February 19, 1999
New York A new study released by the International Longevity Center-USA, Ltd. (ILC-USA) shows how important Social Security benefits are to narrowing the gap in retirement wealth between white and minority households. In "Minorities Face Retirement: Worklife Disparities Repeated?" for the first time Social Security benefits are calculated into projections of the wealth that older households expect to have when they retire. Adding this important source of retirement financing, the total wealth of the median black household more than doubles from $86,000 to $189,000 and total wealth of the median Hispanic household nearly triples from $53,000 top $158,000. In contrast, in the median white household, retirement wealth increases only slightly more than one-and-a-half times, from $238,000 to $391,000, when Social Security benefits are included.
During their working life, minorities earn less than whites. Black workers make 76 percent and Hispanic workers make 57 percent of white workers' annual earnings. Disparities in wealth at retirement are even more dramatic. The black median households will have only 48 percent, and the Hispanic median household will have only 40 percent, of the wealth of the median white household at retirement. Findings from the "Minorities Face Retirement: Worklife Disparities Repeated?" study indicate that Social Security benefits account for more than a half (54 percent) of black and two-thirds (66 percent) of Hispanic median household retirement wealth. They account for slightly more than a third (39 percent) of median white household retirement wealth.
The study's investigator, Marjorie Honig, Ph.D., ILC-USA visiting senior economist, and professor and chair of economics at Hunter College and professor at the Graduate Center of the City University of New York, noted, "These findings are very timely and have major implications for the nation's Social Security debate currently underway. Minorities are counting on Social Security for the biggest portion of their retirement wealth. Any tinkering with this program that fails to produce the expected amount of income will have the most advertise effect on black and Hispanic households."
A New Method for Calculating Retirement Wealth
Net worth at retirement is typically measured by adding financial assets, such as savings accounts and stocks and bonds, to housing equity. Expected Social Security and employer pensions are usually not included in the calculation. The "Minorities Face Retirement: Worklife Disparities Repeated? study, however, includes all four sources of retirement wealth. Results from this new method of calculation improve the outlook for minorities, but a great disparity still exists in the wealth they will have available at retirement.
Robert N. Butler, M.D., ILC President and C.E.O., remarked, "Dr. Honig's study clearly demonstrates that Social Security is instrumental in preventing poverty among millions of older Americans. I'm deeply concerned about how proposals to change Social Security will impact retirees especially minorities and the poor."
Social Security Comprises Biggest Portion of Wealth for Most Retirees
Social Security benefits account for the bulk of anticipated retirement wealth for 70 percent of U.S. households. Impoverished households, regardless of race or ethnicity, will be the most dependent on Social Security benefits in retirement. In fact, in the poorest households, Social Security will account for nearly two-thirds of total retirement wealth. While the dependency on Social Security lessens as retirement wealth increases, it is expected to be the major source of retirement wealth for more than two-thirds of American retirees.
For the wealthiest third of older U.S. households, pension wealth will be a more significant source of income than Social Security. Pensions are expected to comprise less than a quarter of the retirement wealth for the median U.S. household, however, and pensions are a minimal source only 6 percent of retirement income for the poorest households.
After Social Security, housing wealth will be the second largest source of wealth for all households below the median.
For her study, "Minorities Face Retirement: Worklife Disparities Repeated?" Dr. Honig used data from the first wave (1992) of the Health and Retirement Survey (HRS), a longitudinal survey funded by the National Institute on Aging and conducted by the Institute for Social Research at the University of Michigan. She analyzed 4,371 households in which the financially responsible member worked within the last 10 years, reported race and ethnicity, was not self-employed or retired, and the worker, or his or her spouse, was between the ages of 51-61. Because black and Hispanic households were over-sampled in the HRS, there are 853 and 397 households, respectively, from these racial and ethnic groups.
Savings for Retirement are Inadequate
Using the same data from HRS, Dr. Honig subsequently found that regardless of race or ethnicity, few are saving enough to maintain their pre-retirement standard of living. The median white married household, for example, expects to have $391,000 in wealth at retirement but needs $469,000 to produce an annual retirement income of 70% (a retirement goal household, in other words, would need to save another $79,000 by retirement, or $7,800 annually (15% of income) for the remainder of their working life.
Since blacks and Hispanics will have less retirement wealth, relative to their current income, they would need to save an even greater proportion annually to maintain the pre-retirement standard of living. Dr. Honig found that to retire with an income that is 70% of pre-retirement income, the median black household, with income of $33,000 year, would need to save 34.8 percent of their income annually over the remainder of their working life. She also concluded that the median Hispanic household, with income of $27,000, would need to save 31.9 percent of their annual income to meet its retirement goal.
Dr. Honig warned, "The saving goals for minority households are clearly not achievable. They imply that in retirement minorities will have significantly lower living standards compared to whites than they had during their working lives."
"Minorities Face Retirement: Worklife Disparities Repeated?" will be published this spring by the University of Pennsylvania Press in Forecasting Retirement Needs and Retirement Wealth, Brett Hammond, Olivia S. Mitchell, and Anna Rappaport, eds.