How to close the race-based chasm in U.S. retirement wealth
CHICAGO (Reuters) – The gap in U.S. retirement wealth between white and minority families has widened to the point where it really is not a gap anymore. It is a canyon.
In 2016, white families had six times more money saved for retirement on average than black or Latino families, according to new data from the Federal Reserve’s Survey of Consumer Finances. As recently as 2007, the gap was fourfold for black families and fivefold for Latino households, according to a new analysis of the Fed data by the Urban Institute. (urbn.is/1Vj06A3).
Research shows that low-income families can – and do – save. Instead, the widening chasm results from a range of economic factors and upside-down tax policy. Lifetime income inequality certainly is one driver, but the problem is much broader than that, said Signe-Mary McKernan, co-director of the institute’s opportunity and ownership initiative.
“The cards are stacked against lower-income Americans,” she said. “We’re a country built on the premise of economic opportunity but entire groups are not getting the same chances to move up.”
For starters, minority workers are far less likely than whites to hold jobs that offer tax-advantaged retirement saving programs like 401(k) plans. That means these workers are not enjoying the benefits of plan features such as employer matches or automated contributions. Even workers who are offered these accounts do not benefit as much, since the tax incentives associated with 401(k) and Individual Retirement Accounts are structured as deductions, and flow predominantly to taxpayers in higher brackets.
Lower rates of home ownership among minority households also contribute to the retirement gap, the researchers found. Last year, 68 percent of white households were homeowners, compared with 46 percent of Latino households and 42 percent of black households, the Urban Institute reports. That means fewer minority households can tap in to home equity to meet retirement needs.
”When you think about home ownership, part of the story is appreciation of home values, but families of color have faced structural barriers in achieving this goal,” said Kilolo Kijakazi, an Urban Institute fellow also working on the wealth gap research.
Well-qualified home buyers of color face substantial barriers such as being shown fewer homes, the institute’s research shows. And price appreciation for homes in neighborhoods of color is lower than in white neighborhoods with comparable income levels. Lower home ownership rates and less home equity mean fewer families of color can tap in to home equity to meet retirement needs.
Federal tax policy is upside-down here, too, with current tax subsidies flowing to the most affluent households, who are more likely to itemize their filings and tend to be in higher tax brackets. The capital gains exclusion on housing also benefits higher-income taxpayers, who tend to own more expensive homes.
TRUMP PLAN HEADS IN WRONG DIRECTION
Targeted federal policies could go far to close the gap – starting with the tax code. On home ownership, for example, we could establish a first-time homebuyer tax credit and a refundable credit on property taxes. This could be funded by limiting the mortgage interest deduction for the most affluent households. For example, the Bowles-Simpson fiscal commission back in 2010 proposed capping the deductibility of mortgage interest at $500,000.
Improving the federal Saver’s Credit also could be a big help. The credit provides a second layer of tax incentives for lower-income households beyond the benefit of tax deferral that everyone receives for contributing to a 401(k) or IRA. Taxpayers with yearly incomes of less than $31,000 (single filers) and $62,000 (joint filers) this year can claim a credit of up to $1,000 for contributions to a qualified retirement plan or individual retirement account (IRA) – but only if they have a tax liability.
Near 10 percent of tax filers could claim the credit, but only about 5 percent do so, according to the National Institute on Retirement Security. Restructuring the credit into a match would have the biggest impact. That could be done by making the credit refundable – in other words, available no matter what your tax liability (reut.rs/2hACrwq).
Federal policy under the Trump administration is heading in exactly the opposite direction, especially where retirement saving and tax policy are concerned. The administration is phasing out the U.S. Department of the Treasury’s myRA program, a low-cost, simple entry-level retirement saving plan targeting workers who are not offered a plan by employers. And Congress has pulled back two Obama-era rules aimed at helping states launch their own low-cost saving programs.
Meanwhile, the administration’s tax plan would further fuel the inequality trends, not reverse them. Tax cuts would flow mainly to businesses and high-income households. If in place next year, 50 percent of the cuts would flow to households with the top 1 percent of income ($730,000 or more), according to the Tax Policy Center, while middle-income households (earning $50,000-$90,000) would receive about 8 percent. Low-income households would receive even less. And the plan is silent on the issue of mortgage interest deductions and credits for first-time homebuyers.
Instead, we need smart policies that help low-income households get ahead. Let’s start narrowing the retirement chasm – now.