The racial retirement savings disparity persists – How these state IRA schemes are working toward equity

The income and wealth disparities between people of color and white households are large, but state-run retirement programs are striving to bridge the gap.

According to the US Bureau of Labor Statistics, as many as 67% of private-industry workers had access to retirement plans in 2020. But, a significant percentage of employees are still excluded from these programs – and workers of color are disproportionately affected.

According to AARP, around 64% of Hispanic workers, 53% of Black workers, and 45% of Asian American workers do not have access to a workplace retirement plan. Small businesses are also less likely to provide retirement plans to their employees, with 78% of individuals working for businesses with fewer than 10 employees without access to a plan, according to AARP.

Individual retirement account savings initiatives facilitated by the state have stepped in to try to bridge the racial savings gap.

“At this time, it’s preliminary, but the aim was to bridge the retirement savings gap for folks who are left out, which tends to be lower-income workers and workers of color,” said Michael Frerichs, Illinois state treasurer.

According to Georgetown University’s Center for Retirement Initiatives, sixteen states have implemented new efforts to assist private-sector workers in saving, with 11 of them offering auto-IRA schemes. The center discovered that there were more than $735 million in assets in these state-facilitated retirement savings plans as of the end of January.

“A key goal of the worldwide push to have governments play a supportive role in the private pension system has been to close the racial, gender, and white-collar vs blue-collar savings imbalances,” said J. Mark Iwry, nonresident senior scholar at The Brookings Institution.

He coauthored former President Barack Obama’s “auto-IRA” legislation plan, which aimed to increase access to retirement savings through automatic enrollment in IRAs, and he was a driving force behind the statewide state-facilitated retirement savings movement that began more than 20 years ago.

How does it work?
Instead of competing with huge corporate retirement plans, state-facilitated retirement savings initiatives target an underrepresented market segment: small companies.

The majority of these state plans require firms to either provide a workplace retirement plan or assist in automatically enrolling their employees in the state’s program.

According to Craig Copeland, director of wealth benefits research at the Employee Benefit Research Institute, the savings program is typically a Roth IRA, which means employees save money after taxes, and they can put away 4% to 6% of their earnings through an automated payroll deduction. Businesses do not contribute for the programs, and savers’ accounts are managed by an investment firm.

The benefit of saving with a Roth IRA is that the funds grow tax-free and can be taken tax-free in retirement, subject to certain criteria. If members need money for an emergency, they can withdraw their contributions but not their gains tax-free.

According to Frerichs, over half of the participants in Illinois’ Safe Choice program are Black or Hispanic. The program has been in operation since 2018, and it has recently increased access to companies with as few as five employees.

“We’re receiving people that fell between the cracks and don’t have a safety net,” he added, noting that this includes bartenders, waiters, and grocery store staff.

The automatic payroll deduction is perhaps the most potent feature of auto-IRA plans. “This is the set it and forget it’ mindset,” California State Treasurer Fiona Ma stated. It’s easy for employees to spend the money that appears in their checking accounts, but having a portion of it goes directly toward retirement helps their finances to grow.

According to Katie Selenski, the program’s executive director, workers who join CalSavers begin with a default contribution of 5% of their pay and are subject to a yearly automatic escalation of 1 percentage point until they are saving 8% of their salary.

“Being able to save and watch it grow has been a game changer in terms of attempting to close the wealth gap,” Ma noted. She pointed out that in California, two out of every three workers eligible for the program are persons of color.

The state’s CalSavers program was expanded to businesses with one to four employees on January 1. If they don’t already offer a 401(k) plan to employees, those firms are expected to have a payroll deposit savings system that would allow workers to join in CalSavers by the end of 2025.

Increasing savings
The wealth gap between black and white households is the product of years of discrimination, including policies like redlining, which denies loans to prospective homeowners in minority districts. As a result, these state IRA programs represent a step toward narrowing the gap.

Lawmakers have pushed for greater progress in the shape of a Secure Act 2.0 proposal. A section of the proposal would establish a federal matching contribution for lower-income workers investing in a qualified retirement account, starting in 2027. This match would be capped at 50% of up to $2,000 in donations, or $1,000 per individual.

“For low-income workers, putting away $2,000 and getting a 50-cent match for every dollar is a huge boost,” said Monique Morrissey, an economist at the Economic Policy Institute. “It will help, but it will be several years away. Thus, for the time being, we can see that these [auto-IRA] arrangements benefit in terms of ease.”

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