Retirement

Racial Wealth Inequality Gradually Declines, But That Is No Reason To Celebrate

Wealth inequality by race remains staggeringly high, but it has gradually declined throughout the pandemic. This is different from the experience of the Great Recession, when after 2007 the disparity between Black and Latino households, on the one hand, and White households, on the other hand, widened. But, this difference is also no cause for celebration. Wealth inequality remains high and most Black and Latino households did not see any wealth gains, while most White households did.

Households save money or build wealth to have a buffer in case of an emergency, to supplement their Social Security benefits in retirement and to invest in their own future through education, starting a business or moving if new and better opportunities arise. Yet, time and time again, wealth has historically been very unequally distributed by race and ethnicity. Calculations based on Federal Reserve data show that Black households on average owned $340,599 and Latino households owned $323,682 – or almost one million dollars less, compared to White households’ average $1.3 million in September 2022. White households on average had about four times as much wealth as either Black or Latino households had (see figure below).

A lot of research has documented that these wealth gaps follow from widespread structural barriers that many households of color face and from intergenerational advantages – gifts, inheritances, social networks and others – that White households have historically enjoyed and still enjoy. It is thus not surprising that the racial wealth gap has persisted for decades, centuries even. The current wealth gaps by race and ethnicity are in fact larger than they were in the 1990s, for example (see figure below).

The difference in average wealth by race or ethnicity has recently declined. At the start of the pandemic in March 2020, White households owned almost five time as much wealth as Latino households, for example. As housing and stock markets boomed, the gap shrank, so that White households owned “only” four times as much as Latino households did in September 2022.

A shrinking wealth gap is more desirable than a widening wealth gap, assuming people of color’s wealth is growing faster, rather than declining more slowly, than that of White households. But, there is a lot more to this story than that.

Most importantly, the wealth gap is still massive and it will take targeted, large wealth transfers such as reparations for Black households to ultimately eliminate it. The current wealth gap is larger than it was in the 1990s, even after shrinking for two years (see figure above). It would also take one hundred years to eliminate the gap without such policy steps, assuming that the wealth continues to shrink at the pace of the past two and half years. A small dent in widespread racial wealth differences does not constitute racial equality.

Moreover, the numbers above do not show the experience of a typical household in each group. The numbers show average household wealth in each racial or ethnic group. Average wealth is a meaningful measure to tell us how large the total wealth gap between racial and ethnic groups is. It thus is a reasonable guide for policy to focus on. But, it does not reflect the financial situation of the typical household since wealth is highly skewed towards the wealthiest households within each group. Median wealth, what the household exactly in the middle of the wealth distribution owns, is a better measure in this regard, but those data are not available on a quarterly basis. We do know, however, that the recent disproportionate gains for Black and Latino households resulted from outsized increases in real estate wealth. Average home equity for Black households grew by 75.7% for Black and by 85.9% for Latino households, but by only 22.1% for White households from March 2020 to September 2022. Yet, most Black and Latino households do not own a house. Their homeownership rates were 45.2% and 48.7%. respectively, in September 2022. A long history of housing and mortgage market discrimination has kept and still keeps Black and Latino households out of homeownership. As a result, the median home equity for Black or Latino households is zero and most Black and Latino households saw no gains from the run up of housing prices. In contrast, three-in-four White households were homeowners in September 2022, meaning that most White households indeed benefited from the rapid rise in house prices. These differences in homeownership rates also make it much less likely that the wealth gap at the median is also shrinking alongside the average wealth gap.

Further, Black and Latino households own much less financial wealth than is the case for White households. This then also means that the gains in real estate wealth made up the bulk of the overall wealth gains for Black and Latino households, 76.1% and 85.9% respectively. Again, most Black and Latino households saw none of those gains, but those gains are almost the entire story of the past two and half years.

And, most of the financial gains came from the stock market run up, but only a minority of Black and Latino households own stocks either outright or through their retirement accounts. Calculations based on Federal Reserve data show that only 34% of Black households and 24% of Latino households owned any stocks, while 61% of white households did. The overwhelming majority of Black and Latino households hence did not see any gains from the stock market gains over the past few years, while most White households did. This again suggests that the median racial wealth gap may not have shrunk alongside the average wealth gap.

Debt is the other side of the ledger, offsetting assets. Unlike housing and stock ownership, the likelihood of owing debt does not vary much by race and ethnicity. A little more than 80% of White households and closer to 70% of Black and Latino households owe debt in some form. Black and Latino households typically owe more costly debt such as credit cards, car loans and student loans than White households. After all, they do not own a house and thus do not have access to mortgages and home equity lines that often carry lower interest rates.

These data suggest that the median racial wealth gap possibly did not shrink as much as the average wealth gap. The wealth gains that contributed to a declining average racial wealth gap were concentrated among a minority of Black and Latino households, while they were more evenly distributed among White households. The bottom line is that the racial wealth is still and has remained stubbornly large and will stay that way unless policymakers at the federal, state and local level step up.

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