As the U.S. population becomes more diverse, it will be increasingly important for policymakers addressing Social Security’s solvency to understand the extent to which various racial and ethnic groups rely on Social Security versus other sources of retirement wealth. Yet, to date, studies on retirement wealth have tended not to focus on race and ethnicity and
have largely ignored the role of Social Security. This Center for Retirement Research brief, based on a recent paper, uses data from the Health and Retirement Study (HRS) to document the retirement resources of white, black, and Hispanic households at various points in the wealth distribution for five cohorts of 51-56 year olds between 1992 and 2016.
The non-Social Security retirement wealth held by white huseholds averages about 7 times that of blacks and about 5 times that of Hispanics. Adding in Social Security wealth changes the picture dramatically. Under this more complete measure, retirement wealth for white households drops to about 2.5 times that of minority households. Social Security has such a powerful effect because the program is nearly universal and its benefit formula is progressive.
A universal program allows minority workers to build up credits as they move from job to job. This constancy differs from employer-sponsored retirement plans, where minorities often work for employers that do not provide coverage. A progressive benefit formula provides much higher benefits relative to earnings for lower-wage workers than for their higher-wage counterparts. Since blacks and Hispanics earn significantly less than whites, their Social Security benefits are a much higher percentage of their pre-retirement earnings.
Inequality in retirement wealth does not translate to the same amount of inequality in replacement rates. In 2016, the typical white household had a replacement rate of about 51 percent based on income from all sources of retirement wealth. The typical black and Hispanic households were at 42 percent and 48 percent respectively. So, compared to white households, replacement rates for black and Hispanic households were much more equal than retirement wealth itself. The reason for this relative equality is inequality in income. For example, in 2016, the typical household earnings from the denominator of the replacement rate for white households was $69,200—it was $41,650 for black households and $37,700 for Hispanic households. So, in moving from retirement wealth to replacement rates, blacks and Hispanics have a lower earnings target than whites and their higher replacement rates from Social Security benefits significantly narrow the overall inequality gap.