Trends in Retirement Security by Race/Ethnicity

Retirement security has declined in the wake of the global financial crisis and ensuing recession. Despite an extended period of recovery, half of households ages 30-59 are at risk of inadequate retirement income compared to 44 percent in 2007. The questions addressed in this brief are how the percentage at risk varies by race/ethnicity in 2016 and how the impact of the crisis and the recovery led to the 2016 pattern. This brief uses the National Retirement Risk Index(NRRI) to assess the retirement security of today’s working-age households. The NRRI is calculated by comparing households’ projected replacement rates – retirement income as a percentage of pre-retirement income – with target replacement rates that would allow them to maintain their standard of living. These calculations are based on the Federal Reserve’s Survey of Consumer Finances, a triennial survey of a nationally representative sample of U.S. households. As of 2016, the NRRI showed that, even if households worked to age 65 and annuitized all their financial assets (including the receipts from reverse mortgages on their homes), half of households were at risk of falling short in retirement. The discussion proceeds as follows. The first section describes the nuts and bolts of the NRRI. The second section presents background data on wealth and earnings, showing that white households now hold roughly six times as much wealth and earn almost twice as much as minority households. The third section reports the NRRI for white, black, and Hispanic households for 2007-2016. In 2016, whites had the lowest share at risk, followed by blacks and then Hispanics. The pattern over time is somewhat surprising, with the situation of blacks holding relatively steady and that of Hispanics deteriorating sharply. To explain this pattern, the fourth section explores the underlying wealth and earnings data. The data suggest that the deterioration for Hispanics reflects their buying housing in the wrong places at the wrong time and that the steadiness for blacks is a function of falling earnings at the bottom of the income distribution and Social Security’s progressive benefit formula. The final section concludes that while considerable inequality exists in retirement preparedness, it is significantly less than exists in the distribution of wealth and earnings before retirement. The reason, though, is that minorities have a lower standard of living to maintain than whites.