I read a shocking statistic the other day that I felt compelled to write about. Around 75% of households headed by an African American or Hispanic have less than $10,000 saved for retirement. To put it in perspective, $10,000 will generate about $33 a month in retirement income. I did further research into the financial disparity between black and brown Americans and the rest of us, and found stark racial inequality in savings in America. Once you see how serious the problem is, perhaps you become convinced like I did that we need federal financial literacy standards in our schools to help pull minority communities out of poverty. Here are a few areas where the numbers absolutely stunned me.
Racial Inequality in Savings is Particularly Bad with Retirement Accounts
The low retirement savings of African American and Hispanic households continues into old age. A National Institute for Retirement Security Report found that the average retirement balance among black and Hispanic households between 55 to 64 years of age was only $30,000. Meanwhile, white household’s average balance in the same age category was $120,000.
Data from Social Security confirms this racial inequality in savings. About 50% of black Americans rely on Social Security for 90% or more of their retirement income. The agency does not have great data going back decades on Hispanic households as they were lumped in with whites at times. Apparently, African Americans claim Social Security benefits at a younger age than other racial groups. When you take benefits at age 62, the earliest possible allowed by law, you reduce your lifetime benefit payments by 25%. Likewise, if you waited until 70 to claim benefits, your monthly benefit would be 32% higher than if you claimed at 66.
So not only do African American households have lower median incomes that lead to lower Social Security benefits, these households claim early and reduce their benefit payments by a massive percentage. African Americans live about three years less than other races as a whole, so they receive this reduced benefit over a shorter period of time as well. Social Security is in effect a wealth transfer from young black men to old white women because of life expectancy demographics and high benefits to spouses of high earning primary breadwinners.
Black and Hispanic Americans are disproportionately found in the ranks of public sector workers. Public sector households have relied in the past on pension benefits to carry them through retirement. However, as my well documented research into states like New Jersey shows, many of these pension plans will face financial insolvency in the near future. Even the defined benefit plans, one of the few saving graces in reducing racial inequality in savings currently, is poised to have a negative impact on minority households.
In addition, black and brown Americans can be disproportionately found in jobs that do not offer good retirement benefits. If you work at Checkers or a lansdscaping company, you probably do not have a good 401k match available to you. In that case, you put off saving for retirement, and we have a problem like we have today where three fourths of people basically have nothing saved for their golden years.
America’s De Facto Home Equity Retirement Plan Does Not Work So Well if You Are Black or Brown
All you need to do to see how many middle class Americans rely on their home equity to fund retirement is turn on a cable news TV program in the middle of the day. Clearly, whether it is home equity loans, refinancing, reverse mortgages, downsizing, or funding a retirement home entrance fee, your primary residence is the primary financial asset for many Americans.
Say you are the average white American in retirement, with $120,000 saved up. You have lived in the same house for twenty years, and just finished paying off your 15 year mortgage a few years ago. Your home is worth $150,000, and now you want to move to an all inclusive retirement community in Florida to protect against future long term care expenses. What do you do?
Most of these continuing care retirement communities (CCRCs) require a large, nonrefundable entrance fee to move in. After that point, you have a controlled rental rate that is supposed to cover your long term care needs without making you go bankrupt. When you do analysis on a CCRC as an investment, you look at median home prices in the area. The reason is that potential customers have most of their savings tied up in their homes and need to be able to sell them to come up with the money to pay the entrance fee.
If you do not necessarily need money for long term care, many Americans opt for a reverse mortgage, which essentially buys your home from you over time while you stay in your house. This is an important income supplement for people who have not saved enough in 401k, IRA, and other retirement accounts.
However, what if you buy a home and make the payments, and it still doesn’t work out? A recent report by the Washington Post found that 9 of 10 mostly black zip codes in Atlanta have lower home prices than this point 12 years ago. One house in a neighborhood popular with black professionals sold for $440,900 in 2005. That same house sold for $290,000 in june 2015. The article places a large part of the blame on bad loans from the crisis, which had a negative feedback loop on black communities. As foreclosures on these houses went higher, prices tumbled. When the recovery occurred, the buyer base was more limited, whether because of racism or fear of financial loss.
As minority households have lower wealth generally, they are more likely to be in housing stock that depreciates in value like manufactured homes. The solid single family homes that they do purchase might not increase in value like they do in mostly white, high income neighborhoods. The Washington Post article suggested that the problem was widespread. With lower price appreciation, black and brown communities get lower proceeds from the sale of their homes. In retirement, this results in a lower income supplement that rescues the finances of many white Americans.
The Lack of an Emergency Fund Destroys the Balance Sheets of Many Minority Households
If you look at savings accounts, the racial inequality in savings persists. About eight percent of households overall do not have a bank account. In the African American community, twenty percent of families go without a bank account, because they cannot maintain the minimum balance. A very low number of minority families have three to six months expenses in a savings account, which is the figure recommended by personal finance experts. Without this savings, minorities get higher interest rates on everything from car loans and mortgages to credit card and personal loans.
When I was looking for a house in St. Louis to rent, I found an ad on Craigslist targeted at African American buyers. The seller wrote the ad advertising a home sale in this manner, “I give it to ya 8%! Cheapa dan a car note, cheapa dan any kinda note!” An 8% mortgage is an absolutely terrible interest rate. This seller was trying to act chummy or something but was proposing awful terms for a buyer.
I listen to a lot of rap and hip hop, particularly when I was growing up in a majority minority school. I remember driving to high school senior year and hearing ads on the radio where a great beat came on and an African American guy, speaking as a hip DJ would, promised “Bad Credit? No Credit? No Problem! E’erbody be driving off in a new ride THIS weekend!” Never mind that these car loans probably came with horrible loan terms.
Maybe you are uncomfortable with the way I am quoting language. As a white male, I am not in the community I am writing about. Whatever your view about whether it is right for me to focus on this topic because of my lack of personal experience in discrimination, you know I am right. The race of the lender does not matter. Everybody wants to make money, and everybody wants to get paid. That’s true whether you are own a car lot on the minority part of town or run a huge mortgage operation at a big bank. Some of it is probably racism, but some of it is clearly that black and brown Americans have less liquid savings. If you fall on hard times, you have to turn to the worst of the worst out there, credit card companies, pawn shops, and payday lenders. These loan sharks charge between 15%-400% interest rates. There is no way a family gets ahead while paying that kind of interest.
Ferguson exposed how relatively small fines can entrap honest hard working citizens into cycle of poverty. Small $300 fines turned into open warrants and thousands of dollars in debt because the folks getting pulled over in Ferguson did not have the money in a savings account to pay the bill. Discriminatory policing led to the problem, but the problem could have been prevented by having three to six months expenses in a bank account.
To End Racial Inequality in Savings, We Need Federal Financial Literacy Classes in Schools
Disadvantaged minorities have lower financial literacy opportunities. We allowed people to own other people in America for more years than we haven’t. If you were a slave or grew up as a child or grandchild of one, you had no benefit of inheritance or financial literacy knowledge passed onto you from the older generation. Thus, the cycle of poverty continued. Hispanics families, particularly first generation immigrants, might only speak Spanish at a high level. If that is the case, your understanding of the financial system would be limited from language barriers. The causes of the racial inequality in savings in this country start from racial injustice. However, I believe these problems can be mitigated or even fixed with aggressive financial education to start righting past wrongs.
We must have financial literacy classes, especially in Title 1 schools with disproportionate minority population like the one I where I went to high school. State legislatures require economics and government classes senior year. They should add personal financial economics 101. You would have to fund this mandate with billions of dollars, but I argue it would be money well spent. The current crop of home economics classes that teach you how to balance a checkbook are extremely outdated and only useful if you have the skills to obtain a free checking account to write checks in the first place. You need to have instruction that shows you how to integrate all your accounts with online apps. You should state the names of the pawn shops and payday lenders in town and let the kids know how much interest they would be paying in practical terms.
Instead of wide reaching financial education after the financial crisis, we got the Consumer Financial Protection Bureau. A paternalistic government agency is never going to look out for someone as good as they could themselves if equipped with the right knowledge. If you started in schools, children could pass along what they learn to parents. Everybody wants to know how to get rich. This is a real way to make that happen rather than pop culture showing black and brown Americans that only way to make it financially in life is entertainment and athletics. Racial inequality in savings is one of the biggest crises America faces. Until we do right by our neighbors and give them the same opportunity to learn what my granddad and parents taught me at home, how can we expect Dr. King’s dream to be fulfilled?
What do you think about the racial inequality in savings gap? Where have you seen it in your personal life and what prescriptions would you have to fix it?