Why do some racial groups have more wealth than others? That’s a question researchers have long tried to answer, and inheritances and other forms of intergenerational wealth are often seen as major factors. But Federal Reserve Bank of Boston economist Jeff Thompson says they play a surprisingly minor role.

In this episode, Thompson discusses the findings of a paper he co-authored, “The Limited Role of Intergenerational Transfers for Understanding Racial Wealth.”  The paper finds that three facts about inheritances limit its influence on the nation’s racial wealth gaps: 1) Most people don't receive an inheritance; 2) most inheritances aren't substantial; 3) people tend to consume or squander a good part of whatever inheritance they do receive.

Thompson says that the number of hours worked over a lifetime per household is a far more influential variable, and he also offers thoughts on where policymakers looking to close racial wealth gaps should focus.

JAY LINDSAY:

Hi, I’m Jay Lindsay. I’m your host on this episode of Six Hundred Atlantic. My guest today is Jeff Thompson. He’s an economist here at the Boston Fed, and he’s the head of the New England Public Policy Center, which is part of our Research Department. Now, regular Six Hundred Atlantic listeners may also remember him from Season 3 of Six Hundred Atlantic. That season, we covered racial disparities, and Jeff was our chief consultant.

Jeff is with us today to talk about a topic we hit on in Season 3, and which he covers in a recent paper. And the paper basically asks, “How important are things like inheritances in explaining the persistent, and wide differences in the amount of wealth held by different races in this country?”

And the answer the paper gives is, “Not very important at all.”

Now, this is not an answer that’s given by a lot of people, so that makes it interesting. And we want to talk about this with Jeff today. So, welcome Jeff. Thanks for coming.

JEFF THOMPSON:

Thank you for having me.

JAY LINDSAY:

So, let's start off by defining terms. So, what are we talking about when we talk about inheritances? Does that include cash, cars, houses, anything that you can turn into cash? And there's also another component of intergenerational wealth, inter vivos gifts. Can you help us with those two things?

JEFF THOMPSON:

Sure. In principle, you can inherit anything, and you can also be given anything as an inter vivos gift. The big difference is that an inheritance comes as a result of someone's passing away. It comes as a result of an estate process. Whereas an inter vivos gift is just given to you by a still living family member.

JAY LINDSAY:

And along the lines of still setting up the discussion, can you help me define the racial wealth gap? Can you lay out some basic stats and the differences in wealth between the various racial groups?

JEFF THOMPSON:

Sure. So, if we look at the wealth that's recorded by the Survey of Consumer Finances, we see for example that the typical, the median Asian household has wealth of $536,000, followed by the typical or the median white family having $285,000 in wealth. And trailed by Hispanic families at $61,000, Black families at $45,000. So, there's a considerable gulf between the resources for the different racial groups.

JAY LINDSAY:

Yeah, it's interesting that Asians are the highest wealth racial group by a considerable amount, but if you take Asian people and white people, they together ... there's a very big gap between Hispanic people and Black people. That's what's evident in those gaps. Is that right?

JEFF THOMPSON:

No, that's right. If you do the arithmetic, you'll see that the gap between whites and Asians is about $250,000, and that's similar to the gap between Blacks and whites, which is about $240,000. And that's for the typical family, the median.

JAY LINDSAY:

Okay, great. Thanks for setting us up with those stats. So, we're going to get into more detail on this as we go along, but can you kind of in broad strokes talk to me about what you consider the most important findings of your paper?

JEFF THOMPSON:

I think the most important takeaway from my paper is that the generational aspect of wealth is simply far less important than most people imagine. For the vast majority of families, nearly all of the wealth that you have will be wealth that you build during your lifetime and you consume up until the point you die. Most people don't receive an inheritance, most people don't leave a bequest. And the vast majority of your wealth, for most people, regardless of their race, is contained in their home and in their work-related pensions.

JAY LINDSAY:

I assumed inheritances were much more common. And I know that this is not just me thinking that. In fact, in your paper you talk about this transfer of wealth between generations, and you say that while this factor looms large in the media's discussions of racial inequality, it explains relatively little of the disparities evident in the data. I guess my question here is, why do you think the media and others have overstated the importance of inheritances and other intergenerational transfers?

JEFF THOMPSON:

It's a question I'm also interested in. So, why are we so fixated on this general topic? One, I think it's very reasonable to think that popular culture focuses us to think about it. We're sort of fixated on the lives of the very wealthy among us. There are many multitude of television shows focused on this, social media influencers. Back in the day, it used to be Lifestyles of the Rich and Famous, and maybe now there are Instagram influencers and Keeping Up With the Kardashians, right, that might influence us to think about this intergenerational element of the passing of great wealth.

Some of it is people observing things that are happening in the real world. So, it is true that some very wealthy people pass on their wealth and their heirs become very wealthy. So, that's happening, but they're just so rare that it simply doesn't have any relationship to the experience that the vast majority of people have. And there's another element of why people might be thinking this that's somewhat more heartening, in a sense. It's much more common nowadays for people to try to understand the historical foundations of the experiences that we live in, how we got here. And so people have paid a lot more attention and given a lot more proper weight to the role of some of the really terrible elements of American history, the elements in history that preceded the civil rights struggle, Jim Crow, the legacy of slavery. So, we're sort of, in a good sense, primed to be thinking about and contemplating the role that our history plays in our current conditions.

But when we do the hard social science and try to dig apart this particular aspect, how much of our current racial wealth disparities can be traced back to too much of history, the data don't suggest very much of it.

JAY LINDSAY:

So, you've already referred to some of this, but you talk about a few critical facts about inheritances that support your finding that they just aren't a huge part of the country's overall wealth picture, no matter your race. And I want to name three of them here. One of them, most people don't receive an inheritance at all. You also talk about how most inheritances aren't all that substantial. The third is this prodigal son effect where people tend to consume or squander a good part of whatever inheritance they do receive. So, I'm hoping you can talk about each of these, maybe starting with the fact that most people don't get an inheritance.

JEFF THOMPSON:

So, to really identify how prominent inheritance is, we only zoom in on the over 65 populations. So, by that time, if you're going to get an inheritance, you have received it. So, what are these numbers looking like, right? What we see is that less than a third of all households, by the time they've reached 65, have ever received any inheritance. It's about that high for white families and about half as high among Black families. So, there is a racial disparity, but regardless of your race, the vast majority of families are not getting any inheritance whatsoever.

JAY LINDSAY:

And you're saying that the inheritances people do receive generally are not that big?

JEFF THOMPSON:

That's right. When you look at gifts given, half of those gifts are less than $50,000. Now, I don't want to poo-poo that. If I were to be lucky enough to receive a substantial gift of the $50,000, I would benefit ... I would appreciate it mightily, right? We all would, right? But it doesn't make a huge chunk in terms of our overall ... or the overall wealth that we end up accumulating. And, certainly when contrasted with the prominent role of our work-based pension plans, of the value of wealth in our house, it doesn't end up being all that important.

JAY LINDSAY:

And what about this third factor? I'm calling it this Prodigal Son factor where it seems like even when you do get an inheritance, a lot of people either consume it or they squander it.

JEFF THOMPSON:

Yeah. And this is a tougher thing to think about, in part because the research are more complicated. There are some papers that are able to look at people who have received large inheritancesh and tracks them before and after the receipt of the inheritance. And so what do we see?

What we see is that a lot of those people end up dropping out of the workforce. They retire early. So, they're appreciating the benefit of this gift. And so they adjust their work and they adjust their consumption. The papers that can track the wealth that people are holding after having received an inheritance, there are a handful of papers, and the best one that I have identified is it shows that the wealth is only half the amount of the received inheritance ends up remaining on the person's balance sheet years later.

But I don't want people necessarily to take that and they say, "Well, it doesn't mean anything. It just vanished into thin air." Because it didn't vanish. But what it does mean is that the outcome that we should focus on, at least in part, is not wealth, but it's actually consumption.

JAY LINDSAY:

if inheritances are overstated as a big component of wealth in the wealth gap, I want to talk about something that may be historically understated, and that's defined benefit pensions. Can you talk to me first of all about what they are and why they're an important component of wealth and where they fit into this whole discussion on racial wealth gaps?

JEFF THOMPSON:

Defined benefit pensions are widely and erroneously believed to be dead because they are simply no longer as prominent as they used to be. But the truth is the value of the assets in defined benefit pension plans are just as large as all the assets that are in the defined contribution plans. So, add up all the assets held in 401Ks, 403Bs, et cetera, et cetera. They're equal in size to the assets in defined benefit pensions.

JAY LINDSAY:

And so again, we're talking about, say, you might commonly hear about a pension that a teacher or a police officer might get where they get a certain amount of money every month after they're retired. Is that what we mean by defined benefit?

JEFF THOMPSON:

The key distinction is in what's the defined portion of the plan. So, a defined contribution means that you put in a little chunk every month and your employer matches it, and it functions like an account. You're going to get an account statement every month, every quarter, so you can see the assets in your plan. The defined benefit pensions, which are the traditional old-school pensions, what defined them was the size of the benefit. There are formulas. How long you worked at your job, right? Your final salary. And based upon those features of the formula, it spits out an amount that you are promised to receive for the entirety of your lifespan.

JAY LINDSAY:

Great. Right. And so again, these do play, as you make the point in the case … in the paper, they play a significant role in wealth and in this discussion about the racial wealth gap. And maybe you can talk about that.

JEFF THOMPSON:

So, the reason why they play such a great role in our understanding of racial wealth disparities is because the sectors that continue to be very prominently represented by old-school defined benefit pensions are the public sector. So, think state workers, police officers, teachers, federal employees importantly. And those sectors of our economy are disproportionately represented by African-American workers. There's a fascinating statistic that I produced in an earlier paper, which is 10% ... just under 10% of all black BA holders work for the federal government. That's twice as high as the next highest racial group.

For historical reasons, for geographic reasons, Black workers are more heavily concentrated in sectors of the economy that have DB pensions than are other workers of any other race. And so when we use wealth measures that exclude DB pensions, we're systematically leaving out wealth that matters for Black workers.

JAY LINDSAY:

But the bottom line here is overlooking this source of wealth, overlooks a significant source that, as you said, has a modest effect on closing the racial wealth gaps. In any case, it's a significant source of wealth that ... Much more significant than inheritances, for instance.

JEFF THOMPSON:

Yeah, absolutely. So, in some of my analysis, I'm using not the full age distribution, but I'm focusing on this prime-age working groups, so like 40 to 60. And so if we look at that group, we can see that market wealth that does not include DB pensions, the white-Black ratio is about seven. When we include DB pensions and we create a wealth concept we call private wealth, the racial wealth gaps, the white over Black, goes down to about 4.4. So, it diminishes it considerably.

JAY LINDSAY:

When you say seven and 4.4, what do you mean?

JEFF THOMPSON:

So, in the first one, white families have nearly seven times as much wealth. The mean white family has seven times as much wealth as the average black family when we don't include DB pensions. When we do include DB pensions, we see that that gap is actually 4.4. So, the white family has four and half times as much wealth.

JAY LINDSAY:

Great. Thanks for clarifying that. Sort of I guess on this topic of components of wealth that are maybe more important than, say, inheritances you raise something else in your paper, and it's about the importance of hours worked over a lifetime. And that paper has what I think is a striking example. It says that the typical white family is headed by a 55-year-old married couple with 40 and a half years of combined full-time work, with the highest educational attainment in that household is a bachelor's degree.

Meanwhile, the typical black family is headed by a 50-year-old single adult with 27.6 years of full-time work and the most common level of education is an associate’s degree. So, we're talking about 13 more years of work for the typical white family. Thirteen more years of making money. This seems like a huge factor in the racial wealth gap. That just seems like math. How important is this?

JEFF THOMPSON:

It's hugely important. So, all the savings that are essentially socked away at the earliest stage across those additional 13 years, they're just going to build and build and build. You referenced it. It's just math. On some level it is just math. I mean, we care about it, not because it's just math, but we care about it because it has consequences for households' well-being. And that is a big portion of the wedge that we see across different groups in society is the amount of work that's being put in.

JAY LINDSAY:

I guess this is a good time I think to switch to I guess one of my last questions and that's about policy. To me, it seems sort of like good news if inheritances are less of a big factor and these other things, like lifetime earnings, are more of a factor. It's easier to maybe make policy to increase lifetime earnings than to do something about past wealth transfers. I'm wondering, am I making sense here, and can you talk to me in general of what you think policymakers should be interested … based on what you've seen in your research, what they should be interested in, if they're interested in closing the racial wealth gap?

JEFF THOMPSON:

The policy-related implications that come out of our work points to a number of pathways to boost families' retirement savings. There are plans that already exist and that people are enrolled in that are underfunded, and policymakers should endeavor to make sure that the plans are as close to healthy funding levels as they can.

Also importantly, we see a lot of workers who don't have pensions. So, I think there are a number of interesting and innovative approaches to help provide pension access to workers that are not covered through their employers, to help employers that don't currently have pensions, to adopt them. And to help pension plans that are out there but that are just poorer quality. You can think about adjusting tax policy, a number of regulatory approaches that would boost the generosity and the reliability and simply the access to retirement-based pension plans across the board.

And then there's also a number of implications relating to policy focused on educational attainment really almost across the board. You see at the graduate level, so we can talk at the highest end of educational attainment and go down to the very bottom or the youngest age ranges. And you can see that if you look at the fields and the disciplines that Black and Hispanic students end up being attracted to, they're linked to two occupational trajectories that are less remunerative. So, they're less likely, Black and Hispanic students, are less likely to pursue, say, STEM fields, which translate more readily to jobs that have higher rates of pay and more stable careers. Right? So, facilitating high school and college students to be able to pursue and thrive in those disciplines, that's an important step.

But also important is at the complete other end of the educational attainment distribution, which is you have high school dropouts or students who complete high school but have no other credentials. So, we have the ideas of apprenticeships, of ways of connecting young men without much educational attainment to reasonable paths to get a solid good paying job and helping people stay out of incarceration. Those are a whole series of interventions to help them start to build careers and ultimately build wealth over their whole lifespan.

JAY LINDSAY:

You're talking about lifetime earnings here and working hours, and in the example in the paper, I know it's a sensitive topic in many ways, but we have a typical white family with two income earners, a typical Black family with one. And so the working hours, there's going to be a big gap there. I don't know what you do with policy in this area? I don't know if there's anything you want to say about that.

JEFF THOMPSON:

Yeah, I think you're right to point out that it is a sensitive topic, but again, there's no getting around the fundamental reality that two earners in a family are going to be bringing in more earnings. They're going to do a better job to shield each other and buffer each other in down economic times, and they'll be able to jointly build more wealth. I've never read about any sort of policy intervention that seems very promising to me to help inspire a greater likelihood of marriage or couple-hood. And a lot of people would approach this topic, and they draw attention to potential downfalls. Not all unions, not all marriages, should stay together.

So, I think it's a very sensitive topic, and I think the most positive way to think about it is to think that if we identify, if there are disincentives that we are building, either through tax policy or other policy, that are unintentionally undermining couples from coming together and staying together, then those should be examined and probably removed. And the set of things we talked about just minutes ago talking about educational interventions and expanded access to apprenticeship programs and helping young men stay out of interaction with the criminal justice system, those sorts of interventions are going to put more young men on solid, stable footing. And will probably have the additional benefit of probably helping them be more able to join and stay in stable partnerships moving forward. So, you'll have positive benefits from more on the educational side of any interventions we could think about.

JAY LINDSAY:

Great. Yeah, Jeff, it's an important topic. It's a great discussion. I really thank you for being with us today and taking these questions and talking about your paper with us.

JEFF THOMPSON:

I'm happy to be here.

JAY LINDSAY:

So, if you’re interested in the paper, it’s called the “The Limited Role of Intergenerational Transfers for Understanding Racial Wealth Disparities.” Now, that’s on bostonfed.org. Also on bostonfed.org, you can find more information about pretty much everything we've discussed today, and more about the podcast. The podcast is at bostonfed.org/sixhundredatlantic. It has other interviews, it has our other podcast seasons. And while you're there, please subscribe to our mailing list to stay informed about upcoming episodes. And we'd really appreciate it if you would rate, review, share, and subscribe to Six Hundred Atlantic on your favorite podcast app. I'm Jay Lindsay, I’m signing off on another episode of Six Hundred Atlantic. Thanks for listening.