Examining the Minority Gap in Social Security and Pensions

The pension gap between white and nonwhite Americans is not always easily attributable to institutional racism. Accusations of even unintended racial consequences deeply imbedded in tainted assumptions that underlie long-established actuarial formulas or pension policies can raise powerful emotions. While political claims may twist left or right, hard answers and viable solutions will always require tough-minded expertise and cool-eyed research.

Last summer, for example, conservative African American commentator Deroy Murdock wrote in the Washington Times (July 29, 1997), "Social Security is a bad deal for black Americans, despite FDR's noble objectives." Murdock contends that blacks "often find themselves outlived by their benefits," because they have lower life expectancy at birth than whites. Murdock questions the fairness of a system that will pay full Social Security benefits starting at age 67 (for all people born during or after 1962) to a racial group with a life expectancy at birth that is now short of age 67. A national board member of the right-leaning group Third Millennium, he caps his argument with a call for "replacing the Porgy and Bess-era Social Security program with 21st-century private pension accounts."

A COMMON ERROR

Former deputy commissioner of Social Security Robert J. Myers, who served as the program's chief actuary for 24 years, recently wrote Aging Today that Murdock's argument is predicated on a common error. Myers explained, "People often believe that life expectancy at birth represents an age to which all newborns live and then instantaneously drop dead. Actually, life expectancy means the average number of years that a group can be expected to live after a specified age. In this case, only about half would die before age 67, and the other half would live for about 12 years longer." (He observes that it's more accurate to examine life expectancy at age 20, "when people generally enter the labor market." According to the 1992 U.S. Abridged Life Tables, the most recent available, African Americans at age 20 can expect to live to 67.7 on average, meaning half of blacks with that life expectancy actually will continue living to an average age of 79.6 years.)

Life expectancy for blacks is certainly shorter than for whites (for African-American males, the difference in life expectancy at age 20 is 6.5 years less than for white males, while life expectancy for black women is about a half-year shy of that for their white counterparts.) However, Myers noted that the resultant disadvantage for African Americans in lower overall Social Security benefits is offset by other aspects of the program.

Black Americans benefit more than whites from Social Security's protections for young survivors when a parent dies and especially from the program's progressive payment formula. For the lowest-income retiree, Social Security replaces a far higher percentage of the person's earnings than it does for those who earned the maximum amount taxed by the system. Although the lowest level of earners receive smaller dollar amounts, in 1995 the income-replacement proportions for the lowest earners was 60%, nearly double the 34% paid to the average high-strata earner.

Myers commented that Social Security "is not intended to be an investment program, but rather an income-maintenance one, with broad pooling of risk among the participants so that those with low earnings are provided reasonably adequate benefits, and those with higher earnings are provided a good floor of economic security protection."

THE PENSION GAP

Even trickier than untangling the racial differences in Social Security is understanding de facto discrimination in private pensions. One recent example of this research challenge is a study by economist Yung-Ping Chen of the Gerontology Institute at the University of Massachusetts, Boston. According to Chen, in 1994 one in three white elders received private pensions, while only one in six black and Hispanic elders did. He added, "Whereas private pensions represented 1 in 10 dollars of total income for whites, private pensions contributed approximately 1 in 14 dollars of total income for black and Hispanic elders. In short, private pensions have not become a significant source of retirement income to a large number of elders, especially minority elders."

Chen identified a growing differential between white employees and black or Hispanic workers who participate in 401(k) and similar "salary-reduction" pensions plans that allow workers to voluntarily commit some of their earnings to their retirement years. He said the disparity is troubling, because these are among the most widely offered retirement savings mechanisms available today.

Chen discerned that much of the difference is attributable to aspects of the minority workers' jobs, such as occupation, earnings, union status and full- vs. part-time positions, and to personal characteristics, particularly age, gender, education level and marital status. The study found that variables such as these do not entirely explain the differential between whites and minorities in the workplace.

The research, supported by grants from the U.S. Department of Labor and the AARP Andrus Foundation, showed that in 1993, 41.3% of white workers were offered salary-reduction plans compared to 31.9% of African American and 21.5% of Latino employees. These percentages increased for all three groups since 1988, but the growth was substantially greater for whites.

WHY LESS ATTRACTIVE?

The research question broached by the study "is whether the impact of voluntary salary reduction plans on the growing race/ethnicity gap is due to differences in minority and white access to these plans or to other factors that make these plans more or less attractive to whites and minorities." Among those who were able to sign up for the plans in 1988, 61.2% of whites joined compared to 47.4% of blacks and 52.2% of Hispanics. In 1993, though, these figures jumped by eight percentage points for whites (to 69.2%) but only by 5.1 and 5.4 percentage points for African American and Latino employees respectively.

Chen and his colleagues found that given a chance comparable to that of whites to join in salary-reduction pension plans, a significant proportion of black and Latino employees still decline to sign up. When the researchers controlled their findings against "'affordability' variables designed to measure the ability of workers to afford the loss of current income that comes with salary-reduction plan participation," neither African American nor Hispanic workers took up the opportunity as widely as whites did.

The research group did find that after adjusting for different personal characteristics, the proportion of Hispanic employees taking up the plans was "not demonstrably different from white uptake rates." However, lower educational levels and related factors did not account in either 1988 or 1993 for all of the division between the voluntary pension-plan involvement of black and white workers.

Chen concluded that "voluntary reduction plans appear to have contributed to the growing pension coverage gap between whites and minorities." Because the expected statistical variables did not explain the pension gap, the study surmised that "a different research strategy may be needed" to understand what makes these plans "less attractive to minority workers." Chen told Aging Today, "We need a focus-group strategy to look at attitudes people have about such plans." The next step is for researchers to listen to what minority workers have to say.

For information about Chen's study, "Minority Access to Employer Pensions," contact Chen at (617) 287-7326; fax (617) 287-7080. *