Retirement Tax Benefits Exacerbate Racial Inequities

In a current report co-authored with College of Chicago Professor Daniel Hemel, I described how our retirement tax system favors the wealthy disproportionately.

But it surely’s worse than that:  Our system of beneficiant tax subsidies for retirement financial savings—reminiscent of 401(ok) plans, different outlined contribution plans, and particular person retirement accounts (IRAs)—additionally exacerbates racial inequities. Due partially to those tax breaks, the hole between the typical retirement account balances of White households and Black and Hispanic households widened markedly over the past three many years.

In response to the latest Survey of Consumer Finances, White households held, on common, an account steadiness of $168,500 in 2019, whereas the typical steadiness of Black and Hispanic households was $38,300 and $27,300, respectively. And whereas 57 p.c of White households held retirement property, solely 35 p.c of Black households and 26 p.c of Hispanic households had financial savings in retirement accounts.

These estimates don’t embody conventional employer pension plans (often called outlined profit plans) however, nevertheless we slice the info, the image seems to be largely the identical.  The Federal Reserve estimates that the mixed worth of outlined profit plans, outlined contribution plans, and insurance coverage annuities totaled virtually $30 trillion, one of many largest components of household wealth within the first quarter of 2021. (The Fed’s estimates of pension entitlements exclude IRAs.)

White non-Hispanic households held 79 p.c of pension wealth, whereas 9 p.c was held by Black non-Hispanic households, 4 p.c by Hispanic households, and eight p.c by different racial or ethnic teams (together with individuals who determine as multi-race). In contrast, in 2019 about 65 p.c of households had been White non-Hispanic, 14 p.c had been Black non-Hispanic, 10 p.c had been Hispanic, and 11 p.c had been in different racial or ethnic teams.

How did retirement financial savings develop so massive? During the last three many years, Congress, largely via bipartisan tax changes, ratcheted advantages up. At present, retirement tax advantages are the biggest income tax expenditure on the books, costing a whole lot of billions of {dollars} a 12 months.

Not solely has Congress’ largesse stripped income from authorities coffers, nevertheless it additionally overwhelmingly benefited high-income savers, these most probably to have the discretionary earnings to place apart in tax-favored accounts. These high-income households are overwhelmingly White.

Congress now’s poised to extend its streak of poor retirement tax policy by creating much more beneficiant tax advantages that may largely profit high-income households. Congressional Democrats additionally plan to sort out one high-profile drawback, mega-IRAs. However mega-IRAs are merely a symptom of a extra severe illness:  our damaged retirement tax system. Addressing that may require a major reorientation in retirement policy, not token options that ignore the true drawback.

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