U.S. employers and the federal government devote more than 1.5% of GDP annually toward promoting defined contribution retirement saving. We study the distributional and lifetime impact of these savings incentives across racial groups using a new employer-employee linked data set covering millions of Americans. The average contribution rate of Black and Hispanic workers is roughly 40% lower than that of white workers. The rich and the children of the rich save more; racial differences in own and parental incomes account for a large share of the racial contribution gaps. Tax and employer matching subsidies further amplify these saving differences by channeling more resources to those who save more. We estimate that breaking the link between contribution choices and saving subsidies, through revenue-neutral reforms, could reduce racial gaps and intergenerational persistence in wealth.
Who Benefits from Retirement Saving Incentives in the U.S.? Evidence on Racial Gaps in Retirement Wealth Accumulation
Published: 2024
Abstract
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Key Findings
- U.S. employers and the federal government devote more than 1.5% of GDP annually to promote retirement saving in Defined Contribution accounts.
- The average contribution rate of Black and Hispanic workers is roughly 40% lower than that of White workers. While approximately half of this difference can be explained differences in age and income between groups, substantial differences remain between workers of difference races but with the same age and income. Those who save less receive less in matching subsidies and favorable taxation as a result.
- We find that parental income matters for saving: individuals with richer parents save more. This, combined with stark racial differences in parental income, make access to parental resources a contributory factor to the racial wealth gap.
- Breaking the link between contribution choices and saving subsidies, through revenue-neutral reforms, would significantly reduce racial disparities and intergenerational persistence in wealth accumulation.