Racial and ethnic inequality is a growing problem in the United States and has been for some time. And this disparity is equally evident in the financial wellness and retirement savings of Americans. Retirement plans have created tremendous wealth for millions saving for retirement. But have the benefits of these plans been realized equally? Or is the racial and ethnic inequality found in the broader labor market also present in retirement savings outcomes and overall financial wellness?
The path to a successful retirement is paved by financial wellness. In the context of saving for retirement, financial wellness requires successful management of day‑to‑day finances, setting and making progress toward financial goals, and believing that these actions will result in a successful retirement. When it comes to financial wellness, Americans are generally optimistic. According to research conducted by The Harris Poll on behalf of Empower Retirement, more than half of people surveyed believe they can attain financial health.1 However, this confidence is not consistent across racial and ethnic groups. Only 38% of Hispanic Americans and 43% of Black Americans consider themselves financially healthy compared to 51% of White Americans.2
In an annual Retirement Savings and Spending Study, T. Rowe Price found that financial stress, specifically around debt, is a primary barrier to peoples’ belief that they will be able to successfully retire.3 The study found that many investors saving for retirement struggle with financial wellness in a variety of ways, and the research suggests that many are deeply affected.
- Black respondents are saving 44% less than their White counterparts, and they are more likely to have student loan, medical, and other types of debt.
- Black respondents are less likely than Whites to own a home.
- While contribution rates for Hispanic respondents are higher than Black respondents, they too are more likely to have relatively high levels of consumer debt and are most likely to have withdrawn equity from their home.
- 20% of White, 26% of Black, and 30% of Hispanic respondents reported having difficulty in paying required monthly bills.4
The prevalence of financial stress relating to debt, budgeting, and savings indicates that many Americans lack the resiliency to overcome many common financial obstacles. According to the Fed’s 2022 Economic Well-Being of U.S. Households survey, some 37% of Americans lack enough money to cover a $400 emergency expense, up from 32% in 2021.5 That means nearly one in four Americans would have to use credit, turn to family, sell assets, or take a retirement plan withdrawal or loan, in order to cover any major unexpected cost.
Achieving financial wellness does not go unchallenged. Insights from the Retirement Savings and Spending Study demonstrate the ill effects that financial stress can have not only on day‑to‑day household finances but longer‑term goals such as saving for retirement.
Accumulation of retirement savings requires active decision-making in three areas – participation, contribution and investing. The adoption of auto features and qualified default investment alternatives (QDIA) have helped with the latter two. But widespread participation in retirement plans remains elusive and the racial gaps are particularly stark.
About half (50.2%) of prime‑age workers in the private sector participate in a workplace retirement plan. Participation rates for Whites (57.7%) and Asians (54.9%) are above the average. However, Hispanics have the lowest retirement plan participation rates (31.9%) with less than one in three participating in a retirement plan. And only two in five (40.5%) Blacks participate in a retirement plan.6
So why the participation disparity? Researchers conclude the following:
- Access to a defined contribution retirement plan is unequal and that among those who do have access, 81% of the heads of White households participate compared with 70% of Black and 63% of Hispanic heads of households.4
- Income inequality drives the participation gap with Hispanics and Blacks having the largest share of their workers in the bottom two income groups.6
- Starting early gives a saver a potential advantage that is almost impossible to make up with a higher saving rate and a late start. There is a significant gap – while 38% of White participants say that they started saving for retirement before 30, only 18% of Blacks and 29% of Hispanics reported doing so.6
- Debt may also be hindering minority participants’ retirement savings progress – Black and Hispanic participants are more likely to hold every type of debt (e.g., credit card, car loans, medical debt, etc.) than their White counterparts.6
Addressing racial and ethnic disparities in retirement savings is not easy. But there are solutions that may help narrow the gap – expand access to employer-sponsored retirement plans, adopt auto features like auto enrollment and auto escalation, add or increase access to financial wellness programs, and encourage use of financial advice and guidance to improve behavior.
Racial inequality in the United States is the result of socioeconomic factors that have been in the making for centuries. Retirement plans cannot escape these forces. They reflect the inequality that is present in our larger society. The problem won’t be solved overnight, and more efforts from every corner of our society are needed to reverse the course of the current trends.
