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Retirement accounts and investments

According to Perron (2010), in a comprehensive study on the effects of the Great Recession, African Americans were significantly less likely to have any kind of retirement account of stocks and bonds. It is reported that the most common types of retirement accounts held by African Americans were 401 (k)/403(b) holdings -33 percent - and traditional pensions - 31 percent. These are retirement accounts that are funded by the employer, whereas stocks, bonds, IRA, and mutual funds are funded by individuals.. One in five African Americans had an IRA (21%); 17 percent had mutual funds; and 15 percent had individual stocks or bonds.

Rhee (2013) found that African Americans are less likely to work in jobs that offer pensions or retirement accounts. Some 54 percent of African Americans work for companies that offer retirement plans. This means that some 44 percent are working in jobs where retirement options are not available to them. On the other hand, 62 percent of White employees work for companies that offer retirement benefits, like 401(k), for example. African Americans tend to contribute less to retirement plans than do Whites. This may be due, in part, to the fact that their incomes tend to be generally lower than those of their white counterparts. It is recommended by economic experts that retirement savings should be from 8 to 11 times one’s income at retirement; however, 74 percent of Blacks have less than 510,000 in total retirement savings. On the other hand, 49 percent of white households have saved less than $10,000. A significant number of African American families have absolutely no retirement savings. The National Institute of Retirement Security found that 62 percent of African American families have no retirement savings, in comparison to 37 percent of white families (Rhee, 2013).

Recommendations for retirement security among Blacks

Grusky et al. (2011) see pension plans like the 401 (k) as particularly problematic and refer to them as a "ticking time bomb,” since the value of these types of funds are subject to stock market risks. Many low-income groups, including African Americans, will not be able to afford a 401(k), or an IRA for that matter. To deal with this issue, changes in tax law are needed, with specific emphasis on tax incentives. The authors recommend four major goals to reform the present defined contribution (DC) pension system: (1) increase participation rates; (2) increase the amount contributed into the system by the worker and their employers; (3) increase returns on retirement accounts; and (4) stabilize the returns on accounts and reduce the associated risk.

In order to increase the participation rate, there need to be changes in the tax incentives. For example, under the present tax laws, high-income employees receive the highest tax subsidy. For many, this arrangement works well; however, under this plan, the low-income employees receive the least. “Thus, replacing the current system whereby a tax deduction is given for retirement plan contributions with a system of tax credits would still provide everyone with a tax incentive but would shift the benefit down the income ladder” (Grusky et al., 2011, p. 153). This model is said to increase the savings of low-income families by having the amount of tax credit dependent on family income. The tax credit, at some point, would be converted into a refundable tax credit for low-income families. This model would require the government to subsidize low-income employees for allotting some part of their savings to a retirement account. This is only a recommendation with a set of reasonable assumptions and has not been tested; however, it is a fair approach to addressing the pension security concerns among low-income workers, including African Americans and other minority groups. Another recommendation is proposed that centers on retirement coverage for more American workers:

Less than half of employees have a retirement plan at work. The so-called universal IRA, which would provide all workers with an individual retirement account, an idea advanced by Obama during the presidential campaign, would help make a retirement account available to all workers.

(Grusky et al., 2011, p. 153)

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