-NY) said in a statement. “The Economic Justice Act is a needed step in a long journey to address systematic racism and historic underinvestment in communities of color.”
Democratic Presidential Nominee Joe Biden announced a plan in July to boost Black and Latino finances. His plan would dedicate $30 billion to a small-business opportunity fund for Black, brown and Native American entrepreneurs.
Until these big ideas turn into big actions, though, the racial wealth gap—and economic insecurity in retirement for Black Americans and people of color— will persist.
