August 18, 2022

The Racial Roots of Retirement Inequality

Financial advisers and retirement experts say the best advice they can give workers to prepare for old age is to save, save, save.

But two young researchers might argue this advice isn’t sensitive to the hurdles that Black and Hispanic workers face when they try to save. At a recent panel discussion, the researchers presented a laundry list of the hurdles, which are harder for minority workers to clear and can be insurmountable.

One disadvantage is widely understood: people of color tend to be in lower-paying jobs overall and disproportionately work in the retail or the food service industries, which have irregular hours, high turnover, and wages that often depend on tips. Many of these jobs do not include employee health and retirement benefits, putting people of color at greater risk than White workers that their retirement income will fall short.

But the roots of retirement inequality run deeper and can be seen in the racial differences in intergenerational wealth – whether homeownership or a college education that leads to a good job – said Dania Francis, an economist at the University of Massachusetts Boston and a panelist at the event hosted by the university’s Pension Action Center.

White Americans, Francis said, are in a better position to retire because they receive inheritances at dramatically higher rates than Black and Hispanic Americans. She cited Federal Reserve data from 2010 through 2019: 42 percent of White households within 10 years of retiring had already received or expected to receive an inheritance from their parents.

The inheritance numbers were 14 percent for Black and 11 percent for Hispanic households.

White parents also provide money to their young adult children at higher rates to pay for investments in their future such as college or a down payment on a house, Francis said. And, she added, the lower wages earned by workers of color will also make it harder for them to ever “bridge that gap.”

Taha Choukhmane, an assistant professor at the MIT Sloan School of Management, agreed. But he pointed to the billions of dollars in retirement incentives built into a tax code that also favors White workers and “contributes to inequality.” …Learn More

May 26, 2022

Parents Work Less After Kids Leave Home

When children grow up and become financially independent, how do parents adjust their finances? Are they finally spending money on themselves? Saving more for retirement? Paying down debt?

No one has come up with a convincing answer yet. Especially puzzling is that past research has shown that parents seem to reduce their consumption after the adult children move out. Yet there’s no evidence that much of the extra money is going into 401(k)s. So what’s going on?

A new study for the first time finds a missing puzzle piece: parents, freed from the obligation to support their children, are choosing to work less.

Parents work one to two hours less per week after their adult children leave home for good, according to researchers at the American Enterprise Institute and the Center for Retirement Research.

Consistent with this finding, their household income declines roughly 4 percent because they’re working fewer hours or finding less demanding jobs with lower pay.

Reaching this conclusion required a series of steps. First, the researchers broadened the definitions of saving and consumption used in earlier studies to see if that shed any light on the issue. Finally, they looked at the parents’ decisions about work.

In the past, the estimates of saving had largely been confined to putting money in 401(k)s. Perhaps something could be learned by counting paying off a mortgage or other debts as a form of saving. But the researchers still found no evidence parents are paying their debts off faster after the kids leave.

So where is that extra money going? …Learn More

May 17, 2022

Enhancement to Savers Tax Credit is Minor

The Savers Tax Credit sounds great on paper. Low-income people get a federal tax credit for saving money for retirement.

But this part of the tax code always seems to disappoint.

The House recently overwhelmingly passed a bill, the Secure Act 2.0, that – along with numerous other retirement provisions – makes the savers credit more generous for some low-income workers.

Under current law, taxpayers can get one of three credits – 10 percent, 20 percent, or 50 percent of the amount they save in a 401(k). The Secure Act, which is now headed for the Senate, would somewhat increase the top income levels for the 50 percent credit – from $20,500 currently to $24,000 for single taxpayers and from $41,000 to $48,000 for married couples. The dollar value of the caps on their credits would remain at the current $1,000 and $2,000, respectively.

The House bill would also eliminate the 10 percent and 20 percent credits for higher-income workers and begin phasing out the dollar caps once taxpayers exceed the $24,000 and $48,000 income levels.

The proposed tweak to the tax structure “is not a dramatic change to who gets the credit,” said Samantha Jacoby, the senior tax legal analyst for the Center on Budget and Policy Priorities.

The House also failed to fix the fundamental flaw in the savers credit: it is non-refundable. This means workers who don’t owe any taxes don’t qualify. Without refundability, Jacoby and Chuck Marr write in a recent report, the House bill “ignores a critical reason why so few people with low and moderate incomes claim the credit.”

Disappointment with the tweaks to the savers credit is apparent in the context of the entire bill, which gives much more to higher-income people. For example, the House increased the age that taxation of 401(k) withdrawals kicks in from 72 to 75. Some retirees with modest incomes will tap their savings long before that and won’t benefit from the provision.

“Overwhelmingly, the people who will benefit from this bill are the people who are higher income and already have secure retirements,” Jacoby said.

Another barrier to use of the savers credit is a lack of awareness that it exists. The share of tax filers who claim the credit has increased in the past 20 years but still hasn’t reached 10 percent, according to a report by Transamerica Institute. …Learn More

May 12, 2022

Got a Retirement Plan? Race Plays a Role

The following statistic will sound familiar since I use it regularly: about half of U.S. workers are not saving enough and may see their standard of living drop when they retire.

A major culprit in this poor state of preparedness is that millions of Americans at any given moment don’t have a traditional pension or 401(k) savings plan at work.

A new study takes a close look at who these people are and shows stark differences along racial lines. A large majority of Hispanic workers in the private sector – two out of every three – do not have access to a pension or 401(k)-style plan, and more than half of Black workers do not have access. Although the numbers are lower for Asians (45 percent) and whites (42 percent), they are still substantial.

Other estimates of private sector coverage, also from this study by John Sabelhaus of the Brookings Institution, show big gaps between high- and low-paid workers and workers with and without college degrees, and at large and small employers.

Coverage also varies from state to state: In Pennsylvania, 41 percent lack access to a retirement plan, but in Florida, 59 percent do not have coverage.

Sabelhaus is certainly not the first to document disparities in retirement plan access for different demographic groups. But his methodology advanced the ball, resulting in more reliable estimates. By using three data sources, he could compensate for their shortcomings while taking advantage of the unique information in each one. He combined recent data from the U.S. Census Bureau, the IRS, and the Federal Reserve Board. …Learn More

March 29, 2022

Boomers Lament Disappearance of Pensions

More than one of this blog’s readers said a recent article about 401(k)s was hardly revelatory. But it sure generated a lot of comments.

Ed McGrath wrote this about “Retirees with Pensions Slower to Spend 401(k):” “Well thank you for this Caption Obvious.”

Perhaps the article struck a nerve because baby boomers are the generation who mostly lost out on pensions. Nearly two-thirds of U.S. workers born in the 1920s through the 1940s – many of them parents of boomers – had pensions. But a measly 6 percent of boomers from the tail end of the wave have them.

Millennials and members of Generation Z usually wouldn’t even consider pensions in their retirement plans. But boomers at one time might’ve hoped or even expected to enjoy a retirement similar to their pensioned parents.

“I am a single woman, a former nurse, and not one job offered me a pension,” said Jennifer Lee, who is 67. “I am relying on my savings and Social Security as well as the equity in my home.” Lee expressed chagrin that a 60-year-old cousin – a rare boomer with a pension – has already “mailed in his retirement papers.”

Several readers pointed out problems with a U.S. retirement system that increasingly relies on savings – leaving retirees to figure out how much to withdraw every year – as monthly pension checks have disappeared. Ken Pidock, quoting a financial journalist, said 401(k)s lack the reliability of pensions: “Forcing people of modest means to depend on the stock market for income to pay bills after they stop working is madness.”

Paul Brustowicz, a former insurance company employee in his late 70s, feels lucky to have the security that comes with a pension, along with his Social Security and some IRA funds he converted to an annuity. “The steady monthly income lets my wife rest easy at night,” he said.

But another reader, Brian Jarvis, has a different perspective on the generational pension divide. “Yes, my father had a traditional pension that I don’t have,” he said. But Jarvis and his wife built up an ample nest egg “that my parents couldn’t have dreamed of,” he said. “We’ll be in good shape for quite a while – the rest of our lives – even without our parents’ type of pensions.”

Unfortunately, not everyone is as prepared as Jarvis. About half of U.S. households aren’t saving enough to retire at the traditional age of 65, which puts them at risk of suffering a drop in their standard of living when they quit working and the paychecks stop. …Learn More

March 10, 2022

Viewing Retirement Saving as a Fresh Start

Employers have learned over the years that understanding employee psychology is critical to getting them to save for retirement. Researchers have landed on a novel idea along those lines: explain to employees that they have an opportunity to save in a 401(k) or increase their 401(k) saving on a future date that represents a fresh start, such as a birthday or the first day of spring.

In a 2021 study in the journal Organizational Behavior and Human Decision Processes, this “fresh start framing” during an experiment increased the percentage of workers who agreed to contribute to their employer retirement plans and increased the share of pay contributed to the plans. In both cases, the increases were well in excess of 25 percent in a comparison with employees who were presented with less salient future dates.

Add this technique to a well-established one that growing numbers of employers already use with some success: automatically enrolling workers in the 401(k), and sometimes automatically increasing their contributions, which research has shown can work better than waiting for them to do it themselves. Most of the retirement plans in the study did not have any automatic features, and the fresh start dates proved another way to elicit better saving habits – voluntarily.

The option to delay a commitment to save is based on an assumption that people are more willing to make a change that involves sacrifice if it can be postponed – smokers often try to quit this way. One theory for using a fresh start date is that it imbues a feeling of optimism, giving employees permission to set aside past failures. …Learn More

February 24, 2022

Retirees with Pensions Slower to Spend 401k

Retirees have long been reluctant to spend the money they’ve accumulated in their 401(k) savings plans. But it also used to be common for retirees to have a traditional pension to cover their regular expenses.

By the time the baby boomers came along, pensions were available to a dwindling minority of workers, and it isn’t entirely clear how much they’ll tap into their 401(k)s.

A new study quantifies the impact of this transformation in the U.S. retirement system, where traditional pensions are now found almost exclusively in the public sector. The conclusion, by the Center for Retirement Research, is that retired boomer households lacking a pension seem more likely to rapidly deplete the 401(k) savings they rely on, “leaving them with more risk that they will outlive their savings.”

Consider a simple example of the difference a pension makes. In the past, typical households that started retirement with a pension and $200,000 in 401(k)s and other financial assets had about $28,000 more at age 70 than their counterparts with $200,000 in assets but no pension. After age 75, the difference between the haves and have-nots widened to about $86,000.

For this analysis, the researchers used data on the retirement finances provided in a survey of older Americans, specifically the heads of households born between 1924 and 1953, which includes some of the earliest boomers.

The researchers also found that the pace at which these retirees spent their savings hinged on the percentage of wealth they held in the form of annuities, whether a pension, Social Security, or an insurance company annuity. The retirees who got more of their income from annuities depleted their savings more slowly.

Based on prior generations’ behavior, the researchers roughly estimated that boomers – given their lower pension coverage – are in danger of using up their financial assets at around age 85. This would leave them with little room in their budgets for a long life, a large unexpected medical bill, or an inheritance for their children.

Boomers probably shouldn’t assume then that their parents’ retirement experiences are a reliable indication of how they will fare.

To read this study, authored by Robert Siliciano and Gal Wettstein, see “Can the Drawdown Patterns of Earlier Cohorts Help Predict Boomers’ Behavior?” …Learn More