Ray Boshara is director and William Emmons is senior economic adviser at the Center for Household Financial Stability, an initiative of the Federal Reserve Bank of St. Louis. The views expressed here are their own.
It’s hard for anyone who lives in St. Louis to not reflect on the issues underlying the situation in nearby Ferguson, Mo. The challenges are many and complex. As researchers, we wrestle with the question: Is the current state of household wealth in the United States positioning enough young people, families and communities to thrive?
Probably not. But a look at the Federal Reserve’s recent Survey of Consumer Finances on the wealth and income of African American (and other) families could offer some insights to help millions of economically disadvantaged Americans — regardless of their race or ethnicity — to move forward.
The numbers are stark. One in three blacks has less than $1,000 in wealth (assets minus debts). For whites, it’s one in nine; Asians, one in eight; and Hispanics, one in four. At the top end of the distribution, the odds of having $1 million in wealth are one in eight for whites and one in nine for Asians but about one in 100 for those who are Hispanic or black. Not surprisingly, median (or typical) wealth levels mirror these disparities: $134,000 for whites, $91,000 for Asians, $14,000 for Hispanics and $11,000 for blacks.
What’s driving this? While other researchers have documented the effects of historical discrimination on the wealth gap, our research suggests three factors. First, African Americans have 40 percent less income than whites and appear to have fewer options to convert that diminished income into wealth (due, perhaps, to differing rates of access to homeownership, employer-sponsored retirement plans and inheritances). Second, already large educational gaps are growing larger: Although degree attainment is rising across the board, blacks and Hispanics are earning high school, college and graduate degrees at significantly slower rates than whites and, especially, Asians.
Third, African Americans consistently ranked lowest among all races and ethnicities in financial health, according to a scorecard we constructed from 38,000 responses to the Survey of Consumer Finances since 1992. Survey questions included whether a family saved, missed payments, carried a credit card balance, had sufficient liquid assets and had manageable levels of debt relative to their incomes. We found that scores strongly correlated with wealth. African Americans scored the lowest — even when comparing those with graduate and professional degrees, suggesting that higher education alone will not narrow large gaps in wealth.
Nor will only having a good job; families need savings and wealth as well. Without wealth, there’s no cushion when a job is lost, a health emergency arises or a car breaks down. Without wealth, there are fewer banking choices beyond payday lenders and check-cashers. Without wealth, there are fewer opportunities to start a business, buy a first home or pursue college without debt. Without wealth, people must rely on Social Security and their families to live with dignity in old age. And without wealth, there’s nothing to pass on to future generations.
What can be done? Research suggests that policies and programs that build savings and wealth at “milestone moments” have promise. Indeed, studies by Thomas Shapiro of Brandeis and others show that even small amounts of wealth at the right moments in life can have a transformative effect on the course of a life.
One of the best of those moments is when a child is born or enters school. Examples abound: Every child enrolling in kindergarten in the Normandy School District of St. Louis County — Michael Brown’s alma mater — automatically receives a $500 deposit in Missouri’s 529 college savings program, thanks to the nonprofit Beyond Housing. San Francisco (using public funds) and Nevada (using non-public resources) automatically open college savings accounts for every child entering a public school kindergarten. Other states start even earlier: Maine and Rhode Island, both using non-public funds, automatically establish a 529 account for every child at birth. In addition to serving as a platform for teaching financial basics, many such programs nationwide offer matching deposits for lower-income kids, disproportionately benefiting African American and other minority populations.
Another great moment is tax time, when earned-income tax credit refunds averaging more than $2,400 can be converted to savings, such as in the “Refund to Savings” and “SaveUSA” projects. Similarly, there is the opportunity to leverage the employment moment by expanding retirement savings options to the millions of workers lacking 401(k)s; in this regard, the Treasury Department’s new “myRA” product holds promise. Finally, homeownership, carefully pursued as part of a broader financial wealth strategy, remains an alternative.
With some vision among leaders and policymakers, in addition to well-designed economic interventions, more financially fragile Americans could have a reasonable shot at the American dream. Wealth begets wealth; the challenge is to have some in the first place.
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