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State Mandates and the Racial Retirement Gap

On Juneteenth, we celebrate both the abolition of slavery in the United States and the hope that it represents for our future. We also reflect on how companies like Vestwell—and our industry as a whole—can advance the work of racial equity today.

To that end, there is an unfortunately large amount of work to do. The retirement gap between black and white Americans is stark. In 2016, the typical black household approaching retirement had 46 percent of the retirement wealth of the typical white household. As a result, the poverty rate in 2019 among black retirees hit 18%, while the poverty rate for white retirees came in at 6.8%.

However, this is not an intractable problem. The example of history can point our industry toward a modern, effective tool for closing the racial retirement gap: state retirement mandates.

Universal Programs Fight Racism—And So Can State Mandates

Universal programs, by their nature, are inclusive institutions. While selective programs accrue benefits only to those who participate, universal programs ensure people on all rungs of the economic ladder benefit from their adoption. In the United States, the best example of this principle in action is Social Security.

Almost all workers participate in the U.S. Social Security program, and as a result, it is one of the most potent weapons in the fight for retirement equity. According to the Boston University study Social Security Is a Great Equalizer, without Social Security income, the retirement gap between white and black retirees would more than double. The study’s co-author, Geoffrey Sanzenbacker, stated that “the universal nature of Social Security is a big factor” as to why the program is so effective at closing the gap.

Unfortunately, the Social Security Trust Fund is expected to hit a depletion point in 2035, potentially jeopardizing the program as a whole. Thankfully, it is not the only tool in our arsenal. State mandates are being implemented by 14 states nationwide, and they are already showing great promise.

State Retirement Mandates Are Already Closing the Racial Retirement Gap

State retirement mandates, like those rolled out by California, Colorado, or Connecticut, expand savings opportunities to people at all levels of society. According to a 2016 feasibility study conducted by the state of California, CalSavers would give over 7 million workers access to a retirement account. Additionally, nearly 66% of that population were expected to be people of color.

Further, improving savings rates may be required for society to close the racial retirement gap. According to Lori Lucas, CFA & President of the Employee Benefit Research Institute, “black and hispanic Americans earning less than $35,000 per year are more likely to have less than $1,000 saved than white Americans.” She also states that “the wealth gap persists between whites and people of color, regardless of income.”

Even better, these mandates can drive private-sector participation in retirement plans, too. State programs set a new floor for retirement benefits, which can encourage employers to pursue a more competitive offering. Also, with the incentives provided by federal legislation such as the SECURE Act, small businesses can reap significant tax benefits as they respond to their states’ mandates.

To that end, state program mandates are well-tailored solutions to this problem. Encouraging participants to save, regardless of their income level, is a necessary step for closing a wealth gap that would persist even if the wage gap had closed.

A Call to Action for the Retirement Industry

The racism black Americans experience today—as well as the scars of our deeply racist past—have only served to threaten our country and our industry. This racism has denied black Americans access to both savings and capital, harming the equality of opportunity and commitment to free enterprise our industry rests upon. State mandates can do more than simply expand our industry; they can create a prosperous environment where every member of society is a full participant in the economy and has the savings to match.

State mandates, though incapable of solving the racial retirement gap alone, are an important step in the right direction. Our industry should welcome them, work with state governments to improve them, and do our part to help pro-equality programs like them succeed.