How to close the race-based chasm in U.S. retirement wealth

U.S. one dollar bills blow in this photo illustration near the Andalusian capital of Seville
U.S. one dollar bills blow near the Andalusian capital of Seville in this photo illustration taken on November 16, 2014. REUTERS/Marcelo Del Pozo

October 12, 2017

By Mark Miller

CHICAGO (Reuters) – The gap in U.S. retirement wealth between white and minority families has widened to the point where it really is not a gap anymore. It is a canyon.

In 2016, white families had six times more money saved for retirement on average than black or Latino families, according to new data from the Federal Reserve’s Survey of Consumer Finances. As recently as 2007, the gap was fourfold for black families and fivefold for Latino households, according to a new analysis of the Fed data by the Urban Institute. (http://urbn.is/1Vj06A3).

Research shows that low-income families can – and do – save. Instead, the widening chasm results from a range of economic factors and upside-down tax policy. Lifetime income inequality certainly is one driver, but the problem is much broader than that, said Signe-Mary McKernan, co-director of the institute’s opportunity and ownership initiative.

“The cards are stacked against lower-income Americans,” she said. “We’re a country built on the premise of economic opportunity but entire groups are not getting the same chances to move up.”

For starters, minority workers are far less likely than whites to hold jobs that offer tax-advantaged retirement saving programs like 401(k) plans. That means these workers are not enjoying the benefits of plan features such as employer matches or automated contributions. Even workers who are offered these accounts do not benefit as much, since the tax incentives associated with 401(k) and Individual Retirement Accounts are structured as deductions, and flow predominantly to taxpayers in higher brackets.

Lower rates of home ownership among minority households also contribute to the retirement gap, the researchers found. Last year, 68 percent of white households were homeowners, compared with 46 percent of Latino households and 42 percent of black households, the Urban Institute reports. That means fewer minority households can tap in to home equity to meet retirement needs.

“When you think about home ownership, part of the story is appreciation of home values, but families of color have faced structural barriers in achieving this goal,” said Kilolo Kijakazi, an Urban Institute fellow also working on the wealth gap research.

Well-qualified home buyers of color face substantial barriers such as being shown fewer homes, the institute’s research shows. And price appreciation for homes in neighborhoods of color is lower than in white neighborhoods with comparable income levels. Lower home ownership rates and less home equity mean fewer families of color can tap in to home equity to meet retirement needs.

Federal tax policy is upside-down here, too, with current tax subsidies flowing to the most affluent households, who are more likely to itemize their filings and tend to be in higher tax brackets. The capital gains exclusion on housing also benefits higher-income taxpayers, who tend to own more expensive homes.

TRUMP PLAN HEADS IN WRONG DIRECTION

Targeted federal policies could go far to close the gap – starting with the tax code. On home ownership, for example, we could establish a first-time homebuyer tax credit and a refundable credit on property taxes. This could be funded by limiting the mortgage interest deduction for the most affluent households. For example, the Bowles-Simpson fiscal commission back in 2010 proposed capping the deductibility of mortgage interest at $500,000.

Improving the federal Saver’s Credit also could be a big help. The credit provides a second layer of tax incentives for lower-income households beyond the benefit of tax deferral that everyone receives for contributing to a 401(k) or IRA. Taxpayers with yearly incomes of less than $31,000 (single filers) and $62,000 (joint filers) this year can claim a credit of up to $1,000 for contributions to a qualified retirement plan or individual retirement account (IRA) – but only if they have a tax liability.

Near 10 percent of tax filers could claim the credit, but only about 5 percent do so, according to the National Institute on Retirement Security. Restructuring the credit into a match would have the biggest impact. That could be done by making the credit refundable – in other words, available no matter what your tax liability (http://reut.rs/2hACrwq).

Federal policy under the Trump administration is heading in exactly the opposite direction, especially where retirement saving and tax policy are concerned. The administration is phasing out the U.S. Department of the Treasury’s myRA program, a low-cost, simple entry-level retirement saving plan targeting workers who are not offered a plan by employers. And Congress has pulled back two Obama-era rules aimed at helping states launch their own low-cost saving programs.

Meanwhile, the administration’s tax plan would further fuel the inequality trends, not reverse them. Tax cuts would flow mainly to businesses and high-income households. If in place next year, 50 percent of the cuts would flow to households with the top 1 percent of income ($730,000 or more), according to the Tax Policy Center, while middle-income households (earning $50,000-$90,000) would receive about 8 percent. Low-income households would receive even less. And the plan is silent on the issue of mortgage interest deductions and credits for first-time homebuyers.

Instead, we need smart policies that help low-income households get ahead. Let’s start narrowing the retirement chasm – now.

(Editing by Matthew Lewis)

  • F16JetJock

    Keep in mind that our Marxist progressive personal income tax system is designed to be discriminatory. Originally, it was designed to be punitive against the wealthy and/or successful employers/achievers But later, after Congress learned that they could control/direct consumer and corporate behavior with income tax law, then 26 USC began to rapidly expand to many thousand of pages in order to favor themselves and their personal/corporate donors at the behest of millions of regular working class Americans. Indeed, so much for creating Marxist income equality**.

    Since 1620, racism has been institutionalized in America in favor of Caucasians, the founders of the USA. Previous to 1620, racism has been part of the human condition since Adam and Eve and with Noah’s family as they dispersed throughout the world. Indeed, racism is a part of the human condition; that’s why there are over two hundred nations throughout the world. Because, like in the animal kingdom, humans seek to associate only with others like themselves whether it be because of skin color, creed, religion, neighborhood or national-origin, by wealth, by occupation, by achievements, by military rank, and all kinds of other reasons. Like it or not, but the elitist powers-that-be of the American Empire (whom are all Caucasian) diligently maintain Caucasian superiority in US government/American Empire bureaucracies (CIA, military, DHS, NSA, etc.). That’s just the way it is; no policy or law will ever change normal human behavior.

    So for low-income people to improve their retirement predicament, well they’ll they just have to accomplish it on their own. The best way is to become educated in a high-demand/high/paying occupation using all of the government sponsored student loan debt that can be had, and then pursue employment with employers with well-funded pension programs such as the U.S. military, U.S. government, and cities, counties and states. Superior education is about the only way to excel in a world that is biased against minorities.

    ** The intent of the Sixteenth Amendment was to permit Congress to grow it’s power over “we the people” via deficit spending facilitated by the 1913 Federal Reserve Act that created the Federal Reserve Bank, a private bank designed to enrich it’s founders (the Ashkenazi Rothschild family banking cabal and Wall Street banking cohorts) and to indirectly cause American consumers and the American Congress to become permanent fiat-currency debt slaves (current account $20 Trillion+; long-term $80Trillion+).

  • joe

    Well, for 40 years you’ve done nothing but lower the bar to accommodate bad behavior. This was one predictable result. At least we didn’t get “eubonics” although Vicksburg is going to look really silly when they remove all the confederate monuments.

  • digriff

    “The cards are stacked against lower-income Americans,” she said. “We’re
    a country built on the premise of economic opportunity but entire
    groups are not getting the same chances to move up.”

    Oh, Ok, so now it is the white mans fault that the minorities don’t have good retirement savings…….anything else?

  • Regina Notman

    Education, education, education!