The best approaches to narrowing racial, ethnic, and gender differentials in retirement wealth are outside the current employer-sponsored pension system, Barbara Butrica and Richard Johnson told the U.S. Department of Labor's ERISA Advisory Council. These tactics include automatic IRAs for employees, efforts to raise wages earned by blacks and Hispanics, more federal funding for training and workforce development, better educational opportunities for future workers, and more financial education for workers and students. Protecting Social Security for low-income seniors is also crucial. Their testimony presents detailed information about differences in pension coverage and wealth.
The text below is an excerpt from the complete document. Read the full written testimony with references in PDF format.
Ms. Billings, Ms. Clark, and members of the 2010 ERISA Advisory Council, thank you for the opportunity to discuss disparities for minorities and women in retirement benefits. According to our tabulations of data from the Census Bureau's Current Population Survey (CPS), one in ten adults age 65 and older was poor in 2008, but poverty rates varied widely with race and marital status. They ranged from 7.6 percent for non-Hispanic whites to 19.3 percent for Hispanics, to 19.9 percent for non-Hispanic blacks.1 Only 5.6 percent of married women were poor, compared with 15.4 percent of widowed women, 18.1 percent of never-married women, and 20.6 percent of divorced or separated women.
Social Security was designed to supplement employer-sponsored pensions and other savings, not be retirees' sole source of income. Yet, it accounted for 90 percent or more of family income for about a quarter of beneficiaries age 65 and older in 2008 (Social Security Administration 2010b). Pension and other sources of retirement income were even less common for minorities and unmarried women. About a third of blacks and Hispanics relied on Social Security for nearly all of their income. Social Security also accounted for at least nine-tenths of income received by 27 percent of older divorced women, 30 percent of older never-married women, and 37 percent of older widows.
American women and minorities have always been economically vulnerable—at both younger and older ages. However, the insolvency of the Social Security Trust Fund, the shift from defined-benefit (DB) pensions toward defined-contribution (DC) plans, and the stock market crash have heightened concerns about retirement security, especially for women and minorities. Social Security benefits are an important source of income for retirees and should be preserved, but other sources of income, such as pensions and retirement accounts, are equally important. By supplementing Social Security, pension benefits can significantly improve economic well-being in retirement. Yet pension coverage is far from universal, and many workers offered retirement plans by their employers choose not to participate. The importance of racial and ethnic disparities in pension incomes is growing as the older population becomes more diverse. By 2040, non-Hispanic whites will make up just two-thirds of the population age 65 and older, down from about seven-eighths in 1980 (U.S. Census Bureau 2004). Between 1980 and 2040, the share of Hispanics age 65 and older will grow from 3 to 14 percent.
What ultimately matters for retirement income security, of course, is how much pension wealth individuals accumulate by the end of their careers. For workers in DB plans, pension wealth is the present discounted value of the stream of future pension benefits. For workers in DC plans, it is simply the plan's account balance. Pension wealth hinges on whether employers offer retirement plans, whether workers choose to participate in these plans, and how long they remain enrolled in the plans. Workers with DB pensions, especially those in traditional plans that base future benefits on earnings received near the end of the career and years of service, must generally remain with a single employer for many years to amass substantial pension wealth. Those who leave their DB-covered job in mid-career usually forfeit substantial pension wealth, even if they participate in a DB plan on the new job, because their benefits from the first job will
be based on the relatively low salary they received years before retirement. For workers in DC plans to accumulate substantial pension wealth, they must typically make sizable contributions and invest their accounts wisely. They must also withdraw their funds prudently once they retire, since DC plans do not require participants to annuitize their balances. Finally, both DB and DC plan participants must resist the temptation to spend their pension wealth when they change jobs before retirement.
Differences in employment and earnings, pension offer and participation rates, contribution rates, investment behavior, and plan leakage all contribute to the wide racial, ethnic, and gender differentials in pension wealth observed among adults on the verge of retirement. Continued efforts to encourage employers to automatically enroll workers into retirement plans could boost overall coverage rates, but they won't reduce these disparities much. Blacks and especially Hispanics have limited pension wealth because relatively few work for employers that offer retirement benefits and because they tend to earn less than whites. Many women have limited pension wealth because they have shorter work histories than men and generally earn less. Efforts outside of the employer-sponsored system, such as automatic individual retirement accounts (IRAs), might offer more promise.
(End of excerpt. The full written testimony with references in PDF format.)