Most Americans have a significant chunk of their life savings in the form of home equity, so inequities in homeownership could have far-reaching consequences for household wealth and retirement preparedness. But home equity is not the only factor contributing to retirement inequality in the U.S. The 2023 Pension Research Council Symposium delved deep into those factors and the potential policy reforms that could fix them. The symposium, titled “Diversity, Inclusion, and Inequality: Implications for Retirement Income Security and Policy,” was held in Philadelphia on March 30 and 31.

Olivia S. Mitchell, executive director of the Pension Research Council, said at the conference, “To understand and overcome retirement inequality, one needs a combination of finance, economics, psychology, sociology, demography, and ethics.”

“Business schools in particular, and higher education more broadly, are important factors in creating the knowledge base that’s necessary to secure people’s retirement and then to go on to create generational wealth, and close the wealth gap,” Wharton Dean Erika James said at the conference in a conversation with Surya Kolluri, head of the TIAA Institute, the research arm of Teachers Insurance and Annuity Association of America.

The Latest Research on the Retirement Racial Wealth Gap

Inadequate Retirement Preparedness

“Retirement adequacy” is often defined as the ability to replace retirement income that is equivalent to between 75% and 80% of pre-retirement income. For many households, retirement is mostly financed from pension accumulations, Social Security benefits, and non-retirement assets.

Retirement-income replacement rates appear to be under 60% for many middle and upper-income families with heads in their 50s, according to Harvard University professors Karen Dynan and Doug Elmendorf. “The challenge of receiving adequate income in retirement is especially acute for many families with Black heads,” they stated in their conference presentation on “Changes in Racial Gaps in Retirement Security over Time.”

For families with heads in their 50s, the median real wealth for those with white heads fell from roughly $260,000 in 2000 to roughly $172,000 in 2019, Dynan and Elmendorf noted. But median real wealth for those with Black heads dropped even more sharply — from about $72,000 to about $24,000 over the same period.

To explain this shift, Dynan and Elmendorf point to sharp declines in the shares of families with defined benefit (DB) pensions, which traditionally have provided considerable income in retirement. (Defined benefit plans are funded by employers, and have increasingly been replaced by defined contribution or DC plans, where employees make contributions for retirement, often with employer matches.) “One might hope that families without DB pensions would save more themselves, but that is not the case,” they note. “The challenge of receiving adequate income in retirement is especially acute for many families with Black heads, as Black-headed families … are notably less likely to have defined benefit pensions.”

Racial Hurdles to Building Housing Wealth

Historical inequities have limited the ability of Black Americans to build their housing wealth, with the result that the current wealth distribution is “heavily tilted towards white Americans,” according to Larry Santucci, senior advisor and research fellow at the Federal Reserve Bank of Philadelphia.

His research points to restrictive housing regulations from the 19th century, which were historically tilted in favor of white Americans. These exacerbated the racial wealth gap, he noted in his presentation on “The Racial Wealth Gap and the Legacy of Racially Restrictive Housing Covenants.”

Santucci cited a 2016 survey which showed that 73% of white families owned their homes, with the average net housing wealth (after deducting unpaid mortgage balances) of about $216,000. In contrast, just 45% of Black families owned a home, with an average net housing wealth of only $94,400, or less than half that of the average white family.

Housing wealth comprises two-fifths of the net wealth of retirement-age Americans, according to Amir Kermani, professor of finance and real estate at the University of California, Berkeley, and Francis Wong, economics professor at the Ludwig-Maximilian University of Munich. “About half of the Black-white gap can be explained by higher rates of distressed sales among Black homeowners,” they conclude in their presentation on “How Racial Differences in Housing Returns Shape Retirement Security.” Closing the gap in housing returns would cut the Black-white gap in primary housing wealth at retirement in half.

Racial differences in housing returns are also driven by racial differences in foreclosures, which make remedial interventions difficult, find Kermani and Wong. They also note that the key driver of racial gaps in housing returns is minorities’ higher propensity to experience distressed home sales (i.e., foreclosures and short sales). The authors suggest that policymakers focus on reducing upstream disparities, like those in the labor market, to help create safety nets for minorities who are more vulnerable to foreclosures.

Debt Burdens of Older Americans

One factor undermining older Americans’ ability to prepare financially for retirement is the debt burden they carry. Increasingly, adults are carrying debt into retirement, according to Mingli Zhong, research associate, and Jennifer Andre, data scientist at the Urban Institute.

Their presentation on “Racial Differences in Debt Delinquencies and Implications for Retirement Preparedness” tracked some 4.8 million adults age 50+ who had credit bureau records. They found that the median debt amount for older households with debt was about three times higher in 2016 ($55,300) than in 1989 ($18,900 in real 2016 dollars).

The authors also reported racial disparities in debt levels. Compared to an older adult in a majority-white community, a typical older adult in a community of color is more likely to have any type of delinquent debt, carry a higher balance of total delinquent debt, and have a higher balance of medical debt in collections. The older adult living in a majority-white area has a higher balance of delinquent student loan debt and delinquent credit card debt, they also found.

Perceptions of Life Expectancy and Financial Literacy

Another topic of discussion was “Racial and Ethnic Differences in Longevity Perceptions and Implications for Financial Decision Making,” by Abigail Hurwitz and Orly Sade of the Hebrew University of Jerusalem, and Olivia S. Mitchell, Wharton professor of business economics and public policy and executive director of the Pension Research Council. Their study finds that people’s perceptions of how long they will live determines how they plan their retirement savings and draw down their retirement funds. “Inaccurate perceptions regarding life expectancy can lead to suboptimal financial decisions with long-term consequences, including under-saving prior to, and overspending during, retirement,” according to the authors.

Based on two surveys covering the same set of nearly 2,300 individuals, the study shows that, in both years, Blacks and Hispanics overestimated their anticipated longevity; in fact, they anticipate living longer than whites. The study goes on to see whether providing people with more accurate information on longevity influences their recommendations for saving and buying annuities. The authors report that people who underestimate their survival chances are more likely to recommend saving and annuitization when they see more accurate information on longevity risk.

Inequities in Wills and Inheritances

Vicki Bogan, finance professor at Cornell University’s SC Johnson College of Business, argues that low levels of financial literacy and inadequate access to savings products are largely responsible for inadequacies in retirement preparedness. Her work on “Financial Inclusion and Retirement Preparedness in the United States” suggests that barriers to engaging with financial institutions, the lack of employer-sponsored retirement plans, and the inability to access financial advice can significantly hinder a household’s ability to save and plan for retirement. Additionally, according to Bogan, health issues also hinder retirement savings.

Differences in retirement preparedness are exacerbated by intergenerational wealth transfers, especially inheritances and large gifts, notes Bogan. She pointed to research showing that over 42% of white households near retirement (age 55–64) had either already received an inheritance or large financial gift or expected to get one. In contrast, fewer than 14% of Black households and 12% of Hispanic/Latino households had received or expected to receive an inheritance or large gift.

A discussion on “Wills, Wealth, and Race” by Jean-Pierre Aubry, associate director of state and local research; Alicia Munnell, director; and Gal Wettstein, senior research economist at the Center for Retirement Research at Boston College, also highlights racial differences in inheritances and wills. Note the authors, “Black and Hispanic decedents are less likely to pass down meaningful estates because they are far less likely to have a will than non-Hispanic whites.”

Social Security and the Racial Wealth Gap

Although the median Black household earns 24% less per adult than the median white household, the latter has six times more marketable wealth (e.g., stocks, housing equity, bank accounts) than the former. Yet after taking account of social security wealth (the present value of social security payments), the Black/white wealth gap is far smaller, report Wharton finance professor Sylvain Catherine and Yale Law School professor Natasha Sarin in their paper titled “Social Security and the Racial Wealth Gap.”

Accordingly, inequality scholars who ignore social security benefits have missed the rising value of government promises of relatively generous future annuities.

The authors note that social security wealth currently comprises 61% and 59% of Black and Hispanic households’ total assets, up from just 21% and 9% three decades ago. This is because the progressive social security benefit formula pays relatively higher benefits to lower-earning, versus higher-paid, workers. The authors warn that, unless policymakers reform the Social Security program to address its looming insolvency, lower-income retirees and particularly Black and Hispanic households will confront larger racial wealth gaps.

The racial gap in retirement income is a theme also addressed by Edward N. Wolff, New York University economics professor, in his presentation on “Understanding Trends in Hispanic and African American Retirement Preparedness in the U.S.” The author estimates that, in 2019, social security benefits accounted for 28% of Black retirees’ incomes and almost 32% for Hispanics, versus 12% for whites. The author concludes that the program “has thus served as an important equalizing factor in retirement adequacy.”

Policy Reforms That Can Help Close the Retirement Racial Wealth Gap

Financial Wellness Programs

Symposium speakers identified several ways in which racial retirement wealth gaps can be narrowed. Jamie Kalamarides, CEO and owner of Bear North LLC, a financial services advisory firm, suggests that retirement preparedness can be boosted with employee financial wellness programs, legislation such as the Setting Every Community Up for Retirement Enhancement (SECURE) Acts of 2019 and 2022, and financial services provider innovations.

Retirement planning opportunities were described by Kalamarides in his talk about “Improving the Financial Security of Workers of Color through Employee Financial Wellness Programs.” Finding that there is “a real business case” for employers to offer financial wellness programs, he pointed out, “Beyond altruism, employers want happier workers. They want them to be more loyal. It reduces turnover. We’ve seen that workers that are less financially stressed are more productive, and that they are more present, or they have less absences along the way.”

Baby Bonds

Racial wealth inequality could be reduced also with novel developments such as Baby Bonds, helping parents set aside money for their children’s education. Naomi Zewde, professor in the department of health policy and management in the Fielding School of Public Health at the University of California, Los Angeles, notes that several states and municipalities have either launched their own versions of Baby Bonds or are actively seeking to introduce these publicly funded accounts, often with more generous financing for lower-income families. Examples include Washington, D.C., Connecticut, and Pennsylvania.

Zewde assessed Baby Bonds in her presentation titled “Would Baby Bonds Reduce Racial Retirement Wealth Inequality?” The approach would establish a fund for every newborn in the U.S., which could be used upon entering young adulthood. She pegged the cost of the plan at $80 billion annually, divided among approximately four million children born in the U.S. every year, for an average payout of $20,000.

Retirement-friendly Tax Policies

Retirement-friendly tax policies could also help alleviate racial wealth inequality, according to Carl Davis, research director, and Brakeyshia Samms, state policy analyst, both at the Institute on Taxation and Economic Policy. Their research on “Tax Policy to Reduce Racial Retirement Wealth Inequality” finds that, among those nearing retirement, the typical white household has five times more non-social security retirement wealth ($176,900) than the typical Hispanic household ($35,000) and seven times more than the typical Black household ($24,300). Retirement savings exemptions predominately favor upper-income white households, and tax reform has “immense potential” to reduce racial retirement wealth inequality, notes Davis.

The authors believe that racial inequities can be addressed by reorienting retirement savings incentives toward moderate-income families, taxing retirement income streams more equitably at the state level, and ensuring taxation of real estate wealth in retirement. Resolving social security’s insolvency would also be important.

Davis and Samms propose that policymakers give preference to tax credits over exemptions, primarily because tax credits are more equitable. Because high-income families are more likely to be white, the bias embedded in existing tax exemptions tends to worsen racial differences. The authors also note that income and asset limits could improve the effectiveness of retirement tax subsidies. The bulk of those subsidies are enjoyed by upper-income families who use retirement accounts as lucrative tax shelters, in their view.

Emergency Savings Accounts and Other Policy Options

David C. John, senior strategic policy advisor at AARP Public Policy Institute, J. Mark Iwry and William G. Gale, both senior fellows at The Brookings Institution, offer their ideas in a presentation on “Enhancing Retirement Wealth and Reducing Retiree Inequality: Emergency Savings Accounts and Other Policy Options.” The authors opine that racial inequities can also be reduced via dedicated emergency savings accounts, expanded access to retirement programs, easier portability of retirement balances from employer to employer, and an improved Saver’s Credit program (which provides tax credits for contributions to retirement plans).

The authors also conclude that people of color and lower-income workers lack access to emergency saving devices, with 53% of Black workers and 64% of Hispanic workers versus 42% of white workers in this situation. Having an emergency savings account and auto-enrollment in pensions are especially important for enhancing retirement preparedness.