Retirement Security For Latinos
Bolstering Coverage, Savings and Adequacy
Too many Americans — and too many Latinos in particular — are not saving adequately for retirement. Half of all households nearing retirement have only $10,000 or less in an employer-based 401(k)-type plan or Individual Retirement Account (IRA). Among Hispanics, the figures are even more astonishing: over half of Hispanic households aged 55 to 59 have no accumulated assets in a 401(k) or IRA. A variety of other measures confirm that Latinos are disproportionately likely to be undersaving. This report discusses ways to address this problem.
Too many Americans — and too many Latinos in particular — are not saving adequately for retirement. Half of all households nearing retirement have only $10,000 or less in an employer-based 401(k)-type plan or Individual Retirement Account (IRA). Among Hispanics, the figures are even more astonishing: over half of Hispanic households aged 55 to 59 have no accumulated assets in a 401(k) or IRA. A variety of other measures confirm that Latinos are disproportionately likely to be undersaving.
Only one in two Hispanics has a basic transaction account, such as a checking or savings account. When surveyed, 43 percent of Hispanic workers described their personal knowledge of investing or saving for retirement as “knowing nothing,” compared to 12 percent for all workers. According to the U.S. Census Bureau, Hispanic Americans are the fastest growing segment of the population at or near retirement. The number of Hispanics aged 65 and over will increase from 1.7 million in 2000 to a projected 15.2 million by 2050. As a share of the retirement age population, Hispanics will increase from 4.9 percent in 2000 to a projected 17.5 percent in 2050.
Although the challenge of under-saving among Latinos may seem substantial, a growing body of empirical evidence points the way to a solution. Three common sense, empirically supported steps to increase retirement saving include:
Making it easier to save. Work, family, and other more immediate demands often distract workers from the need to save and invest for the future. Those who do take the time to consider their choices find the decisions quite complex: individual financial planning is seldom a simple task. In the face of such difficult choices, many people simply procrastinate and thereby avoid dealing with the issues altogether, which dramatically raises the likelihood that they will not save enough for retirement. Disarmingly simple concepts — such as changing the default options in 401(k) plans and making it easy to save part of an income tax refund — have the potential to cut through this Gordian knot and improve retirement security through a set of common sense reforms. The evidence described in our report suggests that such changes may have particular benefit for Latino workers.
Increasing the incentives to save. The federal tax system provides little incentive for participation in tax-preferred saving plans to middle- and lower-income households, those who need most to save more for retirement and whose contributions would most likely represent an actual increase in savings. Furthermore, the rules governing many means-tested government programs entail steep implicit taxes on saving, further diminishing any incentive for moderateand low-income households to save. Savings incentives can be strengthened by revamping the Saver's Credit, which helps to correct the “upside-down” structure of tax incentives for retirement saving, and by reforming the asset tests associated with means-tested programs. These reforms may be especially effective at bolstering incentives for Hispanics to save; Hispanics on average have lower incomes than others and therefore currently receive little or no incentive to save from the tax code, while being more likely to face steep implicit taxes on savings from asset tests. Data from the Census show, for example, that 53 percent of all Hispanic workers reported less than $25,000 in earnings in 2001, but only 25 percent of non-Hispanic Whites earned as little.
Promoting financial counseling. Targeted and tailored financial counseling appears to be an effective means to encourage retirement savings and sound investment choices, especially for middle- and lower-income workers. Yet the majority of workers have not even attempted to figure out how much they will need to save for retirement. Possible options to improve financial counseling and education for middle- and lowerincome workers include grants to community tax preparation sites to provide opportunities for individual retirement savings counseling and assistance (perhaps in the form of a tax credit) to employers who provide employees with access to an independent financial counselor once a year.
This paper has five sections. The first section documents retirement savings and adequacy trends among Latinos. The second section explores ways of making it easier for Latinos to save. The third section examines reforms to increase the incentives for Hispanics to save. The fourth section discusses the importance of financial education in this effort to bolster retirement savings for the Latino community. The final section offers conclusions.