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The Next America | Economic Empowerment

If Your Grandma Gave You Savings Bonds for Your Birthdays, You Just Might Be White

Thomas Piketty’s findings about inherited wealth driving economic inequality may also hold true for racial gaps.

(Shutterstock)

How's this for a shocking statistic: Almost 40 percent of African-Americans and more than one-third of Latinos have no financial assets at all. No money in the bank, no retirement savings, no stock-market investments—nothing. Whites are more likely to possess (and possess more of) every kind of asset, including homes.

French economist Thomas Piketty recently made headlines by arguing that inherited wealth will drive inequality over the long term. A new report from the Center for Global Policy Solutions, a Washington nonprofit, and university research partners finds that inheritance also explains much of the racial wealth gap.

"The fact of the matter is, yes, income matters. But it doesn't explain the entirety of the story," says Rebecca Tippett, director of Carolina Demography at the Carolina Population Center at UNC-Chapel Hill. Even when minorities and whites bring home similar paychecks, minorities have lower net worth.

 

Some policy prescriptions for helping low-income families get ahead—such as encouraging people to earn credentials that lead to better paying jobs—may not do much to address the racial wealth gap. Black, college-educated heads of households have lower net worth than white heads of households who dropped out of high school, says Darrick Hamilton, associate professor at Milano—The New School for International Affairs, Management, and Urban Policy. Both Tippett and Hamilton worked on the report.

The research team analyzed 2005, 2009, and 2011 data from the U.S. Census Bureau's Survey of Income and Program Participation (a huge national sample) to figure out the net worth held by different racial and ethnic groups.

They found that the wealth gap actually gets wider the less income families earn (see chart below). Among the one-fifth of households with the highest incomes, black households have 43 percent of the net worth of white households, and Latinos have 34 percent. But among the one-fifth of households with the lowest incomes, black households have less than 1 percent of the net worth of white households, and Latinos have 7 percent.

(Center for Global Policy Solutions)So what's going on? It's not that white families are better at saving more of the income they earn, Hamilton says—although white families are more likely to have savings accounts.

"It's actually ownership of an asset at a key point in life—an asset that's going to appreciate, and is going to lead to some sort of forced savings," Hamilton says. Often, assets young people receive from family members become powerful sources of future wealth. Think of parents paying the down payment on their daughter's condo, or grandparents creating an investment account for their grandson. Think of the kind of assets that slowly and automatically increase in value for the rest of a person's life.

White families, even those living on very low incomes, are more likely to have assets other than their paychecks to turn to into an emergency. They're also more likely to have a diverse mix of assets, so they're more cushioned from economic shocks. The housing collapse profoundly affected minorities, partly because home equity represents a much greater share of minority families' net worth.

"People don't like this term, but there has to be some type of redistributive mechanism in place to really address these huge disparities," says William Darity, professor at Duke Sanford School of Public Policy and another coauthor of the report.

Cash transfers from the government, like food stamps and housing assistance, can help keep families out of abject poverty, but they don't help grow wealth. To address the wealth gap, Darity thinks the government should create a personal trust fund for every child that he or she would be able to access upon reaching adulthood. Babies born to wealthier families would get less money in their accounts.

Washington is currently more focused on reigning in entitlement spending than on starting new investment programs. But the Center for Global Policy Solutions wants to make sure lawmakers are at least aware of the wealth-gap statistics. At the very least, they help explain why economic downturns are so disproportionately hard on certain minority groups. Consider that as of 2011, the median African American held only $200 in assets that could regularly be converted into cash. Latinos held $340, Asians $19,500, and whites $23,000. 

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