Retirement

Narrowing the Social Security Racial Gap – But Only Slowly – Center for Retirement Research

Think of the thousand reasons black Americans receive 19 percent less in Social Security during their retirement years than white retirees.

Inequality in the labor market reduces job opportunities and their income, which is the basis for determining how much they will receive in their Social Security checks. Ill health or the need to care for sick children or family members shortens work and reduces benefits.

Smaller welfare checks are also a problem because Blacks are less likely to marry. Single workers’ financial difficulties extend into old age if they don’t have a high-earning spouse to receive a larger Social Security check.

Hispanics also earn less — 14 percent less — for some of the same reasons, including lower wages and caregiving jobs.

This huge racial gap in Social Security retirement benefits exists despite the progressive formula the government uses to try to even the playing field for low-wage workers.

A new study by the Urban Institute finds that making the formula more attractive to low-wage workers could be the most effective way to close the benefits gap between black and Hispanic retirees and their white counterparts.

However, the researchers concluded that even an open benefit formula would not do as much to reduce the racial gap as increasing the wages of black and Hispanic workers.

In-depth analysis compared the future impact of many changes proposed by Congress or policy makers. The estimates apply to benefits that may begin when members of Generation Z retire.

One change to the formula analyzed in this study would equally increase benefits for Blacks and Hispanics by about 4 percent to 5 percent. Black retirees will receive $23,800 more during their retirement years and Hispanics $20,500 more. Whites would get only $800 more.

The reform would close the gap by increasing future retirement benefits for low-wage workers and cutting them at the top. Social Security uses a tiered formula. Currently, under the first phase, Social Security benefits are equal to 90 percent of a worker’s average monthly earnings of less than $1,174 if they retire at the plan’s full retirement age. The first tier will be generous, rising to 95 percent of incomes below $1,503.

To reduce future benefits for high-wage workers, the formula will drop from the current 15 percent to 5 percent of monthly income over $7,078 that will be replaced by Social Security.

Two other changes will also reduce the gap but by smaller amounts. One proposal, which mostly helps women, gives working parents a credit on their Social Security records for caring for a dependent child for more than 80 hours a month. A minimum benefit indexed to the federal poverty level is intended to help workers with very low incomes or an open employment history.

On the tax side, eliminating the federal income tax on all Social Security benefits is a popular idea that appeared in a 2016 bill in Congress. But removing the taxes would disproportionately help White retirees, the researchers found, because the taxes only apply to middle- and upper-income earners.

Their take: “Changing Social Security alone seems unlikely to significantly reduce the existing racial and ethnic gap.”

Achieving equality for Black and Hispanic retirees, they said, will have to start with expanding opportunities for workers and increasing equal pay.

To read this study by Richard Johnson and Karen Smith, see “How Could Social Security Reforms Improve Benefits for Black and Hispanic Beneficiaries?”

The research reported here is derived in whole or in part from research activities conducted pursuant to a grant from the US Social Security Administration (SSA) funded as part of the Retirement and Disability Research Consortium. The opinions and conclusions expressed are solely those of the authors and do not necessarily represent the views or policy of SSA, any federal government agency, or Boston College. Neither the United States government nor any of its agencies, nor any of its employees, makes any warranty, express or implied, or assumes any legal responsibility or liability for the accuracy, completeness, or usefulness of the contents of this report. Reference herein to any particular commercial product, process or service by trade name, trademark, manufacturer, or otherwise does not imply endorsement, recommendation or favor by the United States Government or any agency thereof.


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