A new paper published by the Federal Reserve Bank of Boston finds that when the measure of wealth includes two major retirement resources – defined benefit pension assets and Social Security wealth – the wealth gaps between white families and Black and other minority families narrow substantially. The paper also finds that when the analysis includes these resources, the white-Black racial wealth gap shows little if any growth over the last three decades. However, white families, on average, still have approximately three times as much wealth as Black families.

The paper, “A New Look at Racial Disparities Using a More Comprehensive Wealth Measure,” is coauthored by Federal Reserve Bank of Boston economist Jeffrey Thompson and Federal Reserve Board of Governors principal economist Alice Henriques Volz.

Studies of racial wealth disparities typically measure the gaps using only market wealth, which is the sale value of a household’s assets minus its debts. In their analysis, Thompson and Volz include wealth represented by projected defined benefit pension assets and projected Social Security benefits as well as market wealth – what they call “combined wealth.”

The authors use the combined-wealth measure to analyze a sample of white and minority households in which the family head is 40 to 59, an age group for which they can more accurately estimate projected retirement assets. They find that in addition to being substantially smaller when the analysis involves the expanded concept, the white-Black racial wealth gap has stabilized over the last three decades. This is distinct from results based on market wealth alone.

Although the authors argue that combined wealth is a superior measure for evaluating household well-being, particularly the ability to finance retirement, they also write, “There are reasonable justifications, both conceptual and measurement related, behind the focus on market wealth.” For example, because of the illiquid nature of defined benefit assets and Social Security wealth, combined wealth is not an ideal measure to use when studying racial disparities in emergency resources. Social Security and defined benefit pension benefits generally can be accessed only after retirement and only in a fixed amount at fixed intervals, and they cannot be used as collateral in obtaining access to financing. Furthermore, dependents may receive survivor’s benefits, but the wealth cannot be bequeathed, and it cannot be gifted.

Results point to the equalizing effects of defined benefit pensions and Social Security

According to the paper, the wealth gap between the average white family and the average Black family becomes about half as large when measured using combined wealth instead of just market wealth. In addition, although the gap between the mean combined wealth of white families and the mean combined wealth of Black families remained wide over the sample period of 1989 through 2019, it grew only slightly, and at the median, the gap decreased slightly.

“This paper draws attention to the powerfully equalizing effects of policies that are already in place but typically not accounted for in analysis of racial disparities in wealth,” the authors write. “We highlight the value of (defined benefit) plans in achieving a further policy goal that has received greater attention in recent years, namely building wealth among non-white families.”

The authors also note the policy implications of finding that Social Security greatly reduces racial wealth disparities. “The equalizing role of (Social Security wealth) in bridging the racial wealth gap is one more reason to maintain the fiscal health of the Social Security program well into the future,” they write.

The sample of households in the study comes from the Federal Reserve Board’s Survey of Consumer Finances. The survey collects data on a household’s finances and basic demographic information about the head of the family.

The more comprehensive measure shrinks the racial wealth gap

Adding projected defined benefit pensions and Social Security wealth to market wealth substantially raises mean family wealth for all races, but it lifts it by a greater degree for Black families, the paper finds. The mean combined wealth of $1.6 million for white families in 2019 was 60% greater than the mean of $1.02 million represented by only market wealth. For Black families, mean combined wealth was nearly three times as large as mean market wealth, climbing from $186,000 to $524,000.

Median combined wealth in 2019 was $596,000 for white families and $197,000 for Black families. That is nearly three times greater than market wealth for white families but roughly five times greater for Black families.

“(Defined benefit) pensions and Social Security both boost wealth to a greater extent among non-white families than among white families,” the authors write, “and therefore their inclusion in wealth measures should be expected to result in reduced racial wealth disparities.”

The authors look at the white-Black wealth gap over time and find that the disparity trends differently depending on which wealth measure is used.

With market wealth, the ratio of mean white family wealth to mean Black family wealth grew from 4.4 to 1 in 1989 to 5.5 to 1 in 2019, although the increase was not continuous. At the median, the ratio for market wealth decreased sharply from 1989 to 1995 but then grew from 4.5 to 1 in 1995 to 8.6 to 1 in 2013 before decreasing to 5.8 to 1 in 2019.

Those growth trends are not evident when the analysis involves combined wealth. At the mean, the ratio was 2.8 to 1 in 1989 and did see some fluctuations in the ensuing years, but it ended up at 3.0 to 1 in 2019. At the median, the ratio decreased during the early 1990s, from 3.5 to 1 in 1989 to 2.4 to 1 in 1995, grew to 3.9 to 1 in 2001, then decreased again and was at 3.0 to 1 in 2019.

Authors: Combined wealth tells a more accurate story of economic well-being

The authors write that market wealth understates the financial well-being of families with defined benefit pensions and families who rely or will rely substantially on Social Security in retirement. Excluding defined benefit pensions and Social Security from the analysis of racial wealth disparity omits forms of wealth that are particularly important to Black families, they argue.

For two-thirds of all Black families, the net value of Social Security exceeded market wealth in 2019. In contrast, Social Security wealth exceeded market wealth for half of all white families. Among Black families, average wealth from defined benefit pensions was almost twice as large as average market wealth in 2019. Among white families, it was less than half as large.

The authors also point out that having a defined benefit pension and Social Security will cause some households, particularly low-income households, to save less for retirement than they otherwise would.

“Since (defined benefit) pensions and Social Security ‘crowd out’ other forms of private savings,” the authors write, “their exclusion from standard measures of market wealth limits our ability to understand the level of and trends in household wealth and well-being.”

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Jeffrey Thompson is a vice president and economist in the Federal Reserve Bank of Boston Research Department, where he is the director of the New England Public Policy Center.

Alice Henriques Volz is a principal economist in the Microeconomic Surveys section of the Division of Research and Statistics at the Board of Governors of the Federal Reserve System.