Understanding Racial Disparities in Financial Preparedness for Retirement
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Abstract
We estimate a model of labor supply and savings over the life cycle where key parameters — including the interest rate, the degree of risk aversion and the fixed cost of working, and the stochastic processes of health, mortality, and wages — are all allowed to vary by race. We find the Black-white gap in the labor force participation rate at age 62 is mostly due to the racial differences in health and the fixed cost of participation, and the Black-white gap in wealth at age 62 is mostly due to the racial wage gap. In addition to the racial differences in preferences and skills, labor market discrimination against Blacks could also contribute to their higher fixed cost of participation and lower wages. This suggests that reducing the discrimination faced by Blacks in the labor market could significantly reduce the racial disparities in retirement preparedness.
Key Findings
- The Black-white gap in the labor force participation rate at age 62 is mostly due to the racial differences in health and the fixed cost of working, a parsimonious measure that includes the transportation cost, the psychological cost, and any other costs associated with working.
- The Black-white wealth gap at age 62 is mostly due to the racial wage gap.
- The lower interest rate (return to assets) faced by Blacks also contributes to the racial wealth gap.
- Reducing the racial discrimination faced by Blacks in both the labor and the financial markets could go a long way in addressing the racial disparities in financial preparedness for retirement.
Citation
Guo, Junjie, and Ananth Seshadri. 2022. “Understanding Racial Disparities in Financial Preparedness for Retirement.” Ann Arbor, MI. University of Michigan Retirement and Disability Research Center (MRDRC) Working Paper; MRDRC WP 2022-445. https://mrdrc.isr.umich.edu/publications/papers/pdf/wp445.pdf
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Paper ID
WP 2022-445Publication Type
Working Paper