7 Ideas to Reduce the Racial Retirement Gap

Ten states have already enacted "auto IRA" programs, with support from AARP. Under these programs, most employers who do not offer savings plans must enroll qualifying workers in a state-facilitated individual retirement account.

3. Auto-enrollment for all workplace plans

When you start a new job, “you’re still trying to figure out in week one or two where the bathroom is, where the paper clips are. You’re not thinking about what happens 20 or 30 years down the road,” Simms says. “Automatic enrollment is a biggie because it takes the pressure off a new employee to get to some of these important matters, to check those boxes.”

According to a 2023 Vanguard study, workplace retirement plans that automatically enroll employees when they become eligible have a 93 percent participation rate, compared to 66 percent when workers must voluntarily opt in. Numbers like that are why SECURE 2.0 includes an auto-enrollment mandate that takes effect in 2025.

The requirement, however, only applies to newly established 401(k) or 403(b) plans. Expanding it to cover all workplace plans “would probably make the biggest difference in terms of increasing participation rates and helping narrow that participation gap between low-wage and high-wage workers, between Black and white workers,” says Nari Rhee, director of the retirement security program at the University of California, Berkeley, Labor Center.

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4. Workplace emergency savings accounts

Research shows how having emergency savings today can shape retirement security in the future. One recent study found that during the pandemic, households with at least $1,000 in rainy-day funds were half as likely to withdraw from a retirement plan as those with nothing socked away.

That puts emergency-saving tools squarely in the mix for addressing retirement shortfalls. Major companies such as Starbucks and Delta Air Lines have added emergency savings to employee benefit options. Starting in 2024, SECURE 2.0 authorizes employers that offer retirement plans to automatically enroll most workers in parallel emergency savings accounts of up to $2,500, funded by payroll deductions.

Access to job-based rainy-day funds could have a particularly high impact for Black households, which generally have far less in emergency savings than white families and are more likely to tap retirement accounts when facing an unplanned expense.

“We are finding that a universal auto IRA with emergency savings greatly increases household wealth for Black and Hispanic households,” says David John, a senior strategic policy adviser with the AARP Public Policy Institute and co-author of a recent report on the proposal.

The December 2023 study, based on national survey data on household finances and predictive models of financial behavior, projected that a universal auto IRA with an emergency savings component would increase retirement net worth by 71 percent for white households and 89 percent for Black and Hispanic households.

5. A retirement savings match

The government uses tax breaks to encourage saving, with bigger deductions for bigger contributions (up to caps set by the IRS). That steers the biggest benefit to higher earners who can most afford to save, Rhee says. “We need to restructure the subsidies so that more of the tax benefits go towards low-income households that actually need the help.”

SECURE 2.0 takes a step in that direction by revamping one tax rule that does target lower earners. The Saver’s Credit provides a tax credit of up to $1,000 for low-  and moderate-income people who make qualifying contributions to a retirement account. In 2027, it will become the Saver’s Match, a federal matching contribution of up to $1,000 deposited into the recipient’s IRA or workplace plan (up to $2,000 for a couple who file taxes jointly and both make qualifying retirement contributions).

Along with directly boosting participants’ nest eggs, the Saver’s Match loosens income requirements for eligibility. And unlike the current credit, it will be refundable, meaning you can get the full amount you are due even if it exceeds your tax bill.

Wilson says the Saver’s Match is “the best thing about SECURE 2.0.” Rhee also praises the new rule but says the government could use matches even more to level the playing field in tax treatment of retirement savings. “We give so much money to the richest households to save for retirement, and we’re still just providing a pittance for low-wage workers,” she says.

6. A higher minimum wage

The more you earn, the more you can save. That fact is a hurdle for workers in low-wage jobs, a disproportionate share of whom are Black.

“We want to enhance households’ ability to save. That means raising wages and lower expenses,” says Naomi Zewde, an assistant professor at the UCLA Fielding School of Public Health who studies health and wealth inequality.

The federal minimum wage has been $7.25 an hour since 2009. Thirty states, Washington, D.C., and Puerto Rico have higher standards, ranging in 2024 from $8.75 to $17 an hour, and dozens of cities have enacted their own increases. While low-wage workers experienced substantial pay growth during the pandemic, 14 percent of U.S workers — about 19.5 million people — still earn less than $15 an hour, including 18 percent of Black and Hispanic workers and 12 percent of white workers, according to tracking by the Economic Policy Institute.

Raising the minimum doesn’t just benefit the very lowest-earning workers, says Karen Smith, a senior fellow in the Income and Benefits Policy Center at the Urban Institute — it can have a ripple effect, boosting earnings up the pay scale.

“These higher earnings would increase workers’ ability to save for retirement, save to purchase a home, increase Social Security benefits that depend on lifetime earnings,” she says.

Critics of raising the minimum wage say higher labor costs will increase unemployment and hurt small companies, although business opposition to the idea has softened in recent years. Smith says data from cities that have increased their minimum wage shows a “relatively small negative impact on employment,” while reducing wage inequality “has a big impact on reducing the racial income gap in retirement.” 

7. More affordable student loan repayment

Due in large part to racial disparities in income and family wealth, Black students are more likely than white peers to take out a college loan and typically must borrow larger amounts, the St. Louis Fed found in a November 2022 study.

They also have a harder time paying it back. Four years after graduating, the average Black borrower owes 105 percent of their student loan — that is, more than they borrowed in the first place — compared to 73 percent for white grads, according to Department of Education data.

That debt can exacerbate wealth inequality because after borrowing more to finance higher education, most Black workers “are still paid less than their white counterparts with similar education levels,” says Dania Francis, an assistant professor of economics at the University of Massachusetts Boston. “Eliminating the racial student loan debt gap would help improve the racial retirement savings gap by freeing up more disposable income for Black workers to contribute to retirement savings.”

Greater access to income-driven repayment plans can help by making monthly student loan payments more affordable for lower earners. The federal government is rolling out a new plan, Saving on a Valuable Education (SAVE), that expands eligibility for income-driven repayment.

The Department of Education says SAVE will cut total lifetime student loan payments by 40 percent on average for qualifying borrowers and by 50 percent for those who are Black, Hispanic and Native American.