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It's a bad news, good news situation for
minorities when it comes to saving for retirement. The bad news: African-Americans and
Hispanic-Americans, the two largest minority groups, are behind the rest of Americans when
it comes to preparing for retirement, meaning a large number are likely to be in poverty
in retirement.
The good news: a growing number of younger
members of these groups recognize they're responsible for their future and are jumping on
the savings bandwagon.
"A rising tide raises all boats" is the phrase
pundits and politicians often use to describe the effects of the economic boom on the
American workforce as a whole. To a certain extent, this adage holds true. But, it masks
the startling fact that minority savings rates are dangerously low, and millions could end
up living in poverty in retirement.
Only 62 percent of blacks and 52 percent of Hispanics
report having saved some money for retirement, according to the Employee Benefit Research
Institute's (EBRI) 2000 Retirement Confidence Survey. In comparison, 80 percent of the
general population has set some money aside.
Further, without a social retirement program like Social
Security - which is showing signs of wear and tear - 71 percent of African-American
families and 75 percent of Latin families would live in poverty, according to a National
Urban League report. Comparatively, 63 percent of white families would live in poverty
without Social Security.
But, this trend can't fully be explained away by wage
discrepancies. A 1998 study conducted by Ariel Capital Management and Charles Schwab &
Co. compared the savings habits of 605 blacks and 607 whites, earning more than $50,000
annually. In the study, nearly three-quarters of African-Americans say their lack of
knowledge about investing is a reason why they don't save or invest more.
Let's take a look at the economic and cultural influences
driving the current savings rates, what the bright spots are and what might be done from a
policy standpoint so minorities don't find themselves high and dry in retirement.
"Them That Got"
In "Them That Got", soul singer Ray
Charles ponders getting ahead economically, singing: "If you gotta have somethin'/
before you can get somethin'/ how do you get your first is still a mystery to me…"
Charles conveys an undeniable truth about a capitalist
economy: Money makes money. The difficulty of getting that first "somethin'" is
a leading reason why African-Americans and Hispanic-Americans are so far behind in saving
for retirement.
For the most part African-Americans and Hispanic-Americans
occupy the lower strata of the U.S. economy. A higher percentage of these two groups work
at lower paying jobs, compared to the rest of the population. The $2,000 needed to make
the full annual contribution to an IRA, for example, often is needed to cover basic living
expenses.
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"The problem is that we've been
employees. … We've never been in the position to have discretionary income."
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| — Percy Bolton,
an African-American certified financial planner and President of Percy Bolton Associates
Inc. of Pasadena, Calif. |
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These two groups are also trying to shake off the legacy of
employment discrimination that has kept them in lower-paying jobs. Eighty-one percent of
blacks believe "racism continues to be a major obstacle for African-American wealth
creation," according to the Ariel/Schwab study. Forty-nine percent of whites believe
this to be true.
"The problem is that we've been employees, said Percy
Bolton, an African-American certified financial planner and President of Percy Bolton
Associates Inc. of Pasadena, Calif. "There are fewer business owners. … We've
never been in the position to have discretionary income."
When minority groups do have the income or opportunity to
save for retirement, they are often ambushed by a lack of education about the intricacies
of tax-deferred savings or equities.
Certified financial planner Marilyn Broussard, herself
African-American, said that's one of the biggest issues she faces when dealing with her
African-American clients. "I've found clients (have) a lack of knowledge about the
dynamics of compound interest," she commented.
Cultural Barriers
Aside from the economic disadvantages, there are a variety
of cultural factors that make saving a lower priority for blacks and Hispanics.
One of the biggest is family. Both blacks and Hispanics
have a strong sense of family and often expect wealthier family members to help those less
fortunate.
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"Many black families will trade
away a comfortable retirement to send their kids to college. For a lot of
African-Americans, a leisurely retirement is viewed as a luxury."
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| — Mellody
Hobson, president of Ariel Capital Management Inc. |
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In the Hispanic-American community, it's common for recent
immigrants to send a portion of their annual income to family in another country, says
Eric Rodriguez, senior policy analyst with the National Council of La Raza, a
constituency-based national Hispanic group. The EBRI survey shows that Hispanic-Americans
are the largest minority group to provide significant financial support to family/friends
outside of the household.
In the African-American community, many workers support
relatives or family with surplus cash rather than saving for retirement. Saving for a
child's college education ranks as a high saving priority among blacks age 35 or younger.
Yet, this investment in a younger generation is a
retirement investment, of a sort. Minority children are often expected, much more so than
white children, to support their parents in retirement. The better off the children are
economically, the better off the parents will be in retirement.
Indeed, about 45 percent of blacks expect to support aging
parents, while only 29 percent of whites have similar expectations, according to the 1999
Ariel/Schwab study.
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"I hear it a lot from blacks. The
person would express (savings) goals. They would back off from the goals on the statement
that 'The Lord will provide."
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| — Marilyn
Broussard, certified financial planner with Waddell & Reed. |
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"Many black families will trade away a comfortable
retirement to send their kids to college. For a lot of African-Americans, a leisurely
retirement is viewed as a luxury," said Mellody Hobson, president of Ariel Capital
Management Inc., in a statement.
Another factor at play in the African-American community is
religious fatalism. Traditionally, the church has been a central social and welfare
organization in the community. "I hear it a lot from blacks. The person would express
(savings) goals. They would back off from the goals on the statement that 'The Lord will
provide,'" Broussard said.
Bob Mizerak, national director of Seniors in Community
Service program with the National Urban League, admits "there's some validity"
in that assertion.
But, he also points out that in some neighborhoods,
churches have been a catalyst for saving. "Some churches are encouraging people to
start putting money in the bank and start investing," Mizerak said.
Often, savings are diverted to charity or providing for
other family and friends.
The Trust Factor
Another factor hindering both groups' ability to build
sizable retirement nest eggs is their affinity for conservative investments. Historically,
the stock market has had higher long-term returns than other investments, so it has been a
good place to get money to grow at a rate higher than inflation. However,
African-Americans and Hispanics have been woefully underrepresented in the equity markets.
"Our participation in stocks was very limited. It's
easier, I believe, for people to have the confidence to invest, if there were other people
in their circle who had invested," Broussard said.
That said, those blacks able to save and invest prefer
conservative investments like Treasuriess or rental real estate. Historically, blacks view
property ownership as a sign of financial freedom, Bolton said.
With many Hispanic-Americans, the challenge is to get them
to trust financial institutions in the first place. "They are distrusting of
financial institutions," Rodriguez said.
After that, it's a question of choosing the correct
investments. "Hispanics are the least likely to take financial risk for financial
gain," he said.
A final factor hindering both groups is a feeling that the
financial institutions don't understand how to tailor their message appropriately. For the
Hispanic-American community, that means offering literature in Spanish. For
African-Americans, that could mean having a black representative talk about retirement
programs.
In both cases, the financial institutions need to recognize
that these two groups often choose to deal with a financial institution based on the
relationship with the representative.
However, both Rodriguez and Broussard suggest that few
blacks or Hispanics work for financial services firms in key investment or sales roles.
Bright Spots
Despite the grim picture, there are some bright spots.
Two factors work in the Hispanic community's favor. The
first is a high rate of small business ownership. That can serve as an engine to drive
personal wealth creation.
The second is that this group is willing to delay
consumption. "There is an ability to put money away. We see that as very
positive," Rodriguez said. "The community is a good bet for the (financial
services) industry."
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"There is an ability to put money
away. We see that as very positive. The Hispanic community is a good bet for the
(financial services) industry."
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| — Eric
Rodriguez, senior policy analyst with the National Council of La Raza. |
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In the African-American community, a growing number of
young blacks realize they're responsible for their own financial security and are starting
to save for retirement earlier.
The results from the Ariel study confirm this trend. When
asked how likely they were to begin investing in stocks or mutual funds in the coming
year, 62 percent of African-Americans 35 years old or younger said they were somewhat
likely to very likely. But, of respondents 50 or older, only 45 percent said they were
somewhat likely or very likely.
"Among younger professional blacks, I see a
difference. They do begin to save for retirement. They are taking the analysis and
projections that planners can do more seriously," Broussard said.
Policy Implications
The government solutions to increasing savings rates in
both the Hispanic- and African-American communities mostly revolve around making it easier
for these groups to save.
Simply raising contribution limits to IRA and 401(k) plans
won't help these folks.
A basic issue is access to retirement benefits. In the
Hispanic-American community, for example, employment rates are high, but few workers have
jobs with retirement benefits. The Portman-Cardin legislation currently before Congress
attempts to address this deficiency. The proposed law contains tax breaks for small
businesses, making it easier to offer retirement plans. It also offers catch-up
contributions that would allow older workers to put aside more money for their retirement.
One proposed program that has gotten favorable reviews is
Vice President Al Gore's Retirement Savings Plus private retirement savings accounts. The
key feature that many like is a government-matching contribution. Indeed, the matching
contribution could be a significant incentive for folks to save, Broussard said.
But, the government can't provide all the solutions; the
financial services industry needs to tailor appropriate messages for these communities,
both Broussard and Rodriguez say.
This fall, the Investment Company Institute and National
Urban League are rolling out a national education program entitled "Investing for
Success." The program is designed to address many of the issues raised in the
Ariel/Schwab study, said Derede McAlpin, manager of public information with ICI.
Specifically, the program aims to cover topics such as
developing realistic financial expectations, the benefits of dollar-cost averaging, the
benefits of diversification, securing your retirement, understanding risk reward, and the
importance of a long-term savings perspective.
In terms of improving trust of financial institutions,
home-grown service providers seem to do well.
For example, Rodriguez points out that Hispanic-run credit
unions have won acceptance among the Dominican community in the Washington Heights section
of New York City and among Chicanos in Arizona.
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