Why it’s so hard for Black Americans to save for retirement – and how the pandemic escalated the racial wealth gap

Financial adviser Pamela Capalad spends a lot of her time with clients breaking down job offers and coaching them on raise negotiations – she finds the strategies especially important for people of color.

Income is one of the most important elements when saving for retirement and Black workers in America earn statistically less than their white peers and counterparts. Black men with a bachelor’s degree, for example, earned 24% less than their white counterparts in 2019, according to a Conference Board report published last year. This discrepancy creates financial burdens in the present and the future, especially when it comes to retirement security. 

“You need income that is in addition to what covers your bills,” said Capalad, a certified financial planner and founder of the advisory firm Brunch & Budget, which is based in Brooklyn, N.Y. “That’s one of the biggest issues for people of color – they’re paid less.” 

Salaries are only part of the equation when determining a worker’s compensation, she added. Compensation also encompasses health insurance, life and disability insurance, and retirement benefits, for example. Seeing the big income picture, however, can be difficult for workers looking to get ahead. A high salary alone may seem worth the job opportunity, even if other benefits aren’t there – or are lacking. 

“The tricky part – especially if you’re a person of color who has historically been paid less and offered so much more than you’re used to – is the temptation,” Capalad said. 

Financial adviser Pamela Capalad says one of the biggest retirement challenges for people of color is that they are paid less than their white counterparts.

Pamela Capalad

The racial wealth gap 

Wage inequality is one of the foundations of the racial wealth gap in retirement savings, but there are many other factors that play important roles. 

A home is one of the most valuable assets an American can have in their retirement, but people of color are less likely to be homeowners than their white counterparts. While financial advice can help people overcome investment fears and find the right products to achieve retirement security, the lack of diversity in the financial services industry creates barriers for people of color seeking good financial advice. Maintaining one’s health is important for living a long and high-quality life, yet healthcare access and affordability can be unattainable in some minority communities, and medical debt disproportionately impacts Black Americans. Many of these factors can be traced back to the long history of discrimination in America, including public policies that disadvantaged people of color.

Saving for retirement is a challenge for many Americans, but people of color tend to have fewer resources available for their post-work lives, data show. Many minority groups are more likely to have no retirement savings at all, according to the Economic Policy Institute. Nearly seven in 10 (68%) of white Americans  between the ages of 32 and 61 years old had retirement account savings in 2016, up about 1 percentage point from 2007. Comparatively, 41% of their Black peers in that age bracket had retirement account savings in 2016, down from 47% in 2007. That means about 6 in 10 Black families had nothing saved for retirement, at least not in employer-sponsored accounts, such as 401(k) plans, and individual retirement accounts, as the EPI defined these savings. 

Even after three years, it’s still too soon to tell the true economic impact the pandemic has taken on Americans’ retirement preparedness. But there are a few indications that this extraordinary event has made the racial retirement wealth gap worse. Black Americans were laid off more during the pandemic, and recovery in employment was slower for them thereafter, a RAND Corporation study found

There are other rippling effects that have already begun. People of color saw gains in home ownership rates decline after the pandemic, and they were also more likely to see a reduction in wages. Older people, individuals with chronic health conditions and people of color, were also at higher risks of complications arising from COVID-19 during the height of the pandemic. 

A looming recession and increased inflation aren’t helping narrow the gap. The costs of everyday expenses like groceries and gas have climbed, and in an effort to curb inflation, the Federal Reserve has been steadily increasing the federal-funds rate, which makes borrowing money – such as for a mortgage or on a credit card – more expensive. 

The repercussions of less income 

Black households’ median income was roughly $48,000 in 2021, compared to white non-Hispanic households with median household income of about $78,000, according to the Census Bureau. Hispanic households had a median income of about $58,000. Asian households’ median income was slightly more than $101,000.  

Research shows labor discrimination has fueled the divide. White workers were more likely to have “good jobs” than their Black or Latino counterparts, even with the same level of education, according to a 2019 report from J.P. Morgan Chase & Co. and Georgetown University’s Center on Education and the Workforce. Good jobs were defined as those with “family-sustaining earnings,” such as $35,000 a year for workers between the ages of 25 and 44, or $75,000 for people with at least a bachelor’s degree. 

“If you have very low levels of income, you have less discretionary income, and that means you have most of your money going to immediate needs: food, shelter, clothing, basic supplies,”  said Dedrick Asante-Muhammad, chief of race, wealth and community at the Institute for Policy Studies. “There isn’t as much to invest.” Those who do invest may have to be more conservative with their asset allocation in an effort to preserve their money, which also limits returns, he added. 

Wage inequality makes a lasting impact on retirement security, said Richard Johnson, a senior fellow and director of the retirement policy program at the Urban Institute, an economic and social policy think tank. This is a problem in a few ways. For starters, even if lower-income workers contribute a substantial portion of their salaries to a workplace savings account – such as 15%, as many financial advisers suggest – the contribution amount will be lower because their salaries are lower. And regardless of how much they want to put toward their nest egg, if they’re earning less, they may still have the same spending needs as other families. 

Lower earnings can then lead to lower Social Security benefits, which are calculated using factors such as lifetime earnings and age at the time of claiming. This creates a smaller benefit at retirement. Workers may also have to claim at a younger age (the earliest being 62) because of health problems, Johnson said, or no longer be able to work in a physically demanding job, as some Black Americans do. People who claim Social Security benefits before their full retirement age receive a lower benefit than if they had waited until their full retirement age. The longer beneficiaries wait to claim, the more they get, up to age 70. 

Because of their lower earnings and the way Social Security benefits are calculated, however, Black Americans typically receive less than their counterparts. Lower-wage workers do receive a larger share of their pre-retirement earnings due to the progressive formula the Social Security Administration uses, but it still comes to a smaller dollar amount. For example, in 2016, Black beneficiaries received just over $9,280, compared to white Americans, who received roughly $11,610, according to the Urban Institute. Black Americans did receive more in Supplemental Security Income ($620 versus $300) and slightly more in public assistance ($40 versus $20), but had less in retirement income, interest and total earnings. 

Social Security is a lifeline to many older Black Americans. Only three in 10 Black Americans aged 65 or older had income outside of Social Security in retirement, such as 401(k) savings or pensions, compared to 47% of white Americans in 2014, according to the National Academy of Social Insurance. Social Security was the sole source of income for a third of Black Americans, compared to 18% of white Americans. 

Home ownership 

Denzel Tonuge hopes to purchase a home in the Bay Area, something his mother, Karen Campbell, was unable to do despite her best efforts.

Denzel Tongue

Through his family’s history, Denzel Tongue has seen just how difficult homeownership can be for Black Americans. 

His mother grew up in West Oakland, Calif., moved away, and tried to save enough money with a union job, but she was still priced out of the housing market when she returned to her old neighborhood to buy a home. Tongue’s grandfather, a U.S. Air Force veteran, had to settle for a home in West Oakland, then considered a “high lending risk” zone, because of policies and practices that kept them out of more favorable Oakland neighborhoods. 

Despite their hardships, Tongue, who works at the Alameda County Public Health Department, still hopes to purchase a home in the Bay Area one day. He has studied the hard lessons about the nation’s housing market for people of color — including inferior lending rates to low-income individuals that prevents them from gaining access to the capital they need to buy a home, and the marketing of predatory financial products to these individuals, he said. 

“Homeownership can be super tenuous in the Black community — there’s just a lot of obstacles to homeownership,” he said. “That being said, I still really love my hometown, would still love to live here, and my goal is to continue to save and hopefully own a home in the Bay Area.” 

Redlining was a racially discriminatory practice that allowed lenders to deny mortgage services to applicants in predominantly Black and immigrant neighborhoods. It got its name from the red lines that marked restricted areas on a map that were deemed too risky. When the Fair Housing Act of 1968 was passed, redlining was outlawed, but its repercussions last to this day – and some studies find it may still exist. The restriction to homeownership, or the allowance of homeownership in only certain, lower-valued neighborhoods, has affected the ability of people of color to bolster their retirement security and accumulate generational wealth.

Homeownership is a critical component of retirement security, and barriers to homeownership have helped widen the racial retirement gap for Black Americans, public policy experts said. It leaves many older Black Americans unable to tap into a key retirement asset, either from the sale of a home or home equity loans. Although inflated home prices are a burden for those looking to purchase property, it’s through gradually rising home prices that many people see personal net worth jump. 

“Homeownership is still the biggest asset the typical American will hold in their lifetime,” said William Rodgers III, vice president and director of the Institute for Economic Equity at the Federal Reserve Bank of St. Louis. But there are discrepancies between the races when it comes to homeownership, and the home values of Black Americans lag behind those of white Americans, he said. 

Black Americans saw a slower growth rate for homeownership during the pandemic, the Center for American Progress found — 44.1% at the end of 2020, just 0.1 percentage point higher than at the end of 2019. Comparatively, homeownership among white Americans rose from 73.7% to 74.5%. More Black homeowners than white homeowners also struggled to pay their mortgages during the pandemic — 17.6% versus 6.9%, between August 2020 and March 2021. 

During the pandemic, homeownership among Black households was also more volatile than white households. Black homeownership rose 3 percentage points in early 2020, then fell 2.9 percentage points. At the same time, white homeownership grew 2.3 percentage points in early 2020 and then dipped 1.5 percentage points, the Center for American Progress found. 

An improvement in homeownership for people of color would not only narrow the homeownership gap among racial groups, but also the racial wealth gap in retirement savings overall — something that could have lasting effects for future retirees and the generations that follow them. 

“It’s a generational linkage,” Tongue said. “People can’t pass on that generational wealth. It limits opportunities.” 

Medical debt 

Medical debt is a deterrent to retirement security, as is lack of quality healthcare and insurance, which could cause the medical debt in the first place. Families with damaged credit or less money to spend on medical services and prescriptions may forgo necessary medical attention, potentially diminishing their current or future health. “It is a vicious cycle,” said Signe-Mary McKernan, vice president for labor, human services and population at the Urban Institute.

Medical debt, issues with paying for healthcare and medical debt collections all declined during the pandemic, according to the Urban Institute, but the inequities among races persisted. Among all racial and ethnic groups, Black adults reported the highest rate of medical debt in April 2021, followed by Hispanic adults and then white adults. Black Americans also reported the highest rate of medical debt in collections, followed by majority-American Indian individuals, Hispanic adults and then white adults. 

The reality of medical debt is multilayered, said Berneta Haynes, an attorney with the National Consumer Law Center. Those who have defaulted on their loans or unable to pay their credit cards have the constant stress of debt collectors contacting them, or they may see their wages garnished and a lien placed on their homes. Some individuals may be pushed into risky alternatives, such as using a payday loan. “Medical debt is special in one particular way – it’s unpredictable. You can’t plan for it,” she said. “It is not necessarily anyone’s fault. You can’t necessarily determine when you’re going to get sick or injured. It’s not like taking out a mortgage or an auto loan.” 

The true impact of the pandemic on medical debt is yet to be seen, Haynes said, but there is likely to be some sort of negative effect given expired benefits and COVID-specific legislations, as well as persisting chronic health conditions older Americans are more likely to have. 

Americans of all ages were worried about contracting COVID at the height of the pandemic, but some had higher risks of medical issues than others. Older Americans were one such group. People with chronic health issues were another. 

Black and Hispanic adults tend to confront more health challenges than some of their counterparts, said Tricia Neuman, executive director of the Kaiser Family Foundation’s Program on Medicare Policy, and a larger share of these Americans on Medicare tend to be in poor health. “The pandemic took a harder hit on older Americans generally, and people of color specifically,” she said. 

Financial advice 

When attending large national financial planning conferences with thousands of participants, Saundra Davis was usually one of maybe 100 Black women advisers, she said. If those conferences were on the local level, she was often the only one. 

As a professor of financial planning at Golden Gate University, she regularly sees the same trend reflected among her students, with fewer people of color in her classrooms. This can eventually trickle down to affect how retirement savers get their financial advice – or if they get it at all, she said.

It comes down to empathy, Davis said. “Judging people’s choices without understanding the nuance of their lives can do harm, and I think that’s the thing that gets overlooked in work like this,” she said. Davis is also the founder and executive director of Sage Financial Solutions, a nonprofit focused on providing financial education to underserved communities. 

Having someone to turn to is important – especially in an economic environment where the market is volatile and inflation and interest rates are ticking upward – and prospective clients often need to feel that the professional they’re working with can empathize with why a person may view or use their money the way they do, she said. 

Of the 535,000 personal financial advisers in the U.S. in 2021, 7.3% were Black, 7.5% were Asian and 7.7% were Hispanic or Latino, compared to 82.2% who were white, according to the Bureau of Labor Statistics. 

Of course, not all clients and financial advisers have to come from the same background to work well together. Davis’s financial planner is a white woman, one of the first professionals who welcomed her into the industry, and they have open conversations about Davis’s money management and styles, she said. “If she says something about changing a behavior for me and it is cultural, I can say that to her and she gets it,” Davis said. “She doesn’t try to change my mind.” 

One positive out of the pandemic

To be sure, the pandemic was an unprecedented time in modern life. While the pandemic brought with it many setbacks for retirement savers, it also created circumstances for some Black Americans to create their own wealth through entrepreneurship, said Kiersten Saunders, a personal financial writer and co-author of “Cashing Out: Win the Wealth Game by Walking Away.” 

Kiersten Saunders and her husband, Julien Saunders, are personal financial writers focused on helping Black Americans find successful retirement strategies.

Kiersten and Julien Saunders

Workers were able to spend more time – many while stuck at home – capitalizing on a passion project, or taking in extra income through freelance and gig work. During the day they could work the jobs that gave them a regular paycheck and health insurance, and at night they could build their own businesses. “That wasn’t an option before the pandemic,” Saunders said. 

Business owners suffered because of the pandemic – many shops and restaurants had to shutter their doors or scale back operations – but new businesses also flourished. Black owners of online microbusinesses made up 26% of all new microbusinesses after the start of the pandemic, compared to 15% before March 2020, according to a Brookings Institution report. Comparatively, 60% of microbusinesses were owned by white individuals after the pandemic began, versus 71% prior to it. The boom in Black businesses could be partially attributed to stimulus checks, Andre Perry, a senior fellow at Brookings Metro said during a Brookings virtual event about black businesses last year. 

“This was an opportunity for the rising star, the new entrepreneur, to get a foot in the door and really, really prove themselves,” Segun Babalola, president of the St. Louis African Chamber of Commerce, said during the same Brookings event. “This pandemic actually was a blessing in disguise for some businesses.”