People of colour and white households have very different levels of income and wealth, but state-run retirement programmes are trying to help workers get on the same level.
According to the U.S. Bureau of Labor Statistics, as many as 67% of private-sector workers had access to retirement plans in 2020. But a large number of workers are still left out of these programmes, and workers of colour are often the ones who miss out.
According to AARP, approximately 64% of Hispanic employees, 53% of black employees, and 45% of Asian American employees do not have a workplace retirement plan. AARP also found that small employers are less likely to give their employees retirement plans. About 78% of people who work for companies with fewer than ten employees don’t have access to a plan.
Individual retirement account savings programs, helped by the government, have stepped in to try to close the savings gap between whites and blacks.
The Illinois state treasurer, Michael Frerichs, said, “It’s early, but the idea was to close the retirement savings gap for people who are left out.”
Those people tend to be low-income workers and workers of colour.
The Center for Retirement Initiatives at Georgetown University says that 16 states have passed new programmes to help private-sector workers save, and 11 of those states have auto-IRA programs. The centre found that these state-run programmes to help people save for retirement had more than $735 million in assets as of the end of January.
J. Mark Iwry, a nonresident senior fellow at The Brookings Institution, said that one of the main goals of the nationwide movement to have states support the private pension system has been to close the savings gaps between white-collar and blue-collar workers and between people of different races and genders.
He wrote the “auto-IRA” bill with former President Barack Obama. The goal was to make it easier for people to save for retirement by automatically enrolling them in IRAs. He also started the nationwide movement to help people save for retirement more than 20 years ago.
How things work
State-run programmes to help people save for retirement don’t try to compete with big companies’ retirement plans. Instead, they focus on small businesses, which aren’t well taken care of.
Most of these state programmes require businesses to either offer a retirement plan at work or help their employees sign up for the state’s programme.
Craig Copeland, director of wealth benefits research at the Employee Benefit Research Institute, says that most savings programmes are Roth IRAs, which means that employees save money after taxes. They can put away 4% to 6% of their pay through an automatic payroll deduction.
The programmes are not paid for by the employers themselves, and savers’ accounts are managed by an investment firm.
When you save with a Roth IRA, the money grows tax-free and can be taken out tax-free in retirement as long as you meet certain conditions. In case of an emergency, participants can take their own contributions but not their earnings without paying taxes.
Frerichs says that about half of the people who take part in the Secure Choice programme in Illinois are black or Hispanic. The programme has been running since 2018, and it is now open to businesses with as few as five employees.
“We’re getting the people who fell through the cracks and don’t have a safety net,” he said, adding that this includes workers at bars, restaurants, and grocery stores.
The automatic payroll deduction is one of the best things about auto-IRA plans. “This is the “set it and forget it’ way of thinking,” Fiona Ma, the state treasurer of California, said. Since it’s easy for workers to spend the money that goes into their checking accounts, putting some of it straight into their retirement accounts helps their funds grow.
Katie Selenski, the program’s executive director, says that workers who join CalSavers start saving 5% of their pay by default, and that amount goes up by 1% every year until they are saving 8% of their salary.
“Being able to save money and have it grow has been a game-changer in trying to close the wealth gap,” Ma said. She said that in California, two out of every three people who work and are eligible for the programme are people of colour.
On January 1, the state’s CalSavers programme became available to businesses with one to four workers. By the end of 2025, employers who don’t already offer a 401(k) plan to their workers will have to have a payroll deposit savings plan that lets their workers join CalSavers.
The difference in wealth between households of colour and white households is the result of decades of discrimination, such as redlining, which means that people who want to buy a home in a minority neighbourhood can’t get a loan. So, these state IRA programmes are a step towards making up the difference.
With a measure in the Secure Act 2.0, lawmakers have pushed for more progress. Starting in 2027, low-income workers who save in a qualified retirement account would get a matching contribution from the federal government thanks to a provision in the proposal. This match would be up to 50% of contributions up to $2,000, or a maximum of $1,000 per person.
Monique Morrissey, an economist at the Economic Policy Institute, said, “If low-income workers can save $2,000 and get a 50-cent match for every dollar, that gives them a big boost.” “That will help, but it won’t happen for a few years. So, right now, we can see that these [auto-IRA] plans to make things easier.