This article details two critical points regarding wealth and inequality in the United States. First, retirement wealth inequality is extreme—Black and Hispanic households have less than half the retirement wealth of White households. Second, this inequality would be much worse but for the presence of Social Security. As the U.S. population becomes more diverse, it will be increasingly important for policymakers addressing Social Security’s solvency to understand the extent to which various racial and ethnic groups rely upon Social Security versus other sources of retirement wealth.
Social Security, income gap, retirement wealth, inequality, Black and Hispanic households
One of the more visible manifestations of racial and ethnic inequality in the United States is the income gap. According to the Current Population Survey, in 2018 the median Black household earned 59 percent of typical White household earnings. For Hispanic households, that number was 73 percent. But, the wealth gap makes those inequalities look small. A recent study by Edward Wolff (2018) found that, when looking at standard measures of net worth, Black households have 14 percent the wealth of White households, and Hispanic households have 19 percent. However, as Wolff acknowledges, standard measures of net worth miss an important source of wealth. While these measures typically include financial assets (for most households, held in defined contribution retirement accounts such as 401(k)s or 403(b)s), plus housing wealth and minus debts, they do not include Social Security benefits.
With respect to measuring racial wealth inequality, this omission is likely to be important. For one thing, Social Security coverage is universal. By comparison, defined contribution plans cover only 50 to 60 percent of workers, with coverage favoring White workers (Rhee, 2013). And, Social Security’s benefit formula is progressive, with contributions to the program replacing more of lower earning workers’ income in retirement. With defined contribution plans, higher income workers are more likely to participate in offered plans and save a higher share of their income—if anything, exaggerating the wealth gap (Tamborini and Kim, 2020; Devlin-Foltz, Henriques, and Sabelhaus, 2016). And housing, the other major source of net worth for most households, is unequal at least partially due to historical racial discrimination through policies such as redlining (e.g., refusing loans to individuals living in Black-dominated areas) or steering (e.g., only showing certain buyers low-value properties). And, even absent these issues, lower incomes for Black and Hispanic workers—again, due partially to discrimination but also to inequality of education—make affordability an issue. These issues are not present for Social Security (Choi et al., 2019).
Yet, the program also is in financial trouble. In the most recent Social Security Trustees Report, it was estimated that the Social Security Trust Fund would run out of assets in 2035. And, it’s possible that the COVID-19 fueled downturn could pull that date forward (Gladstone and Akabas, 2020). Should the Trust Fund run out, without a policy intervention the result would be an across-the-board benefit cut of about 21 percent.
As the U.S. population becomes more diverse, it will be increasingly important for policymakers addressing Social Security’s solvency to understand the extent to which various racial and ethnic groups rely upon Social Security versus other sources of retirement wealth. Yet, to date, studies on retirement wealth have tended not to focus on race and ethnicity and have largely ignored the role of Social Security. This article documents the retirement resources—including Social Security —of White, Black, and Hispanic households at various points in the wealth distribution for a cohort of people ages 51 to 56 (Hou and Sanzenbacher, 2020).
Calculating Retirement Wealth
The data source for calculating retirement wealth is the Health and Retirement Study (HRS), a biennial longitudinal survey of American households older than age 50. Wealth for HRS respondents is defined broadly to include resources from: Social Security; employer-sponsored retirement plans (defined benefit [DB] and defined contribution [DC]); non-DC financial wealth (e.g., money in savings accounts, CDs, money market accounts, etc.); and housing wealth.
The focus of this article is the most recent cohort of individuals to be added to the HRS, the late-boomer cohort (born between 1960 and 1965; the results are similar for other cohorts) (Hou and Sanzenbacher, 2021).
The samples are separated into three racial/ethnic groups: non-Hispanic White; non-Hispanic Black; and Hispanic (the age, race, and ethnicity for couples is defined as that of the household financial respondent in the HRS survey). Before discussing the results, it is worth spending a bit of time detailing how the study calculates Social Security, DB wealth, DC wealth, non-DC financial wealth, and housing wealth.
Social Security. The reason Social Security often is excluded from standard measures of net worth is that it is an annuitized form of wealth—people receive their Social Security benefits as a stream of income. As such, they rarely consider how much wealth that stream of income represents, and are not asked about it by economic surveys. So, to calculate Social Security wealth, we start with the data that is available, on benefits.
Data on Social Security benefits come from the Social Security Administration’s (SSA) Summary and Detailed Earnings Data, which are linked to records for a subsample of the HRS data. Converting Social Security benefits into a wealth measure requires calculating the expected present value (EPV) for an individual claiming the benefit at age 65. This calculation adds up the benefits from ages 65 and older, discounting future benefits by a standard interest rate, as well as by the probability that an individual dies and never receives them. (This calculation relies upon survival probabilities from SSA life tables by birth year and sex, and uses the long-run projected interest rate from the Social Security Trustees Report as of the year the individual first entered the HRS.)
Should the Social Security Trust Fund run out, without policy intervention the result would be an across-the-board 21 percent benefit reduction.
Once the EPV at age 65 is calculated, it is further discounted back from age 65 to age at the survey year to reflect the value when the study examined these households (Gustman, Steinmeier, and Tabatabai, 2014; Fang, Brown, and Weir, 2016); if the respondent is married and eligible for spousal and survivor benefits, the benefit components are weighted by the appropriate survival probabilities and converted to an EPV as described above.
Finally, to facilitate a comparison to other wealth the household has accumulated by ages 51 to 56, Social Security wealth is prorated based on the ratio of earnings in the household’s early 50s to its lifetime earnings. (For more details on the calculation of Social Security wealth, see Hou and Sanzenbacher, 2020).
Defined Benefit (DB) Wealth. Defined Benefit retirement plans are funded by the employer, provide a monthly benefit for employees typically based on the worker’s final salary and years of service. Therefore, similar to Social Security, DB wealth is not held in an account, but received as an income stream and therefore rarely included in economic surveys. DB wealth is again calculated based on a measure of income—in this case self-reported estimates of pension income at the participant’s expected retirement age. Similar to Social Security, this expected income stream is transformed into a wealth measure by calculating the EPV of lifetime benefits (Mitchell and Moore, 1997; Gustman, Steinmeier, and Tabatabai, 2010). This measure of DB wealth is then apportioned between past and projected service, so that the wealth amount reflects the individual’s holdings at the time of the survey.
Defined Contribution (DC) Wealth. Defined contribution plans allow workers to save money into an individual account (typically pre-tax), and are often accompanied by an employer “match” to the employee’s contribution. Unlike DB retirement plans, DC plans result in an account that is typically counted as part of wealth in most financial surveys. In the HRS survey used in this study, respondents who report having a DC plan, such as a 401(k), in a current or previous job are asked for the account balance. DC wealth is simply the combined total of all accounts, plus any IRA accounts.
Non-DC Financial Wealth. Non-DC financial wealth includes the net value of stocks, mutual funds, bonds, and bond funds, along with the value of checking, savings, and money market accounts, certificates of deposit, and government savings bonds, excluding any of these assets held in DC plans and subtracting any debt. For households where debt exceeds wealth, the measure of non-DC financial wealth is allowed to be negative.
Housing Wealth. Housing wealth is the net value of the primary residence, which is the gross value less any relevant mortgages and home equity loans. For households where debt exceeds equity, housing wealth is allowed to be negative.
Social Security and the Wealth of the Late-Boomer Cohort
To start, it can be helpful to examine what the picture looks like with and without Social Security. Figure 1, below, focuses on households in the middle quintile (40th to 60th percentile within each racial/ethnic group) of the wealth distribution.
Figure 1. Retirement Wealth for Late Boomers at Ages 51–56 for Middle-Quintile Households Within Race, 2016 Dollars
Source: Authors’ calculations from University of Michigan, Health and Retirement Study (HRS) (1992–2016).
Without Social Security, the picture is one of stark inequality. Black households have 14 percent of the retirement wealth of White households. Hispanic households are only slightly better off, at 20 percent. Once Social Security is included, the picture remains unequal, but not nearly as unequal. Black households have 46 percent of the retirement wealth of White households once Social Security is included. For Hispanic households, the number is 49 percent. As Table 1 clearly demonstrates, Social Security serves as an equalizer.
To see why, it is helpful to take a closer look at the wealth ratios for the three main individual components of retirement wealth: Social Security, employer-sponsored plans, and housing wealth (see Figure 2, below). Although the calculations of wealth shown in Figure 1 also included a fourth source—other financial wealth—this source was very small, even for the typical White household ($15,300). And, this source of wealth was negative for Black and Hispanic households, with debt outweighing assets. In any case, the figure below drives home a point implied by Figure 1. Social Security is a much more equally distributed source of wealth than either employer-sponsored retirement plans or housing.
Figure 2. Share of Wealth Held by Late-Boomer Black and Hispanic Households Relative to White Households, Middle Quintile
Source: Authors’ calculations from University of Michigan, HRS (1992–2016).
While figures 1 and 2 combine to tell a clear story about the importance of Social Security to Black and Hispanic households, in some way they still understate the importance of the program. That’s because, as important as the Social Security program is to the middle of the distribution, it is even more important at the bottom of the distribution.
To illustrate this point, Figure 3, below, divides our sample of late boomers into five wealth quintiles. The lowest quintile represents the bottom 20 percent of wealth holders within each race, the second quintile the next 20 percent, and so on. The figure then shows what share of that group’s wealth comes from Social Security. In other words: how important is Social Security to that group?
Figure 3. Share of Retirement Wealth from Social Security at Age 51–56 by Racial/Ethnic Group and Wealth Quintile Within Race/Ethnicity
Note: When wealth from non–Social Security Sources was negative, as it was for both minority groups, the ratio was capped at 1.
Source: Authors’ calculations from HRS (2016).
Figure 3, above, makes three important points. First, for all older people from the racial and ethnic groups considered here, Social Security is the only source of retirement wealth for the lowest 20 percent of wealth holders. Second, Social Security remains important for all households up until at least the middle-quintile. Even for middle-wealth White households, Social Security represents the majority of their retirement wealth. Third, Social Security is important for even relatively high-wealth Black and Hispanic households. For example, fourth-quintile Black and Hispanic households still hold the majority of their retirement wealth in the form of Social Security. By comparison, for White households in the fourth quintile, less than a third of their wealth comes from Social Security.
Social Security and Racial/Ethnic Inequality Going Forward
The analysis presented here makes two things clear. First, retirement wealth inequality is extreme—Black and Hispanic households have less than half the retirement wealth of White households. Second, this inequality would be much worse but for the presence of Social Security. Black and Hispanic households would have just 14 and 20 percent as much wealth as White households if Social Security were excluded from the calculation. This observation gets us to the policy problem. While Social Security is not at risk of vanishing and being “excluded” entirely from the calculation, it is at risk of exhausting its Trust Fund in 2035. And, if that happens, benefits will be cut, with a disproportionate impact on Black and Hispanic households.
But, the way in which the problem will be solved is not widely agreed upon. The last time the Trust Fund almost ran out, in 1983, two of the biggest changes to the program to put it back on sound financial footing were an accelerated increase of the payroll tax and an increase in the age at which full benefits could be received (Social Security Administration Office of Legislation & Congressional Affairs, 1984).
This approach represented a compromise of sorts between a revenue increase and a benefit decrease. After all, under an increase in the Full Retirement Age, people who retire at the same age as before the policy change experience a larger reduction in benefits. And, people who delay in order to receive the same benefit would receive that benefit for a shorter period of time, effectively reducing their Social Security wealth. And, such a decrease would reduce the retirement wealth of Black and Hispanic workers by a higher proportion than it would for White workers.
The nature of policy changes the next time around will likewise determine the extent to which benefits are maintained or reduced. On its website, Social Security’s Office of the Chief Actuary evaluates a variety of proposals from policymakers with respect to their impact on the program’s finances. Some of these would increase revenue without a reduction in benefits.
‘For all racial and ethnic groups Social Security is the only source of retirement wealth for the lowest 20 percent of wealth holders.’
The Office of the Chief Actuary estimates that removing the cap on the payroll tax (and giving a benefit credit to earnings above the maximum) would eliminate about half of the long-range actuarial shortfall (See E2.2 on the Social Security Office of the Chief Actuary, 2021). Other proposed policy changes would effectively cut benefits. Increasing the full retirement age to 68 by 2045 would decrease the long-range actuarial shortfall by 13 percent (See C1.2 on the Social Security Office of the Chief Actuary, 2021). Or, reducing the annual Cost of Living Adjustment (COLA) by 1 percentage point—a reduction in benefits that has a larger effect as people age—would reduce the long-range shortfall by 59 percent (See A1.1 on the Social Security Office of the Chief Actuary, 2021).
Of course, these estimates are largely just math. Afterall, given a set of economic and demographic assumptions—e.g., employment growth, wage growth, interest rates, mortality, etc.—the amount of money the program will bring in and send out under current law or any change in the law can be calculated. It is up to policymakers to decide the exact combination of policies they want to use to get to 100 percent.
This article makes the point than when considering those combinations, it will be important to carefully study the effect of any proposed changes on the distribution of retirement wealth. Policies that would reduce benefits, such as raising the Full Retirement Age, would tend to increase retirement wealth inequality, and would have a larger adverse impact on minority households. Policies that increase revenue, for example through eliminating the cap on earnings that qualify for the payroll tax, would maintain the equalizing effect of Social Security.
Authors’ note: The research reported herein was derived in whole or in part from research activities performed pursuant to a grant from the U.S. Social Security Administration (SSA) funded as part of the Retirement and Disability Research Consortium. The opinions and conclusions expressed are solely those of the authors and do not represent the opinions or policy of SSA, any agency of the federal government, or Boston College. Neither the United States Government nor any agency thereof, nor any of their employees, make any warranty, express or implied, or assume any legal liability or responsibility for the accuracy, completeness, or usefulness of the contents of this report. Reference herein to any specific commercial product, process, or service by trade name, trademark, manufacturer, or otherwise does not necessarily constitute or imply endorsement, recommendation or favoring by the United States Government or any agency thereof.
Wenliang Hou, PhD, is a quantitative analyst with Fidelity Investments in Boston and a former research economist at the Center for Retirement Research at Boston College (CRR). Geoffrey T. Sanzenbacher, PhD, is an associate professor of the practice of economics at Boston College and a research fellow at the CRR.
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