Mortgage News - Retirees Face Significant Impact From Racial Wealth Gap, Research Reveals

Retirees Face Significant Impact From Racial Wealth Gap, Research Reveals

Mortgage News June 15, 2023

A recent study from the Wharton School of the University of Pennsylvania reveals that retirement replacement rates, which indicate the income seniors can replace after retiring, have been greatly affected in recent years, with a disproportionate impact on Black Americans.

The research paper, compiled by Harvard University scholars, highlights that the median real wealth for families with a white household head aged 50 or above decreased from $260,000 in 2000 to about $172,000 in 2019. In contrast, families with a Black household head experienced a decline from approximately $72,000 to $24,000 during the same period.

The authors of the study, Karen Dynan and Doug Elmendorf, attribute this shift to a significant decrease in the number of families with defined benefit (DB) pensions. These pensions, traditionally offering substantial retirement income, have been increasingly replaced by defined contribution (DC) plans, where employees contribute to their retirement funds, often with employer matches.

Harvard researchers stated that the decline of defined benefit pensions has had a greater impact on these households.

The researchers noted that despite expectations that families without defined benefit pensions would save more on their own, this is not the case. They emphasized that the challenge of attaining sufficient retirement income is particularly significant for households with Black heads, as they are notably less likely to have defined benefit pensions.

According to Amir Kermani, a finance and real estate professor at the University of California, Berkeley, and Francis Wong, an economics professor at the Ludwig-Maximilian University of Munich, housing wealth constitutes approximately 40% of the average net wealth of Americans at retirement age.

According to a recent presentation by professors, addressing the disparity in housing returns could potentially reduce the gap between Black and white individuals’ primary housing wealth at retirement by half of its current magnitude.

The professors further explained that approximately half of this gap can be attributed to higher rates of distressed sales among Black homeowners.

The inequitable impact on Black Americans and people of color extends to the reverse mortgage industry as well.

A report published earlier this year by the National Consumer Law Center (NCLC) highlighted issues related to servicing and a lack of options for mitigating losses, which have hindered the reverse mortgage product from reaching its full potential. As a result, reverse mortgages have unfortunately resulted in foreclosure more frequently than they should have.

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Retirees Face Significant Impact From Racial Wealth Gap, Research Reveals

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