401(k) Tax subsidies and matching benefits from higher earners, usually whites – Retirement Research Center
Social Security programs aim to support low-income retirees by replacing a higher share of past income than earnings. However, workers are encouraged to save subsidies that lean towards retirement in the opposite direction.
According to these plans, white workers (often earn more white workers than blacks and Hispanics) are disproportionately embedded in 401(k) style savings plans based on research on these plans.
White workers are starting to save more. They contributed an average of 4.2% of their income, and their employer competition increased by another 2.1% and the total savings rate was about 6%, researchers from MIT, Harvard, Yale and the U.S. Census Bureau found.
Black and Hispanic workers have fewer plans, and their contributions have also decreased: about 2.4% of their income. Their employers increased by about 1.5%, totaling about 4%.
The shortage of black and Hispanic savings rates is just one of several ways in which our 401(k) retirement system benefits high-income, most white workers.
The researchers explained that the retirement plan is “the best, if not the best, even if not the best financial investment opportunities.” But the subsidy system “rewards those who can and do more” is a big factor in the yawning wealth gap between white workers and their black and Hispanic counterparts.
For black and Hispanics, employers and workers also have less total contribution rates – even as researchers compared them to many white workers who are similar in many ways, including within the same income range. More detailed analysis suggests that there are other reasons for the gap between white workers and black and Hispanic workers.
For example, age difference drives savings. Black and Hispanic workers are on average younger than whites. However, retirement is a bigger priority for older workers, who have less financial needs for them. Other differences may be due to racial differences in working durations – knowledge about employer 401(k) benefits may increase over time – as well as education, which will improve financial literacy. Family Advantage plays another role: Workers with high-income parents contribute more, and fewer premature births are withdrawn.
But even as researchers addressed these differences, they said the savings were “keep bigger.”
Due to the savings gap between race and race, the tax subsidy of 401(k)s lost more than $200 billion a year, disproportionately using white people.
When workers save traditional 401(k), donations are deducted from their taxable income, reducing their debts when paying taxes. But because black workers save less, they get smaller tax subsidies—a tax break that typical white workers receive is 31 cents per dollar. Hispanic workers earn about 62 cents.
Early extraction from 401(k)s is another source of inequality. The IRS requires workers under 59½ to pay 10% of the taxes equal to the withdrawn to reduce retirement savings prematurely. The fine is the income tax that should be evacuated.
Despite the punishment, 23% of black workers under 55 withdraw from their 401(k)s – twice as many as white workers. Hispanic withdrawal is slightly higher than whites. The researchers also found that black savers often withdraw funds because their checking and savings accounts have no white workers with similar income.
They suggest that more progressive policies will eliminate some racial and racial disparities. For example, none of the workers can be based on tax subsidies, but that all workers can receive government contributions to the savings plan, equal to a set percentage of their income.
However, the main goal of this study is to record how many retirement savings incentives lead to inequality in retirement wealth.
To read this study by Taha Choukhmane, Jorge Colmenares, Cormac O'Dea, Jonathan Rothbaum and Lawrence Schmidt, see “Who can benefit from retirement rescue incentives in the United States? Evidence shows that racial gaps on retaining wealth accumulation.”
The research reported in this article was conducted based on grants from the U.S. Social Security Agency (SSA) funded by a part of the Retirement and Disability Research Alliance. The opinions and conclusions expressed are merely the opinions of the author and do not represent the opinions or policies of the SSA or any agency of the federal government. Neither the U.S. Government or any of its agencies, nor any of its employees, has any legal liability or liability for the accuracy, completeness or usefulness of the contents of this report. References herein to any particular commercial product, process or service, by trademark, trademark, manufacturer or otherwise, do not necessarily constitute or imply the endorsement, advice or preference of the U.S. Government or any of its institutions.
