What would a $15 minimum wage in U.S. mean in retirement?

One of the many myths about the minimum wage is that it mainly helps teenagers. That is false, but also ironic – because one of the groups that would be helped most by a higher minimum wage is seniors.

The fate of the proposal by Democrats in U.S. Congress to boost the minimum wage from $7.25 to $15 is not clear, but we do know this: if approved, this legislation would improve the retirement outlook for millions of people of color and those with low wages. It also would improve the financial outlook of the Social Security trust funds, which are facing a solvency problem around 2034.

Wage inequality and flat wage growth are primary culprits in the uneven retirement landscape we now face – and the racial gap in retirement wealth is especially stark. In 2019, the median net wealth – including home equity – of white households over age 65 was $326,170, compared with just $75,190 for Black households, and $63,560 for Latinos, according to the analysis of Federal Reserve data by the Joint Center for Housing Studies of Harvard University.

A majority of Black and Latino retirees have trouble covering basic living expenses, according to the Elder Index, a data set from the University of Massachusetts Boston.

The racial wealth gap in retirement is not only a matter of today’s low wages. It stems from historic racism in the labor market dating all the way back to slavery, Jim Crow-era Black Codes, redlining practices, and more. And erasing the gap will take more than a higher minimum wage. For one thing, it would be enormously helpful to boost Social Security benefits at the low end of the income scale.

The proposal for “baby bonds” now circulating in Congress also could help over time – the idea here is to create a federal program of baby bonds, which would provide every child with a government-funded trust account at birth, starting with a $1,000 contribution; those born into lower-wealth families would receive more contributions over time, and the accounts would benefit from compound interest growth.

HOW $15 PER HOUR HELPS

Steam rises from a vent outside the U.S. Capitol on the day the House of Representatives is expected to vote on legislation to provide $1.9 trillion in new coronavirus relief in Washington, U.S., February 26, 2021. REUTERS/Kevin Lamarque/File Photo

A $15 minimum wage would translate into a raise for nearly one-third of Black Americans and one-quarter of Latinos, according to the Economic Policy Institute. The group’s research also indicates that only 10% of minimum wage earners are teenagers.

The advocacy group Social Security Works – working with Social Security data – calculates that a single worker who earns the current minimum wage for her entire life and claims Social Security benefits this year at her full retirement age would receive a monthly benefit of $979.80. With a lifetime income of $15 per hour, her monthly benefit would be $1,409.60. That is considerably higher – and it is fairly close to the average retirement benefit paid in 2019 – $1,503.

A higher minimum wage also would improve the long-range solvency woes of the Social Security trust funds. The program is funded mainly by the 12.4% payroll tax, which is split evenly by workers and employers, so the trust fund’s health is highly sensitive to improvements – or deterioration – of the payroll tax base. The Social Security trustees report last year indicated that faster wage growth could improve the program’s long-range finances by as much as one-third.

“In short, updating the minimum wage is a win for working families, for the economy, and for our Social Security system,” said Nancy Altman, president of the advocacy group Social Security Works, which is promoting the wage hike.

We still need other reforms to Social Security that would improve benefit adequacy. As a candidate, President Joe Biden proposed reforms that include crediting caregivers in their benefits for time spent out of the workforce, expanding benefits for widows and seniors who had collected payments for 20 years and a more generous yardstick for determining Social Security’s annual cost-of-living adjustment.

A good case can be made to revise Social Security’s actuarial adjustments for early and late claims. The system revolves around the full retirement age (66) – the age when you can receive 100% of your earned benefit. Benefits are reduced by 6.7% for every 12 months before that age and increased about 8% after age 66 for every 12 months up until age 70.

The current formula has its origins in changes to Social Security made in the 1950s, with some tweaking along the way – the last revisions were made in 1983. Since then, actuarial factors have changed, especially life expectancy. In particular, the early claiming reductions should be reduced – a change that would be especially helpful for older workers forced into retirement by the pandemic.

At the same time, raising the full retirement age is just about the worst reform idea I can think of. Retirement ages already are rising gradually to 67 from 65 under the changes enacted in 1983. Further increases would only increase retirement wealth inequity and have a disproportionate impact on people of color, who tend to live shorter lives and often need to file for Social Security at earlier ages.

When it comes to reforming Social Security, we should do no harm.

(Writing by Mark Miller; Editing by Matthew Lewis)

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