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Two
Steps Back:
African
Americans and Latinos will Lose Ground Under Social Security
"Reform" The Economic Policy Institute July
14, 2005 The
United Airlines pension debacle, the president's Social Security proposal,
and the coming debate about tax incentives for saving are all prompting a
re-examination of The
one bright spot in this picture is Social Security, which is pivotal to
minorities' retirement security, and which grew faster for African
American and Latino households than for whites from 1989 to 2001. Social
Security's progressive benefit structure and virtually universal coverage
helped ameliorate the lack of gains in other retirement wealth for these
minorities. But Social Security "reform" that makes Social
Security more like a private defined-contribution account and less like a
defined-benefit plan is likely to hurt minorities and exacerbate their
vulnerability to employment cycles. The
retirement gap As
shown in Figure
1, the non-Social Security assets gap between white households and
African American or Latino ones, and the effect it will have on their
retirement income, are substantial. The expected mean retirement income
from wealth, expected pension benefits, and Social Security benefits for
non-Latino white households nearing retirement (ages 47-64) was $80,800 in
2001. African Americans and Latinos could expect, on average, only a
little more than one-third as much, $28,100 (Weller and Wolff 2005).
Although
the average
expected income for African Americans and Latinos is low, most minority
households preparing for retirement are doing even worse: in 2001,
retirement income for 57% of African American and Latino households
nearing retirement added up to less than twice the poverty line. White
households were far less likely to fall below this threshold, though their
numbers are somewhat surprising: 23% (almost one in four) had expected
retirement income less than twice the poverty line. Troubling
as these numbers are, they are an improvement over 1989, when 68% of
African American and Latino households approached retirement with the
expectation that their income would be less than twice the poverty line.
Nevertheless, despite this improvement, the projected retirement income
gap grew larger between whites and minorities from 1989 to 2001. Mean
expected income rose from $22,200 to $28,100 for African Americans and
Latinos, but even faster-from $59,100 to $80,800-for white households
near retirement age. Thus, from 1989 to 2001, the gap between the mean
projected retirement income of white and minority households widened from
$36,900 to $58,600. In coming years, therefore, if The
three kinds of retirement wealth The
experience from 1989 to 2001 indicates that policies that preserve and
strengthen Social Security benefits, rather than increasing reliance on DC
plans or private retirement accounts, are the best hope for promoting
adequate retirement income for minority households. Social
Security wealth
Social
Security wealth depends on the wages earned over a lifetime-generally,
the more one earns, the greater the income in retirement. Rising wages and
the improved employment picture from 1989 to 2001 thus led to widespread
and substantial increases in Social Security wealth. For minorities
especially, the strong labor market of the 1990s brought more employment
at higher wages. For
minority households, Social Security was even more important. The increase
in mean Social Security wealth between 1989 and 2001 accounted for more
than 75% of the overall increase in retirement wealth for each of the
three age groups of African American and Latino households. And for large
numbers of minorities, Social Security is the only source of cash income
in retirement: 38% of Latinos and 37% of African Americans have no other
source of retirement income, compared to 18% of whites (Sun and
Ghilarducci 2004). Social
Security is the most effective means of assuring at least a modest
retirement income for the vast majority of American households, regardless
of race, for three main reasons. First, unlike pensions, Social Security
is virtually universal. Second, it compels saving, which is otherwise very
hard for low-income households, among which minorities are
overrepresented. And, third, its benefit structure is progressive,
replacing a higher percentage of the pre-retirement wages of low earners
than of higher earners. Unlike the current regressive system of tax
deferrals for private savings through IRAs, 401(k)s, and other private
accounts, Social Security acts as an equalizer for the regressive nature
of private savings. The
ameliorative effect of Social Security. African
Americans earn less than whites while they are working, and African
American retirees have lower non-Social Security income than whites. But
because Social Security replaces more income for low-earners than for
those better off, the income of African Americans falls less after 65 than
for whites. The ratio of household income for those 65 and older to those
55 to 64 is 56% for African Americans and 53% for whites. In 2004,
according to the Census Bureau, the income gap (from all income sources)
between African American and white households headed by seniors over 65
was 74 cents on the dollar, the smallest gap for any age group of African
American households. Pension
wealth Defined-benefit
coverage fell dramatically from 1989 to 2001, as employers substituted DC
plans or simply dropped their DB plans without replacing them at all. The
decline in DB coverage was especially steep for people ages 47 to 55.
Those with any DB plan dropped from 68% to 40%, and those with only DB
coverage went from 55% to 10%. For
minorities, the problem was not just loss of DB coverage, but lack of
pension coverage of any kind. In 2001, 63% of Latinos and 44% of African
Americans worked for employers who didn't offer pension plans, compared to
41% of whites. By 2000, according to the Department of Labor, only 44% of
African American male workers and 28% of Latino male workers had any
pension coverage at all, compared with 58% of white men. Only 43% of
African American women and 30% of Latino women had pension coverage,
compared with 52% of white women. One
group of minority households-those between the ages of 56 and
64-nevertheless managed a healthy 36% gain in mean pension wealth
between 1989 and 2001, in line with their white counterparts.
Unfortunately, even after that healthy increase, these households averaged
only $68,000 in pension wealth, a very modest source of retirement income.
The group that gained the most in pension wealth over this period was
white households ages 47-55, whose pension wealth increased 103%, from
$77,000 to $156,000. At least in part, their success probably reflects the
fact that such households started out owning relatively little DB pension
wealth in 1989. While the other cohorts each lost over a third of their DB
pension wealth, the 47-55 year-olds lost less because they had less to
lose (Weller and Wolff 2005, table 4). Every age group saw large
percentage gains in their mean DC plan wealth over this period, both
because coverage in such plans grew strongly and because the stock market
tripled in value over this period. Because
DB pension coverage is still declining and minorities are far less likely
than whites to have pension coverage, Social Security is more reliable
than employer-provided pensions as a means to ensure that minority
households have adequate income in retirement. Even when DC plans are
available, low-wage minority workers are less able to participate and make
contributions because housing costs and health care consume so much of
their income. Without refundable tax credits or a substantial employer
match, many minority households will never be able to add much DC wealth
to their retirement savings. The
structure of IRA and 401(k) plans exacerbates racial differences in the
labor market in two other ways. First, because of labor market
discrimination, young African Americans are much less likely to have a job
than whites. Among 20- to 29-year-olds in January 2005, 75% of whites had
a job versus 60% of African Americans. So
a greater share of whites can contribute to IRAs and 401(k)s in their
early years when savings count much more than later in life because the
interest earned on those accounts has more years to compound.
Additionally, beyond labor market problems, African Americans need more
education to earn the same income as less-educated whites. In 2003, the
median white high school graduate earned $26,518, but African Americans
needed high school plus some college coursework to earn the same income.
Therefore, to earn the same income later in life, African Americans must
spend some of their early years getting additional education while whites
are already earning and making retirement contributions to an IRA or
401(k). The
same problem does not occur with Social Security. Under the current
formula, Social Security uses a worker's 35 highest earning years to
calculate their benefit. Thus, the difficulties African Americans have in
their early years play a lesser role in determining Social Security
benefits. In addition, the Social Security benefit formula gives lower
earners a higher share of their pre-retirement earnings in benefits than
it gives higher income workers. Second,
stocks return their highest yield if they are bought when prices are low
and sold when they are high. But African Americans' job opportunities are
more sensitive than other groups' to fluctuations in the economy, as
William Rodgers at Defined-benefit
plans, whose structure more resembles Social Security than
defined-contribution plans, are better suited to addressing the problems
faced by African American and Latino workers than are simple saving plans.
Tax incentives to encourage private saving that are not progressive in
nature and do not compensate for business cycle or labor market effects
will exacerbate rather than close the retirement savings gap faced by
African American and Latino seniors. Other
wealth For
minorities the role of other wealth in preparing households for retirement
is further reduced. The wealth gap between African Americans and
non-African Americans has long been substantially greater than the income
gap. According to Havens and Schervish (2004), by 2001, the average
African American household had wealth that was 19% of the national average
but income that was 55% of the national average. In 2001, only 333,000 out
of 13.2 million African American households owned as much as $500,000 in
wealth. The picture was no brighter for Latinos. Unlike
white households, for minorities the great majority of "other
wealth" is concentrated in home equity. The Until
the wages and salaries of Conclusion
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