Why it’s so hard for Black Americans to save for retirement — and how the pandemic escalated the racial wealth gap

By Alessandra Malito

Wage disparities, lower rates of home ownership and other nuanced factors are making it challenging for people of color to save for their post-work lives.

Financial adviser Pamela Capalad spends a lot of her time with clients breaking down job offers and coaching them on raise negotiations — she finds the strategies especially important for people of color.

Income is one of the most important elements when saving for retirement and Black workers in America earn statistically less than their white peers and counterparts. Black men with a bachelor’s degree, for example, earned 24% less than their white counterparts in 2019, according to a Conference Board report published last year. This discrepancy creates financial burdens in the present and the future, especially when it comes to retirement security.

“You need income that is in addition to what covers your bills,” said Capalad, a certified financial planner and founder of the advisory firm Brunch & Budget, which is based in Brooklyn, N.Y. “That’s one of the biggest issues for people of color — they’re paid less.”

Salaries are only part of the equation when determining a worker’s compensation, she added. Compensation also encompasses health insurance, life and disability insurance, and retirement benefits, for example. Seeing the big income picture, however, can be difficult for workers looking to get ahead. A high salary alone may seem worth the job opportunity, even if other benefits aren’t there — or are lacking.

“The tricky part — especially if you’re a person of color who has historically been paid less and offered so much more than you’re used to — is the temptation,” Capalad said.

The racial wealth gap

Wage inequality is one of the foundations of the racial wealth gap in retirement savings, but there are many other factors that play important roles.

A home is one of the most valuable assets an American can have in their retirement, but people of color are less likely to be homeowners than their white counterparts. While financial advice can help people overcome investment fears and find the right products to achieve retirement security, the lack of diversity in the financial services industry creates barriers for people of color seeking good financial advice. Maintaining one’s health is important for living a long and high-quality life, yet healthcare access and affordability can be unattainable in some minority communities, and medical debt disproportionately impacts Black Americans. Many of these factors can be traced back to the long history of discrimination in America, including public policies that disadvantaged people of color.

Saving for retirement is a challenge for many Americans, but people of color tend to have fewer resources available for their post-work lives, data show. Many minority groups are more likely to have no retirement savings at all, according to the Economic Policy Institute. Nearly seven in 10 (68%) of white Americans between the ages of 32 and 61 years old had retirement account savings in 2016, up about 1 percentage point from 2007. Comparatively, 41% of their Black peers in that age bracket had retirement account savings in 2016, down from 47% in 2007. That means about 6 in 10 Black families had nothing saved for retirement, at least not in employer-sponsored accounts, such as 401(k) plans, and individual retirement accounts, as the EPI defined these savings.

Even after three years, it’s still too soon to tell the true economic impact the pandemic has taken on Americans’ retirement preparedness. But there are a few indications that this extraordinary event has made the racial retirement wealth gap worse. Black Americans were laid off more during the pandemic, and recovery in employment was slower for them thereafter, a RAND Corporation study found.

There are other rippling effects that have already begun. People of color saw gains in home ownership rates decline after the pandemic, and they were also more likely to see a reduction in wages. Older people, individuals with chronic health conditions and people of color, were also at higher risks of complications arising from COVID-19 during the height of the pandemic.

A looming recession and increased inflation aren’t helping narrow the gap. The costs of everyday expenses like groceries and gas have climbed, and in an effort to curb inflation, the Federal Reserve has been steadily increasing the federal-funds rate, which makes borrowing money — such as for a mortgage or on a credit card — more expensive.

The repercussions of less income

Black households’ median income was roughly $48,000 in 2021, compared to white non-Hispanic households with median household income of about $78,000, according to the Census Bureau. Hispanic households had a median income of about $58,000. Asian households’ median income was slightly more than $101,000.

Research shows labor discrimination has fueled the divide. White workers were more likely to have “good jobs” than their Black or Latino counterparts, even with the same level of education, according to a 2019 report from J.P. Morgan Chase & Co. and Georgetown University’s Center on Education and the Workforce. Good jobs were defined as those with “family-sustaining earnings,” such as $35,000 a year for workers between the ages of 25 and 44, or $75,000 for people with at least a bachelor’s degree.

“If you have very low levels of income, you have less discretionary income, and that means you have most of your money going to immediate needs: food, shelter, clothing, basic supplies,” said Dedrick Asante-Muhammad, chief of race, wealth and community at the Institute for Policy Studies. “There isn’t as much to invest.” Those who do invest may have to be more conservative with their asset allocation in an effort to preserve their money, which also limits returns, he added.

Wage inequality makes a lasting impact on retirement security, said Richard Johnson, a senior fellow and director of the retirement policy program at the Urban Institute, an economic and social policy think tank. This is a problem in a few ways. For starters, even if lower-income workers contribute a substantial portion of their salaries to a workplace savings account — such as 15%, as many financial advisers suggest — the contribution amount will be lower because their salaries are lower. And regardless of how much they want to put toward their nest egg, if they’re earning less, they may still have the same spending needs as other families.

Lower earnings can then lead to lower Social Security benefits, which are calculated using factors such as lifetime earnings and age at the time of claiming. This creates a smaller benefit at retirement. Workers may also have to claim at a younger age (the earliest being 62) because of health problems, Johnson said, or no longer be able to work in a physically demanding job, as some Black Americans do. People who claim Social Security benefits before their full retirement age receive a lower benefit than if they had waited until their full retirement age. The longer beneficiaries wait to claim, the more they get, up to age 70.

Because of their lower earnings and the way Social Security benefits are calculated, however, Black Americans typically receive less than their counterparts. Lower-wage workers do receive a larger share of their pre-retirement earnings due to the progressive formula the Social Security Administration uses, but it still comes to a smaller dollar amount. For example, in 2016, Black beneficiaries received just over $9,280, compared to white Americans, who received roughly $11,610, according to the Urban Institute. Black Americans did receive more in Supplemental Security Income ($620 versus $300) and slightly more in public assistance ($40 versus $20), but had less in retirement income, interest and total earnings.

Social Security is a lifeline to many older Black Americans. Only three in 10 Black Americans aged 65 or older had income outside of Social Security in retirement, such as 401(k) savings or pensions, compared to 47% of white Americans in 2014, according to the National Academy of Social Insurance. Social Security was the sole source of income for a third of Black Americans, compared to 18% of white Americans.

Home ownership

Through his family’s history, Denzel Tongue has seen just how difficult homeownership can be for Black Americans.

His mother grew up in West Oakland, Calif., moved away, and tried to save enough money with a union job, but she was still priced out of the housing market when she returned to her old neighborhood to buy a home. Tongue’s grandfather, a U.S. Air Force veteran, had to settle for a home in West Oakland, then considered a “high lending risk” zone, because of policies and practices that kept them out of more favorable Oakland neighborhoods.

Despite their hardships, Tongue, who works at the Alameda County Public Health Department, still hopes to purchase a home in the Bay Area one day. He has studied the hard lessons about the nation’s housing market for people of color — including inferior lending rates to low-income individuals that prevents them from gaining access to the capital they need to buy a home, and the marketing of predatory financial products to these individuals, he said.

“Homeownership can be super tenuous in the Black community — there’s just a lot of obstacles to homeownership,” he said. “That being said, I still really love my hometown, would still love to live here, and my goal is to continue to save and hopefully own a home in the Bay Area.”

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02-02-23 0935ET

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