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The Ret i rement Secur i ty Pro ject

The RetirementSecurity Project

Nº 2008-4

Ngina Chiteji andLina Walker

Advisory Board

Bruce BartlettWashington Times Columnist

Michael GraetzJustus S. Hotchkiss Professor of Law,Yale Law School

Daniel HalperinStanley S. Surrey Professor of Law,Harvard Law School

Nancy KilleferDirector, McKinsey & Co.

Robert RubinDirector, Chairman of the ExecutiveCommittee and Member of the Officeof the Chairman, Citigroup Inc.

John ShovenCharles R. Schwab Professor ofEconomics and Director, StanfordInstitute for Economic Policy Research,Stanford University

C. Eugene SteuerleSenior Fellow, The Urban Institute

Commonsensereforms,real worldresults

www.ret i rementsecur i t yprojec t .org

1775 Massachusetts Ave., NW, Washington, DC 20036 ¥ p: 202.741.6524 ¥ www.retirementsecurityproject.org

The Retirement Security Project

is supported by The Pew

Charitable Trusts in partnership

with Georgetown University's

Public Policy Institute and the

Brookings Institution.

The Retirement Security Project • Strategies to Increase the Retirement Savings of African American Households 3

II.. IInnttrroodduuccttiioonn

CConcerns about whether AfricanAmericans are sufficiently prepared forretirement have been raised in academiccircles, in the policy arena, and in thepopular press.2 The voices of the AfricanAmerican citizens tell a story thatsuggests current levels of saving are aconcern for this minority population. Aquarter of African American surveyrespondents expressed reservationsabout having enough resources tosimply take care of basic expensesduring retirement and about one-fifthreported that they expect to struggleduring the first five years of retirement.By comparison, only one-tenth of all U.S.workers had this latter concern.3

In this report, we highlight differences inretirement resources between AfricanAmericans and other U.S. households,discuss their implications with respect toretirement preparedness and examineunderlying reasons for these differences.The goal of the paper is to move beyondsimple comparisons of savings betweengroups to measures that provide a betterassessment of whether AfricanAmericans are saving adequately forretirement and how they comparerelative to other households. Thus, thisanalysis enables us to assess the extentto which the concerns voiced by AfricanAmericans are validated, evaluate theunderlying reasons for racial differencesin retirement preparedness and identify

policy options that would improve theretirement security of African Americanhouseholds.

The primary finding is that AfricanAmerican households are less preparedfor retirement than white households.They have saved smaller sums, which islargely due to differences in labor marketexperience and saving decisions. Whenone accounts for differences in income(which are driven by differences in labormarket experience), the savings gapnarrows but persists.

Retirement resources, however, alsoinclude claims to Social Security anddefined benefit (DB) pensions and whenthese are accounted for, on average,African Americans have adequateresources for retirement. However,African Americans continue to lag behindwhites in that they have lower incomereplacement rates than white retireesand a disproportionate fraction of AfricanAmericans have replacement rates thatwould be inadequate to support theirretirement consumption. Part of theracial differences in retirement resourcesmay be due to differences in familystructure and networks but also due todiscrimination in labor and credit markets.

Given these differences in retirementpreparedness, this report focuses onprivate-market solutions that woulddifferentially improve the retirementsecurity of African American families.The policy proposals emphasize

Advisory Board

Bruce BartlettWashington Times Columnist

Michael GraetzJustus S. Hotchkiss Professor of Law,Yale Law School

Daniel HalperinStanley S. Surrey Professor of Law,Harvard Law School

Nancy KilleferDirector, McKinsey & Co.

Robert RubinDirector, Chairman of the ExecutiveCommittee and Member of the Officeof the Chairman, Citigroup Inc.

John ShovenCharles R. Schwab Professor ofEconomics and Director, StanfordInstitute for Economic Policy Research,Stanford University

C. Eugene SteuerleSenior Fellow, The Urban Institute

Commonsensereforms,real worldresults

www.ret i rementsecur i t yprojec t .org

1775 Massachusetts Ave., NW, Washington, DC 20036 ¥ p: 202.741.6524 ¥ www.retirementsecurityproject.org

The Retirement Security Project

is supported by The Pew

Charitable Trusts in partnership

with Georgetown University's

Public Policy Institute and the

Brookings Institution.

The Retirement Security Project • Strategies to Increase the Retirement Savings of African American Households

remedying information gaps, making iteasier to save and improving incentivesto save, particularly for moderate- andlow-income households. Specifically:

• Provide an ongoing financialmentoring program for children,starting at very young ages, to levelthe playing field for children who arenot born into families with financialmarket expertise or who have limitedopportunity to learn about financialmanagement from related adults. Along-term financial mentoring programcould be built upon existing financialeducation programs that targetchildren but do not typically offerongoing, sustained mentoringopportunities.

• Make it easier to save by increasingthe adoption of automatic features in401(k) plans. This includes changingthe default options in 401(k) plans soworkers are automatically enrolled,and their contributions are automaticallyincreased over time and invested inprofessionally managed, balancedfunds – unless they actively chose notto participate. Additionally, whenworkers change jobs, automaticallyrollover assets in 401(k)-type plansinto an IRA or another retirement planoffered by the new employer to keepthe funds in the retirement system.

• Help millions of workers who currentlydo not have access to 401(k) planssave for retirement by creating asystem whereby these workers cancontribute automatically to a low-cost,

diversified individual retirement account(IRA) through direct payroll deposits.

• Expand, simplify and make refundablethe Saver’s Credit so that theincentives for saving are clearer andmore rewarding and those most inneed of the credit could qualify – evenif they do not owe taxes.

• Reform the asset tests for federalmeans-tested programs so that lower-income families and those in need ofpublic assistance are not penalized foraccumulating retirement assets.

In the following section we compare theretirement resources of African Americanfamilies to the average U.S. family anddiscuss some of the underlying reasonsfor the differences. Section III thenrefines the comparison by controlling forincome differences. Section IV accountsfor claims to Social Security and DBbenefits and assesses the adequacy ofretirement saving. The report ends witha discussion of additional factors thatcontribute to the racial wealth gap (familystructure and discrimination) and offersseveral promising policy initiatives thatare designed to help blacks betterprepare for retirement (sections V and VI).

IIII.. DDiiffffeerreenncceess iinn RReettiirreemmeenntt TToopp

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Table 1. Savings of Pre-retired and Retired Households

Panel A. Pre-retired household (age 51-64)Mean values[Median values]

African American households

All US households

Net worth $123,400[$27,500]

$399,800[$142,300]

Net worth minus housing wealth $77,800[$4,000]

$277,700[$49,000]

Financial Assets $16,300[$200]

$101,700[$7,500]

DC/IRA $39,900[$0]

74,100[$0]

Panel B. Retired households (age 70 and older)Net worth $84,400

[$36,900]$409,600

[$165,000]Net worth minus housing equity $34,700

[$2,000]$281,200[$61,000]

Financial Assets $14,000[$300]

$145,300[$20,000]

Notes: Mean values, with medians reported in parenthesis.Financial assets includes stocks, bonds, certificates of deposits and balance in checking and savings accountsNetworth includes financial assets, housing equity, value of transportation, value of business, farm and real estate, IRA, assets in trusts and other assets. Source: Authors' calculations using data from the 2004 Health and Retirement Survey

housing assets for the median blackfamily is one-twelfth that of the typicalAmerican family, compared to one-fifthwhen housing equity is counted (Table 1).7

Racial differences in retirement resourcesare also apparent among current retirees.The median African American familyaged 70 and older has a net worth of$36,900, which is markedly lower (one-forth) than the net worth of the medianU.S. household (Table 1). In addition,sources of income also differ betweenblack and white retirees (Table 2).Retired African American households aremore likely to rely on income frompension plans and earnings than other

IInnccrreemmeenntt RReessoouurrcceess

Many studies have documented that theaverage African American family haslower savings than the average U.S.family. Table 1 illustrates the extent ofthe racial savings gap, measured by networth, among working-aged householdsapproaching retirement (ages 51-64).4

The median net worth of African Americansis only around $28,000 compared to$140,000 for the median householdnationwide.5 The difference in savingsbetween black and other households iseven larger if one excludes the value ofhousing equity.6 The value of non-

5


and saving choices adversely affectAfrican Americans’ retirement security.

AA.. DDiiffffeerreenncceess iinn llaabboorr mmaarrkkeett

eexxppeerriieennccee

African Americans are more likely to beunemployed than white persons.Unemployment rates are 50 percenthigher among African Americans thanwhite persons (Table 3). In fact, higherunemployment rates among AfricanAmericans are apparent across all educationgroups, including among college graduateswho, as a group, tend to have the lowestunemployment rate among all workers.11

Even among those who are employed,labor market outcomes between AfricanAmerican and white workers differ. Alarger fraction of black workers are employedin low-wage occupations than otherworkers: 15 percent of low-wage workersare African Americans, yet AfricanAmericans comprise only 11 percent of

retirees. Furthermore, income fromassets represents a much smallerportion of total household income forAfrican Americans than for otherhouseholds (almost half as large).

In what follows, we discuss some of thereasons for the observed racial differencesin retirement resources. To a large extent,these differences are attributable to racialdifferences in labor market experience,such as a higher unemployment rate andmore part-time work.8 These differenceslead to lower average earnings thanwhite persons and differential access toemployer-sponsored retirement plans.9

Some of the differences in retirementresources, however, are also attributableto racial differences in saving decisions.For instance, 401(k) participation andcontribution rates are lower among blackworkers than white workers, and investmentchoices are sometimes different.10 Inmost (although not all) instances, thesedifferences in labor market experience

Table2. Sources of Income Among Retired Households (age 70 and older)All U.S. households African Americans

Retirement (pension) income 16.0% 17.5%

Social Security benefits 34.9% 33.1%

Public assistance %1.3%0.2

Assets/other income 14.2% 8.4%

Earnings 32.7% 38.0%

Notes: Social security benefits include workers, disability insurance and survivor's benefitsPublic assistance includes SSI, unemployment and worker's compensation, veteran's payments, welfare payments such as AFDC and TANFAssets/other income includes interest and rental income, income from dividends, educational assistance, financial assistance, alimony and child support Earnings include wages and salary, self employment and farm income Source: Authors' calculations using data from the Current Population Survey

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the total workforce.12 In addition, amongmen, African Americans are more likelyto work part-time than whites: 13.2percent of black men work part-timecompared to 12.3 percent of white men.13

LLoowweerr eeaarrnniinnggss

As a result of these labor market differences,black families tend to have lower earningsthan white families. As a group, blackmen earn about 72 percent of what whitemen earn and black women earn 86percent what white women earn (Table 3).

Low-earning households save less (inlevels) than high-earning householdsbecause they have a lower base fromwhich to save. In addition, there is someempirical evidence that suggests thathouseholds with low incomes tend tosave a smaller fraction of their incomesthan high-income households.14 Thus,the combination of a lower base forsaving and lower savings rate partlyexplains the racial gap in net worth.

Differences in earnings also have implicationsfor retirement resources becauseretirement balances and pensionpayments often are tied to earnings.

All workers

share of all workers1

share working part-time1

share working in public sector7

job tenure: percent with 20+ years (at current job)4

All workers

median hourly wage2

annual earnings3

All persons

employment rate1

unemployment rate6

labor force participation rate5

Source notes: (1) Authors' calculations based on 2006 data from Table PINC-05 from the 2007 March CPS (now called the "Annual Social and Economic Supplement").(2) Median hourly wage info comes from 04/05 SOWA, pp. 166 and 167. The data are for 2003.(3) Median annual earnings for 2006 (in 2006$) from Table 7, p. 6 of Census Bureau's Income, Earnings, and Poverty Data, American Community Survey, 2006.(4) Source is Table 593 "Distribution of workers by tenure at current employer" from 2007 Stats Abstract. 9.4% is the national average (across all sexes and races).(5) 2006 data from Table 570 of the 2007 Stats Abstract.(6) From www.bls.gov/cps/cpsaat3.pdf--"Employment status of the civilian non-institutionalized population by age, sex and race.” (7) Figures listed are for workers regardless of gender based on authors' calculations using data from 2007 Current Population Survey.

Table3. Labor Market Outcomes by Race and Gender

All Men

53.2%

12.3%

16.0%

na

$15.04

$42,210

73.3%

4.7%

73.5%

Black women

6.2%

20.1%

20.4%

7.7

$11.14

$30,398

61.6%

7.5%

61.7%

White women

37.5%

28.5%

8.7

$12.94

$34,133

60.7%

4.0%

59.0%

All women

46.9%

27.1%

16.0%

na

$12.18

$32,649

60.7%

4.5%

59.4%

Black Men

5.3%

13.2%

20.4%

8.9

$12.23

$34,480

63.6%

6.1%

67.0%

White Men

44.5%

12.3%

10.8

$16.82

$47,814

74.7%

4.2%

74.3%

7


Under a DC retirement plan, such as a401(k) plan, the employer’s contributionto the plan typically is a fixed percentageof the worker’s earnings. Consequently,African American workers with lowerearnings would receive lower levels ofemployer contributions than otherworkers with higher earnings.

Likewise, DB plans typically computepension payments based on earningsand years on the job. Accordingly,workers with lower earnings accruelower pension benefits than higher-earning workers and, workers withshorter tenure on the job accrue lowerpension benefits than those with longertenure. On average, African Americanworkers have lower earnings and theyhave shorter job tenure than otherworkers (Table 2); which means they aremore likely to accrue lower pensionbenefits in DB plans than other workers.

DDiiffffeerreenncceess iinn pprriivvaattee--sseeccttoorr eemmppllooyyeerr--ssppoonnssoorreedd rreettiirreemmeenntt ccoovveerraaggee rraatteess

Racial differences in labor marketexperience also lead to differentialaccess to employer sponsoredretirement coverage. In the privatesector, black workers are less likely to beoffered retirement coverage than otherworkers because they are more likely towork in part-time and lower-wage jobs,which typically do not offer coverage.The private-sector coverage rate forAfrican Americans is about 3 percentagepoints lower than the national average.15

Compared to white workers, the gap iseven greater: 50 percent of white

workers in the private sector are coveredby an employer-sponsored retirementplan compared to only 42 percent ofAfrican American workers.16

Furthermore, private-sector AfricanAmerican workers may becomeincreasingly less likely to have coveragerelative to other private-sector workers.Between 1979 and 2004, coverage ratesin private-sector employment fell byabout 10 percentage points amongworkers with a high school education (toabout 40 percent), but stayed stable atabout 60 percent for college-educatedworkers.17 Since a higher proportion ofAfrican American workers have a highschool education or less, to the extentthat the trend continues, the gap incoverage rates between AfricanAmerican workers and white workers inthe private sector may increase.18

DDiiffffeerreenncceess iinn ppuubblliicc--sseeccttoorr eemmppllooyymmeenntt

Black workers, however, are more likelyto be employed in the public sector thanother workers.19 This difference in publicsector employment places black workerson a more favorable footing forretirement than other workers becausemost public sector employers offerpension coverage and the coverage istypically in the form of a DB plan.20 Oneof the advantages of DB plans over401(k)-like plans is that workers generallyare not responsible for makingparticipation and contribution decisions:they are automatically enrolled in theplan if they are eligible, contribution ratesare pre-determined and the assets are

8



professionally managed. Generally,these features are beneficial to allworkers (because inertia can prevent ordelay a worker from participating) butthey are particularly beneficial to lowincome African Americans who, as agroup, tend to have less financial marketexperience and lower financial literacythan other workers.21

The other advantage of DB coverageover DC coverage is that benefits from aDB plan are payable for life (that is, as anannuity); whereas, the majority of DCplans do not even offer the option toannuitize plan balances. Retirees in DCplans, therefore, must manage theirassets to last their lifetime and face thepossibility of outliving their resourcesshould they live longer than expected.Thus, African American retirees who, onaverage, have greater access to DBpensions are better protected from therisk of outliving their resources thanworkers with DC-type retirement coverage.

BB.. DDiiffffeerreenncceess iinn ssaavviinngg ddeecciissiioonnss

While racial differences in earnings andaccess to employer-sponsoredretirement plans lead to racial differencesin retirement account balances, the choicesthat black workers make regardingretirement saving may further amplifythese differences. Even when blackworkers are offered employer-sponsoredretirement coverage through 401(k)-typeplans, they make choices about (i)whether to participate in 401(k) plans, (ii)how much to contribute, and (iii) how toinvest their saving, that lead to lowerrelative savings in these retirement accounts.

For example, among workers who haveaccess to 401(k)-type plans, blackworkers are less likely to participate inthese plans than white workers. Onestudy found that in 2004 only 50 percentof eligible black private sector workersparticipated in their employer’s retirementplan compared to over 59 percent ofwhite workers.22 By not participating,

Mean values (Median values)

Wealth less housing equity(net worth less housing)

Number of Observations

Notes: Mean values, with medians reported in parenthesis.* Because of the small sample size, the mean value for IRA/DC balances is skewed upwards by the presence of a single black household with a very sizeable DC account balance.Financial assets includes stocks, bonds, certificates of deposits and balance in checking and savings accountsNetworth includes financial assets, housing equity, value of transportation, value of business, farm and real estate, IRA, assets in trusts and other assets.Source: Authors' calculations using data from the 2004 Health and Retirement Survey

Financial Assets

IRA/DC

Table4. Wealth and Asset Holdings of Pre-retired Households, by Income Group

Wealth (net worth)

Black

$30,100[$0]

$5,000[$0]

$3,100[$0]

$3,900[$0]

257

All Households

$80,100[$10,000]$36,800[$1,000]$15,900

[$0]$14,300

[$0]

800

All Households

$199,500[$95,000]$119,700[$32,800]$42,300[$4,500]$56,700

[$0]

1,457

All Households

$1,559,000[$708,000]$1,239,100[$479,500]$474,400[$90,000]$169,300[$50,000

484

Income Decile Group

$556,200[$257,500]$426,000

[$120,100] $70,700

[$11,500]$152,500[$15,000]

88

Black

$79,000[$47,000]$38,000

[$11,000]$10,800[$1,000]$32,600

[$0]

256

Black

$978,400[$450,400]$839,500

[$250,400]$127,700[$13,000]$198,000*[$21,000]

30

Below the poverty line Median Income Groups Top Income Decline Group Top Black

9


workers are also losing any employer-matching contributions they might havereceived had they contributed to their401(k) plan and the tax advantages thatcome with saving in these employer-sponsored retirement accounts.

There also is some evidence that 401(k)contribution rates among African Americanswith DC plans are smaller than those ofother households.23 Estimates suggestthat among workers who participate in a401(k) plan, the average 401(k)contribution rate for African Americans is4.2 percent, while it is 5.5 percent forwhites and 5.4 percent across all DCplan participants regardless of race. Thissame study reveals that more than halfof African Americans contribute 4percent or less of their salary to their401(k) account.24

Additionally, African Americans appear tobe less likely than white workers toinvest in and hold high-yielding assets,such as stocks, than the average U.S.family.25 To the extent that investmentreturns are lower as a result, theaccumulated savings over time for ablack worker would be lower than that ofa white worker, on average. Thisdifference in investment choices maypartly explain the difference inaccumulated assets between retiredAfrican Americans and comparably-agedhouseholds. At the median, AfricanAmerican households age 70 or olderhold about $300 in financial assetscompared to $13,000 held by themedian retired household nationwide.

IIIIII.. IInnccoommee--AAddjjuusstteedd DDiiffffeerreenncceess iinnRReettiirreemmeenntt RReessoouurrcceess

It is important to note that the comparisonsof net worth and other retirementresources discussed in the previoussection have been between groups withpotentially very different income. Asnoted earlier, the earnings of black andwhite workers differ. Moreover, Blackfamilies have lower income than otherfamilies, on average, and adisproportionately higher fraction of blackfamilies are in the nation’s lowest incomegroup. The median income for AfricanAmerican families nationwide is abouttwo-thirds that of the typical U.S.household ($32,000 for blacks comparedto $48,000 for the typical U.S. household).26

In addition, 17 percent of AfricanAmerican families are poor compared to7 percent of white families and thenational average of 8 percent.27

In order to assess the relative retirementpreparedness of African Americanfamilies, therefore, it is useful tojuxtapose families with comparableincomes. The key question thenbecomes whether African Americanhouseholds will have comparableretirement resources as other householdswith similar income. In this section weexamine wealth levels of households,controlling for income. This income-adjusted comparison of wealth alsowould illuminate whether there are factorsbeyond income that differentially affectblack and white households’ retirementsecurity. A cursory comparison of

10



Similarly, black households in the top 10percent of income have lower net worththan comparable households.32 Whilethe typical rich household in the UnitedStates has accumulated about $50,000in retirement savings in IRA/DC accountsand about $90,000 in financial assets,the typical African American householdin the nation’s top income group has anIRA/DC balance of just $21,000 andfinancial asset holdings valued only at$13,000.33 Blacks therefore have aresource deficit even when oneconsiders the most well-to-do Americans.

Few black households, however, haveincomes that place them in the top 10percent of all Americans. In fact, blackhouseholds that are in the top 10percent of income among other blackhouseholds have substantially lowerincome and lower net worth than thosein the 10 percent of the U.S. population($257,500 compared to $708,000).Comparing liquid wealth, such asfinancial assets, the typical blackhousehold at the top of the AfricanAmerican income distribution has nomore than one-eighth the assets oftypical rich household (Table 4).Accordingly, African Americans who mayvery well consider themselves richrelative to their peers still lag far behindmany other U.S. households whenentering retirement.

income ratios (two-thirds) to wealth ratios(ranging from one-twelfth to one-quarter)suggest that other factors may play a role.28

Table 4 presents data covering near-retired households who are in the lowestincome group (living below the povertyline), those who are middle income, andthose who are among the top 10 percentof the richest U.S. households.29 Asshown in Table 4, the wealth gap persistswhen comparisons are restricted tohouseholds with similar income. Thisresult is consistent with findings fromother studies.30 The gap is narrower forhouseholds in the highest income group(at the median, the wealth ratio isbetween one-half and two-thirds) but iswider for households in the lowestincome group.

As noted in Table 4, the typical (ormedian) poor African Americanhousehold has virtually no savings (zeroIRA/DC balances, financial assets, andnet worth); whereas, the typical poor U.S.family has accumulated a small amountof wealth (primarily from equity in theirhome).31 Among middle-incomehouseholds, the typical African Americanhousehold still has lower savings thanother households. The net worth of atypical pre-retired middle-class blackfamily is only about half of the net worthof a typical pre-retired middle-classhousehold in the population at-large($47,000 compared to $95,000respectively), indicating that even middle-class blacks will be entering retirementwith fewer resources than other Americans.

11


Social Security and DB benefits) aresufficient to maintain their pre-retirementstandard of living throughout retirement.That is to say, what percentage of thehousehold’s income before retirement canbe replaced by accumulated savings andclaims to benefits in retirement (theincome replacement rate). It is generallythought that an income replacement rateof 75 to 80 percent would be needed tofinance consumption during retirement andmaintain pre-retirement standards of living.35

Estimates of expected mean retirementincome of African American and whitefamilies suggest that the average AfricanAmerican family could expect to have areplacement rate of 73 percent of pre-retirement income, whereas the averagewhite family could expect to replace 83percent of their pre-retirement income,when pension wealth and social securityare included.36 Thus, even afteraccounting for expected Social Securityand DB benefits, a gap still exists in thedegree to which African Americans andwhite families are prepared forretirement: African Americans lie nearthe lower end of the range deemedadequate to maintain their livingstandards while whites are slightly abovethe top of the range.37

Moreover, a recent study that examinesfamilies below the adequate rangereveals that 40 percent of AfricanAmericans could expect to have areplacement rate that is lower than 50percent; whereas only about one-quarterof white households had estimatedreplacement rates in that range.38 Thus,a significant minority of households will

IIVV.. RReettiirreemmeenntt AAddeeqquuaaccyy

The analysis to this point has focused onhousehold net worth primarily, whichincludes the value of home equity,financial assets, and savings in tax-deferred retirement accounts, such asIRAs and 401(k)s. The measure of networth, however, does not includeexpected claims to future benefits fromSocial Security and DB pensions. As wenoted earlier, the importance of SocialSecurity and pension benefits varyacross households and, for some, thesebenefits can account for a substantialportion of retirement income. BecauseSocial Security benefits are progressive,in that benefits replace a higher portionof earnings for low income workers thanfor high-income workers, and becauseblack households on average have lowerincome than other households, theomission of Social Security benefits fromhousehold resources would tend tooverstate the differences in retirementpreparedness between black and whitehouseholds. Similarly, to the extent thatblack workers are more likely to receiveDB benefits than white workers, theomission of DB payments would overstateracial differences in retirement resources.

IInnccoommee rreeppllaacceemmeenntt rraatteess

A more appropriate comparison ofrelative preparedness of those not yetretired therefore would account for theseexpected sources of funding, in additionto accumulated assets.34 One commonapproach is to evaluate whether and towhat extent a household’s expectedretirement resources (including all saving,

12



not be financially prepared for retirementand a disproportionate number of thosehouseholds are expected to be AfricanAmericans.

VV.. OOtthheerr EExxppllaannaattiioonnss ffoorr tthheeIInnccoommee--AAddjjuusstteedd RRaacciiaall WWeeaalltthh GGaapp

In this section, we review some possiblereasons for the observed wealth gapbetween black and other families withcomparable income. We focus on differencesin family ties and networks, which resultin differences in family risk-sharing,financial transfers, and financial literacy.

It is common to view household savingas a process governed solely by factorsaffecting the nuclear household however,there is increasing evidence to suggestthat relationships with extended familymembers may affect the way thatindividuals prepare for retirement.Sharing resources, such as housing,may help older households meet someof their retirement needs and help somefamilies accumulate wealth. At the sametime, intra-family transfers to supportpoorer kin members also may depressyounger generations’ ability to save fortheir own retirement. Furthermore,knowledge and skills about saving couldbe shared within the family, so youngAfrican Americans from lower-incomefamilies may not have the same learningopportunities as those from higher-income families.

FFaammiillyy NNeettwwoorrkkss

Economists have argued that familiescan do almost as well as insurancemarkets in protecting against adverseevents if family members pool risks andresources.39 Choosing to pool risks andresources within the family can allow anindividual who suffers a loss of income torely on other family members to helpfinance consumption when he or sheexperiences the loss in income, whichmitigates the need to save and shore upcontingency reserves for the situation.

It is well-documented that minority families,including African American families, aremore likely to live in extended householdsthan non-Hispanic white families.40 Nearlyone in four African Americans lives in anextended household compared with onlyone in ten non-Hispanic white persons.41

Furthermore, these racial differences inextended family living arrangements remaineven after controlling for economiccharacteristics. One study finds thatblacks and Hispanic households are 14percent more likely than non-Hispanicwhite households to be extended.42

To the extent that families that livetogether are more likely to help eachother financially, the higher presence ofextended households among AfricanAmerican families than non-Hispanicwhite families may explain part of theracial difference in wealth among thosewho are near retirement. Potentially,individuals may decide they do not needto save large sums independentlybecause they believe they can rely onother family members for assistance.

13


Evidence suggests that among singleelderly women, co-residence with otherfamily members appears to alleviatepoverty for nearly one out of every sevenhousehold, for example.43 Similarly,single women benefit from co-residingwith other family members – regardlessof their racial background. However,because elderly African Americanwomen are 1.5 times more likely to besingle than elderly non-Hispanic whitewomen and a greater proportion ofyounger single mothers are AfricanAmerican than white, extended kinnetworks may represent a moreimportant resource for both young andold black women than white women.44

Even individuals or families that do notreside together may choose to shareresources and to pool risks. Somestudies suggest that African Americansare highly embedded in kin networks.45

If individuals who are accustomed toturning to relatives in times of financialneed can expect to rely on such familyassistance during retirement, they wouldhave less incentive to saveindependently for this life stage.

FFiinnaanncciiaall ttrraannssffeerrss bbeettwweeeenn ffaammiillyy mmeemmbbeerrss

While family structure and participation inkin networks can provide a barrieragainst poverty and act as a kind ofretirement resource for the old, otherstudies suggest that African Americans’entrenchment in family networks actuallymay depress their ability to save whilethey are young. In particular, two studiesfind that middle class African American

adults are more likely to have poorrelatives than other middle classindividuals, and that the presence ofpoor relatives throughout the family treeis negatively correlated with an individual’swealth.46 The authors argue that thetotal amount of savings that a middleclass African American household is ableto accumulate during its working years isreduced because of the need to assistpoor parents through financial transfers.

Financial transfers from older familymembers to younger members, on theother hand, can be beneficial for buildingwealth. In the empirical research thatexamines the effect of bequests andinter-vivos transfers on wealth accumulationthere is general agreement that thereceipt of financial transfers canpositively affect the recipient’s ability toaccumulate wealth. Financial assistanceto pay for schooling, for example, willimprove an adult child’s future earningopportunities; and a down payment giftto facilitate the purchase of a home willreduce the amount of debt that one’soffspring has to take on to purchase ahome. Thus, transfers can help youngergeneration family members build wealthearlier than they otherwise would. Theliterature has shown that African Americansare less likely to receive these types oftransfers, even after controlling for theeconomic resources of the adult child.47

Most studies agree that this implies thatyoung black families are at a disadvantagerelative to other families that do receivefinancial assistance (at least in theory).There is less agreement, however, aboutthe volume of transfers that occur, and

14



whether they have large effects onchildren’s saving behavior, and the exactextent to which they create a sizeablegap between the wealth held by AfricanAmerican and other households.48

FFiinnaanncciiaall LLiitteerraaccyy

Another possible consequence of AfricanAmericans’ greater likelihood of havingpoor relatives throughout the family treeis that blacks are subsequently less likelythan those with wealthier kin networks toacquire knowledge, skills and opportunitiesrelated to saving and perhaps morebasic understanding of financial matters.Research suggests that attitudes aboutsaving, risk preferences and investmentchoices may be learned or mimickedfrom parents.49 These wealth-enhancing“traits” are more likely to be transferredto children by wealthy parents, who havegreater understanding, access to, andknowledge about financial markets, thanlow-wealth parents.50 There is alsoincreasing evidence that financialilliteracy is widespread among the U.S.population but it is particularly acuteamong specific demographic groups,such as those with low education,women, African-Americans, and Hispanics.51

Financial literacy can have a significanteffect on retirement outcomes. Studiesshow that those with greater financialliteracy are more likely to plan forretirement and planners are more likelyto approach retirement with higherwealth levels than non-planners.52

Evidence also suggests that those whohave low financial literacy are significantly

less likely to invest in stocks.53 Thus,differences in financial literacy andfinancial market experience betweenAfrican Americans and whites couldexplain part of the wealth gap.

What is less clear, however, is whetherthese differences in financial literacy andfinancial market experience remain aftercontrolling for income differences. In anyevent, because middle class AfricanAmericans are more likely to have poorparents than white middle class familiesand to the extent that poor parents areless likely to be financially literate,middle-class African Americans may beless financially literate than middle-classwhite families.

VVII.. PPoolliicciieess

The paper has documented lowerretirement resources among AfricanAmerican households than otherhouseholds, even after controlling fordifferences in income. The previoussections have highlighted several keyelements that differentially affect AfricanAmericans’ saving levels; in particular,differences in labor market experience,differences in saving decisions, anddifferences in family structure and networks.Most of these differences adverselyaffect African Americans’ retirementsecurity; although some (such as greaterpublic sector employment and family risksharing) provide them with betterprotection from certain risks in retirementthan what is available to other households.

15


Our proposals to improve retirementsecurity for African Americans focus onthree areas in which African Americansdiffer from white household and forwhich there are demonstrable effectivepolicy interventions. First, we focus onreducing information gaps and improvingfinancial literacy of African Americans,which studies suggest would improveplanning and investment choices byAfrican Americans and, ultimately, couldincrease accumulated balances inretirement accounts. Second, wepropose wider adoption of automaticfeatures in 401(k) plans and IRAs, whichwould circumvent underlying reasons forthe racial disparity in saving choices andimprove participation and contributionrates, as well as investment outcomes,for African Americans. And, third, wepropose improving saving incentives thatspecifically target lower- and moderate-income workers, who aredisproportionately African Americans inpart because of racial differences in labormarket experience.

We do not present proposals to alterfamily structure differences that wereanalyzed above since there are bothadvantages and disadvantages to thesefamily networks.54 Neither do we offerproposals aimed at correcting labormarket differences between blacks andwhites. We note, however, that the labormarket differences discussed aboveundoubtedly are attributable to severalcauses: differences in levels ofeducation, differences in geographicproximity to “good” jobs, differences insocial networks, or employer

discrimination for example. Labor marketdiscrimination, in particular, could lead tolower wages, jobs with lower benefits(such as lower or no retirementcoverage) or even difficulty securing ajob.55 Some studies estimate that racialdiscrimination reduces the earnings ofblack workers by about 12 to 15 percentof white workers, even after other factorsthat affect wages are controlled for.56

However, there is still little consensusover the magnitude of racial discriminationthat prevails in labor markets.57

In addition, discrimination outside thelabor market can influence households’total wealth by creating barriers to fairand reasonable rates of interest onloans, and by reducing homeownership.Since homeownership is one of theprimary mechanisms through whichindividuals build wealth, discriminationagainst African Americans in housingmarkets or lending practices could leadto sizeable racial differences in wealth.Studies have found evidence of racialdiscrimination in housing markets — inseeking a home and in securing amortgage.58 Other research also suggeststhat when African Americans do succeedin purchasing homes, residentialsegregation in housing markets may leadto situations in which the homes thatblacks acquire tend to appreciate lessthan those of other families.59 While allthese issues are pertinent to AfricanAmerican retirement security, addressingdiscriminatory access to labor, housingand credit markets, however, are outsidethe scope of this paper.

16



AA.. FFiinnaanncciiaall MMeennttoorriinngg

The research discussed in Section IIIsuggests that attitudes about saving andinvestment choices may be learned fromparents or mimicked and, thus, would beimportant for the accumulation of savings– but children from moderate- and low-income African American families lackaccess to this source of information.This suggests that one possible strategyto increase retirement saving andinvestment outcomes among AfricanAmerican families would be to design

policies that remedy these information gaps.Then, individuals who are born intohomes with limited information would beable to save as effectively as those borninto families with financial market expertise.

Attitudes about saving are likely formedfrom an early age. Habits learned fromwhen one is young tend to carry intoadulthood. If children are encouraged ata young age to start saving and notionsof budgeting are integrated into their dailylives, it may instill a positive attitude towardssaving over their adult years. Furthermore,

Figure 1: Effects of Automated Enrollment on 401(k) Participation

0

10

20

30

40

50

60

70

80

90

100

sgninrae ni K02$ rednUcinapsiHselameF

Perc

ent

par

tici

pat

ing

Default is nonparticipation

Default is participation

35

86

19

75

13

80

Source: Madrian and Shea (2001)

17


if children are introduced to financialinstitutions and financial terminology andgiven an opportunity to make financialdecisions, it may help overcome barriers(either informational or psychological)that have previously inhibitedparticipation in financial markets.

One approach, therefore, might be todevelop a mentoring program targetedat very young children. The approachmight couple young children with a financialinstitution that provides ongoing financialmentoring to the child over a period oftime. The mentoring would begin at avery young age – as early as age 6 –and continue until the child reaches age18. At very early ages, children wouldbe given simple financial goals, such asopening a savings account. As they getolder and become more familiar andcomfortable with money management,the mentoring would include discussionsabout saving with a target or for a particularoutcome, long-term versus short-termsaving goals, access to credit and payingdown debt, and, if account balances arelarge enough (for older children), diversifyingfunds. It also could include discussion ofrealistic expectations about retirementand sources of retirement income.60

Such a mentoring program might beoperated with the partnership of afinancial institution and through thepublic schools. Mentors from financialinstitutions would make regular andperiodic visits to schools. At these visits,the mentor would talk about financialmatters – in the way that families maytalk about their finances. The mentorwould discuss saving goals (such as

preparing for college expenses, savingfor Christmas), how an economic up- ordown-turn might affect a personal savinggoal (such as working through the effectof a gas price increase or an increase inpublic transportation costs on a personalbudget), or how changes in interest ratesor equity returns might affect savinggoals. The type of discussion and thefrequency of these visits would vary withthe age of the audience.

When designing such a proposal, it maybe important to create a sense ofownership over the account and funds inthe account. Children would beencouraged to open a saving accountand contribute to that account. Theiraccount balance will likely be low butsmall account balance would be less ofan issue to children; rather a tangiblereminder of its presence may be moresatisfying to them. One possibility mightbe to have the financial institution issue aPassbook for the savings account. APassbook would simply be a book thatlogs all transactions and remaining balancein the savings account. However,because the Passbook is owned by thechild, maintained by the child and is atangible and visual reminder of their savings,it may generate a stronger sense ofownership and achievement. The Passbookwould likely have a more meaningful effectat younger ages or among those withless access or facility with online bankingoptions, and its appeal may diminishwith age or access. However, its may stillserve to inculcate a pro-saving attitudeamong very young children and itsbenefits might be expected to survivebeyond the functional usefulness.

18



There are a number of existing programsthat provide financial education andliteracy training to children and adults.61

Many of the programs that target childrentend to focus on high-school agechildren.62 A small number of programsfocus on those younger than high schoolbut these tend to be short-term educationprograms and they do not offer long-termfinancial mentoring.63 Children from familieswith financial market experience, however,learn from multiple and ongoing interactionsregarding money management from theirparents. Financial goals and needschange with age and circumstance, andthe skills to adjust with these changes canonly be acquired through a gradual butsustained mentoring program and noneof the existing programs currently offeran ongoing, sustained mentoring opportunity.

Some of the existing programs may offeropportunities or platforms for providinglong-term financial mentoring from a veryyoung age, however. These include thePersonal Economics Program offered bythe American Bankers’ Association thatputs banks together with educators toteach people, including children, aboutbanking services and financialmanagement.64 Additionally, many of the12 Federal Reserve District banks workwith local organizations to provide ‘teachthe teacher’ or ‘train the teacher’ programsin an attempt to ensure that educatorshave the knowledge and resources thatthey need to teach financial and economictopics in an effective manner. Finally,Banking on Our Future is a program thatlinks volunteer banker-teachers withneighborhood schools, community groups,and beacon programs. The youth are

taught the basics of checking andsavings accounts and the impact that creditand investment can have on their lives.

BB.. AAuuttoommaattiicc SSaavviinngg

Financial mentoring alone, however,would be insufficient to ensure retirementsecurity for many Americans. Manyindividuals, even those who arefinancially savvy, are at times too busy totake the time or the effort to sort throughcomplicated financial decisions. As aresult, they either postpone makingthese decisions or rely on simple rules ofthumb that sometimes do not result inprudent investment choices.

For instance, many workers are offeredthe opportunity to save through theiremployer’s 401(k) plan, yet many do notparticipate in the plan. In many 401(k)plans, workers must make an activedecision to participate in the plan.However, participating involves morethan simply filling out a form (eitherpaper or electronic). Workers mustdecide how much to contribute andwhich investment option provided bytheir employer to select. Thesedecisions are complicated and make the401(k) enrollment decision daunting,particularly for workers who have limitedinvestment experience. As such, manyworkers postpone or avoid making theenrollment decision.

Non-participation is particularly highamong lower-income and minorityworkers.65 It is also higher for AfricanAmericans than white workers (as notedpreviously). By not participating in the

19


401(k) plan, African American workersmiss the opportunity to benefit from anyemployer matching contributions and thetax savings from contributing to a 401(k).Furthermore, by delaying participation,they lose the opportunity of lettingcompounding returns grow their assetsover time.

AAuuttoommaattiicc EEnnrroollllmmeenntt

A strategy that has proven successful atgetting workers to participate in their401(k) plan is to change the defaultoption from an opt-in system to an opt-out system. Under an opt-out system,workers are automatically enrolled intotheir company’s 401(k) plan, unless theworker affirmatively chooses not toparticipate. With automatic enrollment,the employer selects a default contributionlevel and at each pay-period, thatportion of the worker’s paycheck isdirected into a default investment fund.

Automatic enrollment in 401(k) plans hasbeen shown to increase participationsignificantly: in firms that implementedautomatic enrollment, participation ratesincreased from 75 percent to as high as95 percent among new hires.66 Theeffect was even more dramatic amongwomen, minority and low-incomeworkers – increasing participation ratesfrom 35 percent to 86 percent forwomen and from 13 percent to 80percent for workers earning under$20,000 a year (Figure 1).

With automatic enrollment in 401(k)s,workers who are unable or unwilling tomake decisions about their 401(k)

participation (because it is too complicatedor they do not have the time) would stillbe able to participate in the plan.Automatic enrollment harnesses thepower of inertia so that individuals saveeven if they make no effort. For AfricanAmericans who are eligible but do notparticipate in their 401(k) plan, automaticenrollment may “turn the tide” for themand help them save earlier than theyotherwise would have and earn investmentreturns over a longer period of time.

Automatic enrollment in 401(k) plans ismost effective when it is combined withother automatic features. These includeautomatic enrollment with automaticincreases in contribution rates over time,automatic investment in prudent anddiversified funds, and automatic rolloverof 401(k) assets when the worker leavesa job. Plans with these enhancedautomatic features (“second generation”plans) would help workers gradually savemore over time, improve investmentreturns in their portfolios and retainassets in the retirement system whenthey change jobs.

AAuuttoommaattiicc EEssccaallaattiioonn

Many “first generation” plans typicallyenroll only new workers at a 3 percentcontribution rate and do not increasecontribution rates over time. The typicaldefault 3 percent rate, however, is lessthan half the average pre-tax contributionrate of 7 percent of pay among participantsin non-automatic 401(k) plans.67

Furthermore, the majority of participantswho are enrolled under automaticenrollment tend to remain at the initial

20



contribution rate if the company does notautomatically increase their contributionrate over time.68 Inertia keeps workersfrom saving more over time.

Building in annual increases incontribution rates (automatic escalation)would help workers gradually save moreover time with virtually no effort.Contribution rates could be increased byone percent per year, unless theparticipant opted-out of those increases.Additionally, a “second generation” planmight enroll new and current non-participating workers at a higher initialcontribution rate, such as 5 or 6 percent.

These enhancements would helpworkers save more and take advantageof any additional employer matchingcontributions which they may havepreviously missed. Currently, about onequarter of employers that offer automaticenrollment also automatically escalatecontributions.69 Wider adoption ofautomatic escalation would, over time,improve the financial position of manylower-income families, particularly AfricanAmerican families, who tend to havelower saving rates than higher incomehouseholds (as discussed earlier).

AAuuttoommaattiicc IInnvveessttmmeenntt

Research shows that many 401(k)participants tend to make poorinvestment choices: they over-invest incompany stock, are too conservative intheir investment choices or seldomrebalance their portfolios as they age.Whether because of limited time orexpertise, these choices either expose

them to too much risk or to lowinvestment returns over time. We alsonoted earlier that African Americans, onaverage, are less likely to hold stocksthan white households. The result of thisdifferential investment choice is thatinvestment returns for African Americanhouseholds, on average, are lower thanthat of white households.

Many “first generation” automatic 401(k)plans typically default contributions into astable value or money market fund.These tend to have lower investmentreturns than more diversified equityfunds, such as life-cycle funds.However, recently promulgatedregulations provide employers and plansponsors some degree of fiduciary reliefif they offer qualified default investmentalternatives (QDIAs) that areprofessionally managed or balanced(such as life-cycle funds). These QDIAsnot only provide higher investmentreturns than stable value funds, theportfolio is rebalanced over time toreflect changing retirement expectationsand risk exposure. The defaultinvestment options would benefit allworkers with DC coverage but theywould be particularly valuable to AfricanAmerican participants by offering thepotential for higher investment returnsover time than might be achieved otherwise.

AAddooppttiioonn ooff AAuuttoommaattiicc 440011((kk))ss

Recently enacted legislation through the2006 Pension Protection Act (PPA)addressed several employer concernsregarding automatic 401(k)s andprovided new incentives to encourage

21


more employers to adopt automatic401(k)s.70 Since the enactment of PPA2006, the number of employers offeringautomatic 401(k)s has increased. In2007, 44 percent of surveyed employersreported using automatic enrollment, anincrease from 26 percent in 2006. Thenumber offering automatic 401(k) isexpected to increase further over time asother incentives offered by the PPA (suchas, enhanced safe harbor plans, whichoffer automatic enrollment, escalationand investment) become effective.

AAuuttoommaattiicc RRoolllloovveerr

Under automatic rollover, when anemployee changes jobs, the funds in her401(k)-type account would beautomatically rolled over into an IRA oranother retirement plan offered by thenew employer. The worker, however,can affirmatively choose not to roll overher funds. Many workers, particularlythose with small account balances, tendto cash out their accounts when theyleave a job; thereby, losing the value ofthe tax-preferred saving and leavingthem with less retirement saving.Recent empirical evidence suggests thatsimply changing the frame within whichworkers evaluate their options for pre-retirement distributions can retain assetsin a tax-preferred retirement accountsand prevent “leakage” from theretirement system.71 In this way,automatic rollovers help to keepretirement funds in the retirement systemwhen workers change jobs by makingrollovers the default option.

These strategies discussed above willbenefit all workers with access toemployer-sponsored retirement plans.However, they will be particularlybeneficial for African American workerswho, on average, have lower earnings,tend to invest in lower return assets, andface higher risk of job disruptions thanwhite workers.

AAuuttoommaattiicc IIRRAAss

A significant minority of African Americanpersons, however, do not have accessto employer-sponsored retirement plansbecause they are employed in low-wageor part-time jobs. These workers wouldnot benefit from the automatic 401(k).However, a new proposal would create asystem whereby workers without accessto employer-sponsored retirement planscan contribute automatically to a low-cost, diversified IRA through directpayroll deposits. Because IRAs areportable and are not tied to a particularemployer, employees would be able tocontinue contributing to the IRAs evenwhen they switch jobs.72

Under this proposal, workers would beenrolled in an IRA and deposits to theIRA will be made automatically at eachpay period, unless the employee activelychooses not to participate in theprogram. A firm that is not ready toadopt a 401(k) or other retirement planwould offer its employees the ability tosave in an IRA every payday by payrolldeposit, which is currently available tomillions of employees. Once payroll

22



deposits begin, they continue automaticallyunless the worker later opts out.Employers above a certain size (e.g., 10employees) that have been in businessfor at least two years and do not sponsorany retirement plan for their employeeswould be required to offer employeesthis payroll-deduction saving opportunity.

The automatic IRA would involve nocontributions or other outlays byemployers. Employers would merely offertheir payroll system as a conduit thatemployees could use to save part oftheir own wages in an IRA. Participatingemployers would receive temporary taxcredits, would be required to obtain awritten waiver from any employee whodoes not participate, would be encouragedto use automatic enrollment and wouldbe able to protect themselves fromfiduciary liability. Employees, or theemployer, could designate the IRA toreceive the savings, including, as afallback for those unable or unwilling tochoose, a national platform IRA thatcould be based on the federalemployees’ Thrift Savings Plan accounts.The default investment for the automaticIRA would be a diversified, low-cost lifecycle fund, with other choices available.73

The self-employed would be encouragedto save by extending payroll deposit toindependent contractors, facilitatingdirect deposit of income tax refunds, andexpanding access to automatic debitarrangements linked to IRAs, includingon-line and traditional means of accessthrough professional and trade associations.

Thus, for many workers without accessto 401(k)-type plans through theiremployer, including African Americanworkers, the automatic IRA will make iteasier for them to save in a tax-preferredenvironment. Additionally for AfricanAmericans, the automatic IRA with adefault investment fund, such as a life-cycle fund, may provide higher returnsthan they otherwise would earn.

CC.. SSaavveerr’’ss CCrreeddiitt

While 401(k)s and IRAs representeffective instruments for saving forretirement because of their tax-preferredstatus, for many low income families,including some African Americanfamilies, the incentives to save in a tax-preferred retirement account may besmall. Contributions to tax-preferredretirement accounts reduce the saver’staxable income; thus, they generallybenefit those with higher marginal taxrates more than those with lowermarginal tax rates. Low income familiestend to face low marginal tax rates or topay no taxes at all. They therefore standto benefit less than other workers fromtax incentives that reduce taxableincome, or not at all.

Tax credits, however, can be used to createstrong incentives for low- and moderateincome households. For example, theSaver’s Credit, which specifically targetsmoderate- and lower-income families,was enacted in 2001 to give taxpayersearning less than $52,000 a tax credit

23


for contributions to 401(k) plans, IRAs,and similar retirement saving vehicles.74

Depending on the taxpayer’s income,households can receive a credit of 10,20, or 50 percent of their contributionsto a retirement account. Because AfricanAmerican families tend to have lowerincome than then the average Americanfamily, they would disproportionatelybenefit from the Saver’s Credit.

The Saver’s Credit, however, is currentlynonrefundable: it merely offsets ataxpayer’s tax liability. Therefore, itprovides no saving incentive for almost50 million lower-income households thathave no income tax liability. Making theSaver’s Credit refundable would providean important incentive to these householdsto save, which would improve retirementsecurity for those families with the lowestincomes. This might have the addedbenefit of making them less dependenton Social Security income and means-tested government programs during theirretirement years. There is also someevidence that restructuring the credit asa matching contribution that is automaticallydeposited into an IRA could furtherincrease the incentive to save.75

The Saver’s Credit also could be simplifiedwith a single 50 percent credit rate, phasedout smoothly above the income eligibilitylimit. It could be improved to reach alarger group of families by expanding theeligibility limit to include households withincome of up to $70,000 per year. Thiswould increase the incentive to save andhelp moderate and lower-income Americans,which includes many African Americanfamilies, save for a secure retirement.

DD.. UUppddaattiinngg AAsssseett TTeesstt RRuulleess

One final way that policymakers canintroduce reforms that improve theincentive to save is by modifying therules for eligibility for public assistanceprogram. Outdated asset tests inmeans-tested public assistance programs(such as Supplemental Security Income(SSI), Temporary Assistance for NeedyFamilies (TANF) and Medicaid) penalizelower- and moderate-income householdsthat save.76 There programs helpindividuals in times of unexpectedhardships or illness, or who may nothave had a full working history and relyon these sources of public assistance tosupplement their retirement needs.Beneficiaries of many of these programsare disproportionately African Americans.77

To be eligible for these programs, applicantsgenerally must meet an asset test aswell as an income test. While the assettests usually do not count accruedbenefits under a defined benefit plan asassets, many states often count 401(k)or IRA balances or both. This has theeffect of a steep implicit tax on 401(k)and IRA saving. As a result, pre-retiredfamilies with incomes low enough toqualify for a means-tested program underthe income test might respond by savingless. Similarly, families that suddenlyexperience a temporary disruption inemployment would be required to nearlydeplete their retirement savings beforebecoming eligible for the publicassistance.

24



Although some state programs haveeliminated asset tests, or at least alignedthe treatment of defined contributionplans with that of defined benefit plans,many have not. The recently enacted2008 Farm Bill addresses the inconsistenttreatment of assets in tax preferredretirement accounts in the food stampprogram by excluding those assets fromthe asset tests. However, asset tests inother public programs, such as SSI andMedicaid, continue to treat retirementsaving in a confusing and seeminglyarbitrary manner, with different restrictionsstate-by-state and account-by-account.

Congress and the states should thereforeeliminate the implicit tax on retirementsaving in these programs by mandatingthat retirement accounts such as 401(k)sand IRAs be disregarded for eligibilityand benefit determinations in federal andstate means-tested programs.78 Changingthe law to exempt retirement accountsfrom being considered in means-testedprograms would treat retirement savingsfairly and consistently and would sendan important signal to families that rely ormight need to rely on means-testedprograms in the future: you will not bepenalized for saving for retirement.

Eliminating asset rules for retirementsavings will have some short-term costsas additional lower-income householdswill qualify for and use means-testedbenefit programs. However, these costsshould be modest; and if moderate- andlow-income households can save for amore secure retirement, fewer people willhave to rely on public benefits in old age.

VV.. CCoonncclluussiioonn

Many African Americans have lowabsolute levels of retirement savings, andblacks’ savings are low relative to thepopulation at-large. Because privatesavings and employer-sponsoredpensions are key components of theretirement system in the United States,the observations that personal savings,pension coverage rates, and pensionbalances are all low present cause forconcern, raising questions about howblacks will fare in retirement and whetheranything can be done to enhance theirpreparedness for this life course event.There are several policy options that arepromising. Policies to boost retirementsavings by remedying information gaps,by making it easier to save, byexpanding access to opportunities tosave on the job, and by raising the returnto saving are likely to affect blackspositively, helping to ensure that AfricanAmericans are financially secure duringthe twilight years.

25


EEnnddnnootteess

1 We thank Bill Gale and anonymous referees forvery helpful comments.

2 Jonathan Skinner, “Are you saving enough forretirement?” Journal of Economic Perspectives,21 no. 3 (2007): 59-80, provides a summary ofthe savings adequacy debate. Several recentstudies argue that many U.S. households dosave enough for retirement; these include JohnKarl Scholz, Ananth Sheshadri and SurachaiKhitatrakun, “Are Households SavingOptimally for Retirement?” Journal of PoliticalEconomy, 114, no. 14 (2006): 607-643; andMark Aguiar and Erik Hurst, “Consumptionversus Expenditure, “ Journal of PoliticalEconomy, 113(October, 2005): 919-948. EricEngen, William Gale and Cori Uccello,“Lifetime Earnings, Social Security Benefits,and the Adequacy of Retirement WealthAccumulation,” Social Security Bulletin, 66, no.1(2005) finds that minority status is associatedwith less than adequate retirement wealth.

3 Employee Benefit Research Institute, 2007Minority survey available atwww.ebri.org/surveys/mrcs/.

4 Net worth includes housing equity, financial andnon-financial assets less debts. Net worth doesnot include claims from expected Social Securityand DB pensions.

5 Another way to think of this difference is tothink of it in annuity terms. If a newly-retiredperson were to purchase a single-life annuitywith $28,000, it would yield only about $220 inincome each month; whereas, an identicalperson with $140,000 would receive $1,100 inincome each month. (www.annuity.com for5% and 15 years)

6 It is sometimes assumed that housing equity isnot used to support consumption since manyelderly households are house-rich but income-poor yet few tap into their housing equity (byselling and renting or downsizing, or through areverse mortgage) to increase their non-medicalconsumption (Steven F. Venti and David A.Wise, “Aging and Housing Equity: AnotherLook” NBER Working Paper No. W8608(Cambridge, MA: NBER, November 2001).However, there is some evidence that housingequity may be used to finance late-life out-of-pocket medical expenses. Also, there has beenrecent growth in the market for reversemortgages (which is a means to draw downhousing equity without having to move);

however, demand remains very low for thisproduct (see Thomas Davidoff and GerdWelke, “Selection and Moral Hazard in theReverse Mortgage Market,” Haas School ofBusiness, University of California Berkeleyworking paper (October 2005).

7 There is also a difference in the amount offinancial assets held. Generally, holdings offinancial assets, such as stocks and bonds, forthe typical U.S. household are low but they aremuch lower for African American households($7,500 versus $200). All data are from the2004 Health and Retirement Survey (authors’calculation).

8 Joseph Altonji and Rebecca Blank, “Race andGender in the Labor Market,” in Handbook ofLabor Economics, Volume 3, eds. OrleyAshenfelter and David Card (Elsevier Press,1999) discusses differences in labor marketoutcomes extensively.

9 Because most of the literature on racialdifferences in labor market outcomes comparesblacks to whites, much of our subsequentdiscussion will use whites as the reference point,even though the earlier sections of this papercompared blacks to the population at large.

10 Blacks and whites also differ in lifeexpectancy, which would affect the amount ofsaving for retirement. However, although racialdifference in life expectancy at birth is large forthose born in 1950 and are close to retirementtoday (around 8.3 years), the difference narrowssignificantly with age (among 65 year olds, thedifference is only 1.6 years and by age 75, thedifference is only 0.5 years) and with time(difference in life expectancy among those bornin 2004 is 5.2 years). Data are for 2004, fromthe Center for Disease Control, “Table 27: Lifeexpectancy at birth, at 65 years of age and at 75years of age by race and sex” atwww.cdc.gov/nchs/data/hus/hus06.pdf#027

11 See Lawrence Mishel, Jared Bernstein andSylvia Allegretto, State of Working America2004/2005 (Washington, DC: Economic PolicyInstitute, 2005).

12 See Mishel, Bernstein and Allegretto(2006/2007).

13 Some fraction of part-time workers may bethose who were unable to find full-time employment.

14 Karen E. Dynan, Jonathan Skinner andStephen P. Zeldes, “Do the Rich Save More?,”Journal of Political Economy, 112, no. 2 (April2004): 397-444.

15 Economic Policy Institute Datazone atwww.epi.org; and Lawrence Mishel, Jared

26



Bernstein and Sylvia Allegretto, State ofWorking America 2004/2005 (Washington, DC:Economic Policy Institute, 2005).

16 The difference between how blacks farerelative to the national average and how theylook when compared to white workers emergeslargely because the population average includesthe coverage rates for Latinos, which are verylow. See Peter Orszag and Eric Rodriguez,“Retirement Security for Latinos,“ RetirementSecurity Project Issue Brief, No. 2005-7;available at www.retirementsecurityproject.org.

17 Economic Policy Institute Datazone “Changein private sector employer-provided pensioninsurance coverage, 1979-2004” (available athttp://www.epi.org/datazone/06/pension_ins.xls); and Table 3.15 of Lawrence Mishel, JaredBernstein and Sylvia Allegretto, State ofWorking America 2004/2005 (Washington, DC:Economic Policy Institute, 2005).

18 See Kurt J. Bauman and Nikki L. Graf,“Education Attainment 2000: Census 2000Brief (Washington, DC: U.S. Census Bureau:August 2003).

19 20.4 percent of black workers are employed inthe public sector; whereas, nationally, only 16percent of workers are employed by the publicsector (authors’ calculations using the March2005 Current Population Survey data).

20 Some state and local governments are offeringDC plans, either wholly or partially, howeverthe majority of state and local governmentscontinue to offer DB coverage. See AliciaMunnell, Alex Golub-Sass, Kelly Haverstick,Mauricio Soto, and Gregory Wiles “Why HaveSome States Introduced Defined BenefitContribution Plans?” Center for RetirementResearch at Boston Brief No. 3 (Boston, MA:January 2008), for changes at the state and locallevel; and Alicia Munnell, Kelly Haverstick andJean-Pierre Aubry, “Why Does Funding StatusVary Among State and Local Plans?” Center forRetirement Research at Boston Brief No. 6,(Boston, MA: May 2008), for the health of thesepension funds.

21 We discuss this issue in greater detail later inthe paper.

22 Patrick Purcell “Pension Sponsorship andParticipation: Summary of Recent Trends,”CRS Report for Congress (September 6, 2007).

23 Karen Smith, Richard Johnson and LeslieMuller, “Deferring Income in Employer-Sponsored Retirement Plans: The Dynamics ofParticipant Contributions,” Boston College

Center for Retirement Research Working PaperNo. 20 (Boston, MA: August 2004). Since theaverage African American has lower lifetimeincome, this result is consistent with earlierstudies that show lower saving rate amonglower-income households.

24 The lower contribution rate may reflect, inpart, lower savings rate among workers withlower earnings, as noted earlier.

25 Kerwin Charles and Erik Hurst, “TheCorrelation in Wealth Across Generations,”Journal of Political Economy, 111, no. 6 (2003):1155 - 1182; and Ariel Mutual Funds andCharles Schwab, “The Ariel-Schwab BlackPaper: A Decade of Research on AfricanAmerican Wealth Building and RetirementPlanning” (Chicago, IL: Ariel Mutual Funds,October 2007).

26 United States Census Bureau, 2008 StatisticalAbstract of the United States, Table 674available online at www.census.gov.

27 Data from March 2007 Current PopulationSurvey (CPS), ages 51-64 only using single raceor two race categories.

28 The income ratio compares the median blackincome to the median U.S. income and thewealth ratio compares the median black networth (or, net worth less housing equity) to themedian U.S. net worth (or, net worth lesshousing equity).

29 Household income is sorted into 10 incomegroups (deciles). Highest income householdsare those whose incomes are in the top decilegroup. Middle-income is defined as being in thefourth, fifth or sixth decile of the nationaldistribution of income.

30 See, for instance, Robert Barsky, John Bound,Kerwin Charles and Joseph Lupton,“Accounting for the Black-White Wealth Gap:A Nonparametric Approach,” NBER WorkingPapers 8466 (Boston, MA: NBER, 2001). whofind that only two-thirds of the wealth differentialbetween whites and blacks is explained bydifferences in earnings.

31 The group averages are higher. On average,poor African American households hold about$4,000 in an IRA or DC account, about $3,100in financial assets, and about $30,000 in totalwealth. However, because mean values arestrongly influenced by the highest and lowestvalues, the median values present a morereliable portrait of a typical household’s situation.

32 The sample size for blacks is small enough torequire the results to be interpreted with caution.

27


33 Authors’ calculation using the 2004 Health andRetirement Study.

34 Particularly since Social Security benefits aremore likely to replace a higher proportion of pre-retirement earnings for African Americans thanhigher-income households and AfricanAmericans are more likely to receive DBbenefits than other households because they aremore likely to work in the public sector.

35 Because families are no longer working andincurring work-related expenses, the amountthey need in retirement to maintain theirstandard of living is lower, according to thereplacement rate perspective.

36 These estimates include personal savings,savings in tax-preferred retirement accounts,expected pension benefits and expected socialsecurity benefits. Mean retirement incomederived from these three sources of savings isestimated at $28,100 for African Americans and$80,800 for whites (in 2001 dollars). The dataare from Christian Weller and Edward Wolff,“Retirement Income,” Report for the EconomicPolicy Institute (Washington, DC: EPI, 2005)available atwww.epi.org/content.cfm/issueguides_retirement_security. The study examines householdsage 47-64, using data from 2001. The resultsreported above are computed using data fromTables 2, 13, 18 and 20.

37 Although the range only provides an estimateof what a family would need, it neverthelessdemonstrates racial differences in saving adequacy.

38 Weller and Wolff (2005).39 Kotlikoff and Spivak, “The Family as anIncomplete Annuities Market”, Journal ofPolitical Economy, 89, No. 2 (April 1981): 372-91.

40 Extended households can includegrandparents, grandchildren, siblings and otherrelated family members. Racial differences infamily living arrangements were apparent evenin the first half of the twentieth century . (SeeSteve Ruggles, “The Origins of African-American Family Structure,” AmericanSociological Review, 59, no. 1 (February 1994):136-15. The difference between black andwhite living arrangements is larger today than itwas 50 years ago. (See Table 2 in YoshinoriKamo, “Racial and Ethnic Differences inExtended Family Households.” SociologicalPerspectives, 43, no. 2 (Summer 2000): 211-229).

41 Kamo (2000). Data used in this source arefrom the 1990 Census.

42 See Ronald Angel and Marta Tienda,

“Determinants of extended householdstructure: Cultural pattern or economic need?”American Journal of Sociology, 87 (1982):1360-1383. The authors control for income-poverty ratio, education, foreign birth,employment and female headship.

43 Chenoa Flippen and Marta Tienda, “FamilyStructure and Economic Well-Being of Black,Hispanic, and White Pre-Retirement Adults,”Center on Demography and Economics ofAging, (Chicago, IL: University of Chicago,September 1998).

44 Not all co-residence arrangements arebeneficial to elderly family members, however.There is evidence to suggest that somehouseholds – particularly single elderly menfrom black or Hispanic households – are worseoff when other kin members co-reside withthem because the new residents contribute verylittle financially to the household. Nearly 11percent of single black and single Hispanicelderly men transition into poverty as familysize increases. (For this statistic see Flippen andTienda (1998).

45 Examples include Carol Stack, All Our Kin(Basic Books, 1997); and Robert Taylor, LindaChatters and Vickie Mays, “Parents, Children,Siblings, In-laws, and Non-kin as Sources ofEmergency Assistance to Black Americans.”Family Relations, 37, (1988): 298–304.

46 Ngina Chiteji and Darrick Hamilton , “KinNetworks and Asset Accumulation,” inInclusion in the American Dream: Assets,Poverty, and Public Policy, ed. MichaelSherraden, (Oxford University Press, 2005);and Mary Pattillo and Colleen Heflin,”Povertyin the Family: Race, Siblings and SocioeconomicHeterogenity,” Social Science Research, 35, no.4 (2006): 804-822.

47 Paul Menchik and Nancy Jianakoplos, “Black-White Wealth Inequality: Is Inheritance thereason?” Economic Inquiry, 35, no. 2, (April1997): 428-442, controls for incomes and otherfactors that which contribute to racial wealthdifferences and finds that inheritances couldaccount for between 10 and 20 percent of theaverage difference in black-white householdwealth. Kerwin Charles and Erik Hurst, “TheTransition to Homeownership and the Black-White Wealth Gap,” Review of EconomicStatistics, 84, no.2, (May 2002): 281-297,findsuggestive evidence that black homeownershiprates may be lower than white homeownershiprates (even controlling for similar income and

28


(Boston, MA: NBER, February 2008). 52 Annamaria Lusardi and Olivia S. Mitchell,“Baby Boomer retirement security: The roles ofplanning, financial literacy, and housing wealth,”Journal of Monetary Economics, 54, no.1,(January 2007): 205-224.

53 Maarten van Rooij, Annamaria Lusardi andRob Alessi, “Financial literacy and stock marketparticipation,” DNB Working Papers 146(Netherlands Central Bank, ResearchDepartment, 2007).

54 Furthermore, doing so would require one tomake normative judgments about ways thatrelatives choose to interact with one another.Instead, we remind readers interested in policythat families are structured differently and thechoices of one generation often can affect thechoices of its offspring, and the latter’sfortunes.

55 For a detailed discussion of racialdiscrimination in labor markets Joseph Altonjiand Rebecca Blank, “Race and Gender in theLabor Market,” in Handbook of LaborEconomics, Volume 3, eds. Orley Ashenfelterand David Card (Elsevier Press, 1999).

56 William Darity and Patrick Mason, “Evidenceon Discrimination in Employment,” Journal ofEconomic Perspectives, 12, (Spring 1998): 63-90;and James Heckman, “DetectingDiscrimination,” Journal of EconomicPerspectives, 12, (Spring 1998): 101-116.

57 The controversy that exists in the empiricalliterature stems largely from the fact thatassessing the effect of race, by itself, requiresresearchers to account for and net outdifferences in productivity-related characteristicsthat may vary by race. However, someresearchers argue that productivity-relatedcharacteristics cannot be fully controlled forand, thus, wage differences may reflect theseobserved productivity differences. See, forinstance, S.G. Sanders, D. Black, A. Haviland, andL. Taylor, “Why do Minority Men Earn Less? AStudy of Wage Differentials Among the HighlyEducated,” Review of Economics and Statistics,88, no. 2 (May, 2006): 300-313.

58 For instance, black applicants faced a higherprobability of having an application for a homeloan rejected, even when they were comparableto other applicants with respect to income andother risk characteristics. See Alicia Munnell,Geoffrey Tootell, Lynn Browne and JamesMcEneany, “Mortgage Lending in Boston:Interpreting HMDA data,” American Economic

wealth levels) because whites are more likely toreceive financial assistance with thedownpayment than blacks.

48 This macroeconomic debate is discussed inLaurence Kotlikoff and Lawrence H. Summers“The Role of Intergenerational Transfers inAggregate Capital Accumulation,” Journal ofPolitical Economy, 99, no. 4, (August1981):706-732 Laurence Kotlikoff,“Intergenerational Transfers and Savings,”Journal of Economic Perspectives, 2, no. 2,(Spring 1988): 41-58; and William G. Gale andJohn Karl Scholz, “Intergenerational Transfersand the Accumulation of Wealth,” Journal ofEconomic Perspectives, 8, no. 4, (Autumn 1994):145-160.

49 Research on ways that parents model behaviorfor their children abounds in the psychologyliterature— for example, Walter Mischel,Yuichi Shoda and Monica Rodriguez, “Delay ofGratification in Children,” Science, 244, no.4907, (May 1989): 933-938. Within theeconomics discipline, empirical studies ofintergenerational correlation in behaviorinclude, John Knowles and Andrew Postelwaite,“Do Children Learn to Save from theirParents,“ University of Pennsylvania (2005)available atwww.econ.upenn.edu/~jknowles/Research/KP.htm; Thomas Dohmen, Armin Falk, DavidHuffman, and Uwe Sunde,“TheIntergenerational Transmission of Risk andTrust Attitudes.” IZA Discussion Paper 2380(Germany: IZA, 2006); Kerwin Charles andErik Hurst, “The Correlation of Wealth AcrossGenerations,” Journal of Political Economy,111, no. 6, (December 2003): 1155-1182; andMark Wilhelm, Eleanor Brown, Patrick Rooney,and Richard Steinberg , “Tracking GivingAcross Generations,” New Directions forPhilanthropic Fundraising, no 42, (Summer,2004): 71-82.

50 Melvin Oliver and Thomas Shapiro, BlackWealth/White Wealth: A New Perspective onRacial Inequality, (New York, NY: Routledge,2006); Ngina Chiteji and Frank Stafford,“Portfolio Choices of Parents and TheirChildren as Young Adults,” AmericanEconomic Review, 89, no. 2, (May 1999): 377-380, and Charles and Hurst (2003).

51 Annamaria Lusardi, “Household SavingBehavior: The Role of Financial Literacy,Information, and Financial EducationPrograms,” NBER Working Paper No. 13824

29

The Retirement Security Project • Strategies to Increase the Retirement Savings of African American Households30

Review, Volume 86, (March 1996): 25-53, formore details. See also Margery Austin Turner,Stephen L. Ross, George Galster, John Yinger, Discrimination in Metropolitan HousingMarkets: National Results from Phase I ofHDS2000 (Washington, DC: Urban Institute,November, 2002).

59 Oliver and Shapiro (2006) estimate that the“cost” to black households is lower averagehousing value appreciation of about $28,000.This estimate does not control for income,however many researchers argue that blacksface residential segregation regardless of theirincome level. Accordingly, if one were to controlfor income, it is likely that this cost would notvanish.

60 “Survey evidence suggests that someindividuals may have potentially unrealisticretirement expectations.” A survey by ArielMutual Funds and Charles Schwab, “The Ariel-Schwab Black Investor Survey: Saving andInvesting Among Higher Income AfricanAmericans and White Americans, p. 28(October 11, 2007) found that about half ofAfrican American households say they expect tolive off of rental income during retirement andthat 12 percent of African Americans expectedto rely primarily on this type of income whenfinancing consumption during retirement. Yet, asurvey of current retirees indicates that fewerthan 20 percent of African American retiredhouseholds had any rental income (Ariel MutualFunds and Charles Schwab, “The Ariel-SchwabBlack Paper: A Decade of Research on AfricanAmerican Wealth Building and RetirementPlanning,” (October 2007): 10.)

61 Those targeted at adults tend to help withnavigating complicated financial transactions,such as applying for a mortgage, or offerretirement planning tools, such as helpingworkers understand the time frame over whichthey must fund their retirement and whatresources are available to them in retirement,including public programs, private saving andfinancial products.

62 Such as Financial Literacy 2010, a nationalcampaign to increase the financial savvy of theaverage high school student.

63 In the U.S., Banking on a Future is a programthat targets children ages 9 though 18.Internationally, Aflatoun is a program thattargets children between ages 6 and 14.

64 See the American Bankers Association (ABA)Education Foundation, “Our National

Programs” atwww.aba.com/consumer+connection/CNC-aboutef.htm.

65 See Brigitte Madrain and Dennis F. Shea,“ThePower of Suggestion: Inertia in 401(k)Participation and Savings Behavior,” TheQuarterly Journal of Economics, 116, No. 4,(2001): 1149-1187, for additional details.

66 Madrian and Shea (2001).67 42 percent of plans have a 3 percent defaultrate and 20 percent have a higher default rate.Hewitt Associates, Trends and Experiences in401(k) Plans 2005 Survey, (Lincolnshire, IL:Hewitt Associates, LLC, 2005).

68 See James Choi, David Laibson, BrigitteMadrian and Andrew Metrick, “For Better orFor Worse: Default Effects and 401(k) SavingsBehavior,” in Perspectives on the Economics ofAging, ed. by David Wise, pp.81-121 (Chicago,IL: University of Chicago Press, 2004).

69 According to a 2007 Wells Fargo Survey, 21percent of employers that offer automaticenrollment also automatically escalatecontributions. According to the Hewitt Trendsand Experience in 401(k) Plans 2007 Survey, 28percent of employers that automatically enrollparticipants also automatically escalatecontributions.

70 See William G. Gale, J. Mark Iwry andSpencer Walters, “Retirement Saving forMiddle- and Lower-Income Households: ThePension Protection Act of 2006 and theUnfinished Agenda” Retirement SecurityProject Policy Brief No. 2007-1 (January 2007)for additional details.

71 William G. Gale and Michael Dworsky,“Effects of Public Policies on the Dispositionof Lump-Sum Distributions: Rational andBehavioral Influences,” Center for RetirementResearch Working Paper No. 2006-15, (August2006).

72 See J. Mark Iwry and David C. John,“Pursuing Universal Retirement SecurityThrough Automatic IRAs,” Retirement SecurityProject Policy Brief No. 2007-2, (April 2007); J.Mark Iwry and David C. John, “PursuingUniversal Retirement Security ThroughAutomatic IRAs,” Testimony before the SenateFinance Committee (June 29, 2006). These andrelated publications are available atwww.retirementsecurityproject.org.

73 For a detailed description of the automaticIRA, see J. Mark Iwry and David C. John,“Pursuing Universal Retirement Security

The Retirement Security Project • Strategies to Increase the Retirement Savings of African American Households 31

Through Automatic IRAs,” Retirement SecurityProject Policy Brief No. 2007-2 (April 2007).

74 J. Mark Iwry, William G. Gale, and Peter R.Orszag, “The Saver’s Credit,” RetirementSecurity Project Policy Brief No. 2005-2 (March2005); available atwww.retirementsecurityproject.org; and J. MarkIwry, William G. Gale, and Peter R. Orszag,“The Saver’s Credit: Issues and Options,” TaxNotes (May 3, 2004); available atwww.taxpolicycenter.org.

75 The explicit 50 percent credit is an implicit100 percent match. For an example, consider acouple earning $30,000 who contributes $2,000to a 401(k) plan. The Saver’s Credit reduces thatcouple’s federal income tax liability by $1,000(50 percent of $2,000). The net result is a$2,000 account balance that costs the coupleonly $1,000 after taxes (the $2,000 contributionminus the $1,000 tax credit). This is the sameresult that would occur if the net after-taxcontribution of $1,000 were matched at a 100percent rate: the couple and the governmenteach effectively contribute $1,000 to theaccount. While taxpayers should respond thesame to equivalent implicit and explicit matches,empirical research provides evidence to thecontrary. For a detailed discussion, see EstherDuflo, William Gale, Jeffrey Liebman, PeterOrszag, and Emmanuel Saez, “SavingIncentives for Low- and Middle-IncomeFamilies: Evidence from a Field Experimentwith H&R Block,” Quarterly Journal ofEconomics, 121, no. 4 (2006).

76 For a detailed discussion of this issue, see ZoëNeuberger, Robert Greenstein, and Eileen P.Sweeney, “Protecting Low-Income Families’Retirement Savings: How Retirement AccountsAre Treated in Means-Tested Programs andSteps to Remove Barriers to RetirementSaving,” Retirement Security Project PolicyBrief No. 2005-6 (June 2005); available atwww.retirementsecurityproject.org.

77 For instance, nearly 30 percent of TANF andSSI recipients are black. Seehttp://www.urban.org/publications/411553.html for characteristics of TANF recipients byrace andhttp://www.socialsecurity.gov/policy/docs/ssb/v65n2/v65n2p1.html for characteristics ofSSI recipients by race.

78 See forthcoming proposals by RobertGreenstein and Zoë Neuberger in “RemovingBarriers to Retirement Saving in Medicaid andSupplemental Security Income” RetirementSecurity Project Policy Paper (forthcoming2008).


Lina Walker is Directorof Research at TheRetirement SecurityProject and ResearchProfessor at GeorgetownUniversity.

Ngina Chiteji isAssociate Professor ofEconomics at SkidmoreCollege and formerResearch Fellow at theInstitute for Race andWealth at HowardUniversity.

The views in this paper are thoseof the authors alone and shouldnot be attributed to the BrookingsInstitution, Georgetown University’sPublic Policy Institute, The PewCharitable Trusts, or any otherinstitutions with which the authorsand the Retirement SecurityProject are affiliated.

Copyright © 2008 GeorgetownUniversity. All rights reserved.

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