It’s not your parents’ retirement—especially if your parents retired with a pension and a gold watch after 25 years on the job! For today’s working adults, it’s more likely to be a retirement based on the safety-net-level of benefits from Social Security, supplemented with personal savings and investment. The catch is, however, that too many African Americans are saving too little for retirement. The fact that 70 percent of African-American workers had saved less than $25,000 for retirement (according to a 2007 survey by the Employment Benefit Research Institute) suggests there will be little “gold” in our golden years.
Traditionally, retirement income has come from three sources (Social Security, employer pensions, and personal savings and investment) and, thus, has been characterized as a three-legged stool. The ongoing, gradual disappearance of employer-sponsored defined benefit pensions (that provide a monthly payout based on years worked and salary level) and their replacement by employer-sponsored defined contribution retirement plans (that provide retirement income based on the amount of employee contributions while working) suggests, however, that the retirement income stool will soon have only two legs. One leg will be Social Security, and the other will be personal savings and investment (both through an employer and independent of employment).
Nearly two of every five African Americans (37 percent) in a 2009 Joint Center poll indicated that they expected Social Security to be a major source of income during their retirement. This expected major source of retirement income, however, provided average monthly retirement benefits at the end of 2009 of only $1,120 for African-American males and $960.50 for African-American females. These monthly average benefits generate an annual income only slightly greater than the federal poverty threshold for persons 65 years and older ($10,458). Over the next 75 years, if no modifications are made to the Social Security program, its pay-as-you-go financing system will be challenged by national demographics, and payments will fall below their already modest levels. Because FICA taxes paid into the Social Security system by workers in a given year are expended that same year to fulfill obligations to current beneficiaries, all of the following will threaten the solvency of the Social Security system: retiring of the large Baby Boom cohort born between 1946 and 1964, increasing of the life expectancy of the “older” old, and declining birth rates.
The landscape of employer pensions and retirement plans does not look especially promising for African Americans either. African Americans are more likely to be unemployed and underemployed than other racial/ethnic groups, a fact that has been unchanged for many decades. When employed, African Americans are hit hard by the shrinking availability of employer-sponsored retirement plans. Though more than half (56 percent) of black workers ages 25-59 were offered retirement plans or pensions by their employers in 2009, less than half (45 percent) of those offered plans or pensions enrolled in them. In addition, low-income earners (38 percent)—among whom African Americans are overrepresented—are less likely than high-income earners (73 percent) to be offered employer retirement plans. African-American workers constitute 20 percent of the low-income labor force (individuals whose earnings are less than the federal poverty level even though they are employed for 27 or more weeks per year), in contrast to the 11 percent they make up of the workforce at all income levels.
Personal saving and investment independent of employment (for example, Individual Retirement Accounts, or IRAs), thus, becomes the major source of income to supplement Social Security retirement benefits. A key issue for African Americans is having the disposable income to save. A 2009 Joint Center poll found that 53 percent of African Americans at all income levels—and 65 percent with income of $35,000 or less—“wanted to save but did not have enough money to.” This same poll found that African Americans are less likely than whites to have invested in IRAs (28 percent of African Americans vs. 47 percent of whites), in stocks or mutual funds (27 percent of African Americans vs. 49 percent of whites), or in bonds (17 percent of African Americans vs. 27 percent of whites).
Raising our current retirement income status from only 30 percent who have saved $25,000 or more for their retirement should become a priority for African Americans. Otherwise, our definition of retirement may become confined to working (either full-time or part-time) until the day we die, or eking out an existence on Social Security benefits alone.
Wilhelmina A. Leigh, PhD, is a Senior Research Associate at the Joint Center for Political and Economic Studies in Washington, DC.