Unlimited Wealth

[Janne Desir]

Justhow large and persistent are these racial wealth gaps? As figure 1 shows, median net worth for white households has far exceeded that of Black households through recessions and booms over the last thirty years. While movements in white wealth are easier to see due to the larger scale, during the most recent economic downturn, median net worth declined by more for Black families (44.3 percent decline from 2007 to 2013) than for white families (26.1 percent decline). In fact, the ratio of white family wealth to Black family wealth is higher today than at the start of the century.

Wealth is the sum of resources available to a household at a point in time; as such it is clearly influenced by the income of a household, but the two are not perfectly correlated. Two households can have the same income, but the household with fewer expenses, or with more accumulated wealth from past income or inheritances, will have more wealth. Figure 3 shows median net worth at different points in the family income distribution. What is immediately evident is that the racial wealth gap remains even for families with the same income. For those in the top 10 percent by income (only 3.6 percent Black), the racial wealth gap is still quite large: median net worth for white families in this income group is $1,789,300 versus $343,160 for Black families. A racial gap exists in every income group except the bottom quintile (23.5 percent Black), where median net worth is zero for everyone.

All of this matters because wealth confers benefits that go beyond those that come with family income. Wealth is a safety net that keeps a life from being derailed by temporary setbacks and the loss of income. This safety net allows people to take career risks knowing that they have a buffer when success is not immediately achieved. Family wealth allows people (especially young adults who have recently entered the labor force) to access housing in safe neighborhoods with good schools, thereby enhancing the prospects of their own children. Wealth affords people opportunities to be entrepreneurs and inventors. And the income from wealth is taxed at much lower rates than income from work, which means that wealth begets more wealth.

Well-designed taxes on inheritances, reforms to capital income taxation, and even taxes on wealth could be part of the solution. Inheritance or estate taxes in particular could enhance equality of opportunity, especially if revenues were invested in programs that give low-income children a better chance at economic success.

New data from the 2019 Survey of Consumer Finances (SCF) show that long-standing and substantial wealth disparities between families in different racial and ethnic groups were little changed since the last survey in 2016; the typical White family has eight times the wealth of the typical Black family and five times the wealth of the typical Hispanic family.

This FEDS Note explores patterns in wealth holding by race and ethnicity, as well as some key issues related to the accumulation of wealth, using new data from the 2019 Survey of Consumer Finances (SCF). We first analyze total wealth among families classified, according to their self-identification during the interview, as White non-Hispanic, Black or African American non-Hispanic, Hispanic or Latino, and other or multiple race (we will henceforth refer to these groups as White, Black, Hispanic, and other, respectively).2 Wealth is defined as the difference between families' gross assets and their liabilities.3 We will describe patterns at the median (the typical household within each group) and at the mean (the average among households in each group).

The SCF data provide a snapshot of families' wealth at a point in time. This point-in-time observation is a result of many complex societal, governmental, and individual factors that play out over the life cycle and even across generations. Among other factors, inter-generational transfers, homeownership opportunities, access to tax-sheltered savings plans, and individuals' savings and investment decisions contribute to wealth accumulation and families' financial security.4 In the remainder of this note, we use the SCF to shed light on how these factors differ by race and ethnicity and how patterns in wealth-holding have changed since the Great Recession.5 Before we move on, we note that families were primarily interviewed for the 2019 SCF before the onset of the COVID-19 pandemic and associated changes to the economy.6 Therefore, we urge readers to exercise caution in making any inferences based on the patterns described in this Note about how US families are faring in 2020.

Despite growth over the last two surveys, the typical White family and the typical Black family have yet to recover to their pre-Great Recession levels of wealth. Over the entire 2007-2019 period, wealth fell by 11 percent for the typical White family and by 7 percent for the typical Black family. Only the typical Hispanic family has seen an increase in wealth relative to before the Great Recession, rising by about 39 percent, while the typical other family's wealth is about unchanged since before the Great Recession.

While these cumulative changes in wealth from 2007-2019 may seem striking, there are two important issues related to the interpretation of changes over time in the SCF from Figure 2, particularly over the full time period.

First, the SCF interviews a different random sample of US families every three years. The same family does not appear in consecutive SCFs. Therefore, the appropriate interpretation of the survey-to-survey changes for a particular group, or cumulative changes over multiple surveys for a particular group, is about the typical (or average) family within that group. The inappropriate interpretation is changes for a specific family over time.

Second, the types and number of families that make up each race or ethnicity group change over time as the underlying population of US families changes. Among other factors, population aging, changes to immigration flows, and the evolution of self-identification patterns alter the composition of each race or ethnicity group between surveys. For example, in the 2016 survey, the other or multiple race group was composed of 50 percent reporting more than one racial identification and 30 percent reporting Asian, whereas in 2019 these figures changed to 69 percent and 23 percent, respectively. Therefore, appropriately interpreting changes in a group's wealth, especially over longer time periods, requires acknowledging compositional shifts within each group. In particular, the robust growth in Hispanic wealth over the last two surveys and the marked slowdown of growth for other families in 2019 are at least partially attributable to compositional shifts in the types of families that make up these groups.

Wealth accumulation generally follows a predictable life-cycle arc, wherein families generally accumulate wealth during their working years, in preparation for retirement. Table 1 displays median wealth by age category based on the age of the reference person, separately, for White, Black, Hispanic, and other families.7 Following the expected life-cycle savings patterns, within each race or ethnicity group median wealth is sharply higher for middle-aged families (35 to 54) compared to young families (under 35) and is highest among older families (55 and over).

Within each age group, the SCF data indicate large differences in wealth across racial and ethnic groups. Even among young families who have had relatively little time to accumulate wealth, there are sizeable differences in wealth by race and ethnicity, most starkly between young Black and young White families. The median young Black family has almost no wealth ($600). In contrast, the median young White family has a wealth of $25,400. Young Hispanic and other families fall in between, with $11,200 and $13,500 in median wealth, respectively. Differences in parental resources may contribute to these early life cycle gaps, which we will discuss in the next section.

In absolute terms, the gaps in median wealth between White and non-White families widen considerably at older ages. For example, amongst families under 35, White families have between $11,900 and $24,800 more in median wealth than Black, Hispanic, or other families. For families over age 55, the gaps widen to between $101,700 and $261,100. In proportional terms, however, the gaps are relatively stable or diminish with age. With respect to the Black-White gap at middle and older ages, the median wealth of White families is four to six times greater than the median wealth of Black families. These within-age ratios are somewhat lower than the Black-White ratio of nearly eight for all families combined (implied by Figure 1).

Wealth-holding can differ across groups due to the intergenerational transmission of wealth. There are numerous ways families can transmit wealth and resources across generations. Families can directly transfer their wealth to the next generation in the form of a bequest. They can also provide the next generation with inter vivos transfers (gifts), for example, providing down payment support to enable a home purchase or a substantial wedding gift. By some estimates bequests and transfers account for at least half of aggregate wealth (Gale and Scholz 1994), have recently averaged 3 percent of total household disposable personal income (Feiveson and Sabelhaus 2018), and account for more of the racial wealth gap than any other demographic or socioeconomic indicator (Hamilton and Darrity 2010).8 In addition to direct transfers or gifts, families can make investments in their children that indirectly increase their wealth. For example, families can invest in their children's educational success by paying for college or private schools, which can in turn increase their children's ability to accumulate wealth. For these reasons, wealth (or a lack thereof) can persist across generations and reflect, among other factors, a legacy of discrimination or unequal treatment in housing, education, and labor markets.9

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