The New Finance of Longevity

What Are The Challenges Facing Low Income Americans And Retirement Security?

Many rely heavily on Social Security, while a wealth-gap grows between homeowners and renters

A new fact-sheet from the National Institute On Retirement Security (NIRS) reveals the numerous hurdles they face. Read more here.

Previous research has shown that low-income Americans rely heavily on Social Security income in retirement. In addition to this, there is a large wealth gap between homeowners and renters — the Harvard Joint Center for Housing Studies found that older homeowners in the lowest quarter of income-earners had non-housing wealth of $12,500, while older renters in the same category had non-housing wealth of just $1,100.

Retirement security varies greatly along the income spectrum. The retirement savings programs that work best for low-income workers often are not the same as the programs that work well for high-income workers. Social Security functions as a critical source of retirement income for older adults with incomes below $40,000, whereas high-income households benefit more from defined contribution plans, such as 401(k)s.

The Income-Gap

In 2016, older adult households with less than $40,000 in annual income received 70 percent or more of their income from Social Security. This contrasts with households above $80,000 who only received 24 percent
of their income from Social Security.

Non-working, older adult households that receive Social Security income, but no income from defined benefit or defined contribution plans, had a relatively low net worth of $80,405. In contrast, those older households with retirement income from all three of these sources had a net worth of $319,050 – more than three times greater. There is a sharp divide in wealth between homeowners and renters, even in the same income category. According to data from the Harvard Joint Center for Housing Studies, older homeowners in the lowest quarter of income-earners had non-housing wealth of $12,500, whereas older renters in the same income category had non-housing wealth of $1,100.

Key Points

  • Low-income older adults heavily rely on Social Security for retirement income
  • Older adults with multiple sources of retirement income have high net worths
  • Median savings are significantly lower for Black and Hispanic households than white

Interestingly, this sharp divide between owners and renters persists up the income ladder. According to data from the U.S. Census Bureau, Black households in 2017 had median income that equaled 59 percent of the income of white households; for Hispanic households, it was 74 percent. This income inequality translates into inequality in retirement savings. The Kaiser Family Foundation found that among Medicare beneficiaries in 2019, white beneficiaries had median per capita savings of $117,800, whereas Black beneficiaries only had $14,500 and Hispanic beneficiaries had $9,650.

Social Security functions as a critical source of retirement income for older adults with incomes below $40,000, whereas high-income households benefit more from defined contribution plans, such as 401(k)s...

These wealth and savings discrepancies derive in part from vast inequalities in the ownership of financial assets. In 2016, the bottom 50 percent of Baby Boomers by net wealth only owned 2 percent of that generation’s financial assets. For Millennials, the bottom 50 percent owned 6 percent of financial assets, but Millennials are experiencing deep inequality earlier in their life cycle than Baby Boomers.

There are ways to improve the retirement security of low-income individuals. Strengthening and expanding Social Security would do much to benefit these retirees as they rely so greatly upon it. For example, enhancing Social Security’s minimum benefit to keep retirees with low career earnings out of poverty would raise the incomes of many older adults. Increasing access to workplace retirement savings plans would improve the savings amounts of many low-income workers. Low-income workers are the least likely to work for employers that offer retirement savings plans, so the state-facilitated retirement savings plans such as CalSavers and Illinois Secure Choice can offer a needed savings vehicle for these employees

 

 

 

Sources:
  • Tyler Bond & Frank Porell, Examining the Nest Egg, National Institute on Retirement Security, January 2020.
  • Tyler Bond, Joelle Saad-Lessler & Christian Weller, Shortchanged in Retirement, National Institute on Retirement Security, May 2020.
  • Tyler Bond & Nari Rhee, “Financial Asset Inequality and Its Implications for Retirement Security,” National Institute on Retirement Security,
    September 2019.
  • Wyatt Koma, Tricia Neuman, Gretchen Jacobson & Karen Smith, Medicare Beneficiaries’ Financial Security Before the Coronavirus Pandemic,
    Kaiser Family Foundation, April 2020.
  • Harvard Joint Center for Housing Studies, Housing America’s Older Adults 2019, June 2019.
  • U.S. Census Bureau, “Real Median Household Income by Race and Hispanic Origin: 1967 to 2017”
  • Andrew Eschtruth & Alicia Munnell, “Modernizing Social Security: Minimum Benefits,” Center for Retirement Research, January 2019.