Understanding Racial Disparities in Financial Preparedness for Retirement

Abstract

We estimate a model of labor supply and savings over the life cycle where key parameters — including the interest rate, the degree of risk aversion and the fixed cost of working, and the stochastic processes of health, mortality, and wages — are all allowed to vary by race. We find the Black-white gap in the labor force participation rate at age 62 is mostly due to the racial differences in health and the fixed cost of participation, and the Black-white gap in wealth at age 62 is mostly due to the racial wage gap. In addition to the racial differences in preferences and skills, labor market discrimination against Blacks could also contribute to their higher fixed cost of participation and lower wages. This suggests that reducing the discrimination faced by Blacks in the labor market could significantly reduce the racial disparities in retirement preparedness.