Shrinking Social Security’s Racial Gap – but Only a Little

Consider the myriad reasons Black Americans get 19 percent less from Social Security during their retirement years than White retirees.

Inequities in the labor market limit their job opportunities and earnings, which are the basis for determining how much they will get in their Social Security checks. Poorer health or the demands of caring for children or ill family members shortens careers and cuts into benefits.

Smaller benefit checks are also a problem because Blacks are less likely to marry. The strain on single workers’ finances spills over into old age if they lacked a higher-earning spouse who would get a bigger Social Security check.

Hispanics also get less – 14 percent less – for some of the same reasons, including lower pay and caregiving duties.

This very large racial gap in Social Security’s retirement benefits exists despite the progressive formula the government uses to try to even the playing field for workers with lower earnings.

A new Urban Institute study finds that making the formula even more favorable to low-income workers would be the most effective way to close the gap in benefits between Black and Hispanic retirees and their White counterparts.

However, the researchers concluded that even a more generous benefit formula would not do as much to shrink the racial gap as an increase in Black and Hispanic workers’ earnings. 

The in-depth analysis compared the future impact of numerous reforms that have been proposed by Congress or policymakers. The estimates apply to the benefits that would kick in when members of Generation Z are retiring.

One change in the formula analyzed in this study would disproportionately increase Blacks’ and Hispanics’ benefits by about 4 percent to 5 percent. Black retirees would get $23,800 more during their retirement years and Hispanics $20,500 more. Whites would get only $800 more.

The reform would close the gap by increasing future retirement benefits for lower-income workers and trimming them at the top. Social Security uses a tiered formula. Currently, under the first tier, Social Security benefits equal 90 percent of a worker’s average monthly earnings under $1,174 if he retires at the program’s full retirement age. The first tier would become more generous, increasing to 95 percent of earnings under $1,503.

To reduce higher-earning workers’ future benefits, the formula would drop from 15 percent currently to 5 percent of the monthly earnings above $7,078 that Social Security would replace.

Two other reforms would also reduce the gap but by smaller amounts. One proposal, which mostly helps women, gives working parents credit in their Social Security earnings records for taking care of a dependent child more than 80 hours per month. A minimum benefit pegged to the federal poverty level is geared toward helping workers with very low incomes or spotty employment histories.

On the tax side, eliminating federal income taxes on all Social Security benefits is a popular idea that appeared in a 2016 bill in Congress. But eliminating taxes would disproportionately help White retirees, the researchers found, because the taxes apply only to people with middle and high incomes.

Their takeaway: “Changing Social Security alone seems unlikely to narrow existing racial and ethnic gaps substantially.”

Achieving equity for Black and Hispanic retirees, they said, would have to start with expanding opportunity for workers and increasing pay equity.

To read this study by Richard Johnson and Karen Smith, see “How Can Changes to Social Security Improve Benefits for Black and Hispanic Beneficiaries?”

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 assumes 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.