Racial Wealth Disparities: Reconsidering the Roles of Human Capital and Inheritance
Wealth can support families facing economic shocks that disrupt income; it can be used as collateral to obtain financing that creates additional opportunities; it can be left as a bequest to support family members in the future; and it is vital to financing future consumption in retirement. However, wealth is known to be distributed unequally by race, leading to concerns about fairness, opportunity, and the legacy of racism in the United States. This paper explores two specific factors that have long been identified as playing potentially important roles in generating disparities in wealth by race: differences in earnings and intergenerational transfers in the form of inheritances and inter vivos gifts.
For their analysis, the authors use what they call “private wealth,” a measurement that adds defined benefit pension assets to the standard market wealth concept in the Survey of Consumer Finances. They also introduce predicted earnings histories into the SCF and use the full range of pension generosity measures available in the survey to develop a better understanding of how human capital formation leads—through higher earnings and non-wage compensation over the working life—to the accumulation of wealth. In addition, they enhance the existing intergenerational transfer data in the SCF by including inheritances that are reported outside of the “inheritance” module and reclassifying some as inter vivos transfers to better understand their role in sustaining racial disparities in wealth.
- Racial disparities in wealth are substantial, but they are smaller when assets from defined benefit pensions are included in the analysis. In 2019, the mean white/Black gap (the ratio of white wealth to Black wealth) in market wealth was 6.8, but it falls to 4.4 when measuring using private wealth.
- Across much of the last 30 years, racial disparities in mean and median private wealth have remained largely constant but jumped up following the 2008–09 financial crisis. Median wealth gaps have since fallen back to pre–Great Recession levels, while mean gaps remain slightly elevated.
- The highest-wealth racial group in the United States is Asian. Combined data from the 2016 and 2019 Survey of Consumer Finances show that the average private wealth of Asian families was $1.5 million, compared with $1.2 million for white families, $394,000 for Hispanic families, and $326,000 for Black families.
- Basic household demographics can account for a substantial portion of the racial disparities. The "typical" white family had private wealth of $246,000 in 2019, compared with $35,000 for the "typical" Black family. The typical white family is headed by a married/partnered couple that has a combined history of 41 years of full-time work and includes one member with a bachelor's degree. The typical Black family is headed by a single adult with either a high school diploma, some college education or an associate degree, and 28 years of full-time work. Adjusting only for differences in the age of the survey respondent and the married/partnered status between Black and white families reduces the mean gap in private wealth in 2019 from 4.4 to 2.9.
- Pension plan wealth (defined contribution and defined benefit combined) becomes increasingly important as working households age. It is the single-largest asset class for families whose heads are in their fifties (29 percent) and their sixties (34 percent). Pension assets also dominate the portfolios of the set of families who can be viewed as having achieved a reasonably "attainable" level of economic prosperity—sitting in the top half of the age-adjusted wealth distribution but outside the top 5 percent. For these families with heads aged 45 to 65, pension wealth accounts for 47 percent of total assets.
- Differences in historic and current job earnings and years of work alone account for 56 percent of the white/Black wealth gap at the mean and 60 percent at the median. Further accounting for differences in pension coverage and generosity between white and Black families pushes the total explained portion of the wealth gap at the mean and the median up to two-thirds. With the additional inclusion of retirement and disability status, occupation and industry indicators, and educational attainment, the share of total white/Black wealth disparities that can be explained rises to three-quarters.
- Inheritances overwhelmingly go to white families and families of "other" races (including Asians, Pacific Islanders, and Native Americans). Collectively, they receive $280 billion annually (9 percent of their total household income), compared with just $11 billion for Black families (4 percent) and $5 billion for Hispanic families (2 percent).
- Most families, regardless of race, receive no inheritance; just one-third of white families (with a head aged 55 and older), 17 percent of "other" families, 14 percent of Black families, and 8 percent of Hispanic families ever receive any inheritance.
- Total inheritances and inter vivos transfers ever received account for 13 percent to 16 percent of the mean and median private wealth gaps between white families and Black and Hispanic families.
The substantial roles of differences in earnings, pensions, and other human capital and work-related variables in explaining racial disparities in wealth should inform policies intended to reduce wealth gaps. Policies that would boost educational attainment, employment, and earnings should be key components of any agenda for building wealth among low-wealth Black and Hispanic households. In addition to facilitating college attendance or completion, these policies should seek to prepare students from low-income backgrounds to enter and succeed in fields of study or trades that lead to higher earnings and ultimately wealth.
The important role that pensions play in sustaining racial disparities in wealth also has policy implications. This paper’s findings suggest that improving employers’ pension benefits and extending publicly supported pension plans to uncovered workers could help low-income workers accumulate pension wealth, thus potentially reducing racial wealth gaps.
In this paper, we present updated measures of racial disparities in wealth using the most recent data from the Survey of Consumer Finances (SCF), augmented by household-level estimates of defined benefit (DB) pension wealth developed by Sabelhaus and Volz (2020). Including this important asset, we find that racial wealth disparities are smaller than the numbers typically discussed in other research or in the media, but the disparities remain substantial. The paper proceeds by exploring two specific factors that have long been identified as playing potentially important roles in generating disparities in wealth by race, namely differences in earnings (education/human capital) and intergenerational transfers in the form of inheritances and inter vivos gifts. We contribute to the existing literature by introducing several data innovations in the exploration of these factors using the SCF. We augment the SCF data with individual-level lifetime earnings histories (developed by Jacobs et al. 2020, 2021) and enhanced measures of intergenerational transfers (developed by Feiveson and Sabelhaus 2018, 2019). We also create an expanded set of variables that reflect the range of pension coverage and generosity across workers. With all three of these new data components, we use non-parametric decomposition techniques to estimate their contributions to racial wealth gaps between white and non-white families. Differences in lifetime earnings, pension generosity, and a handful of other human capital and work-related variables explain three-quarters of the white/Black wealth gap and 80 to 90 percent of the white/Hispanic gap. Reweighting white family wealth to match the distribution of human capital traits of families of “other” races (including Asian, Native American and other groups) raises counterfactual white wealth to the level of “other” family wealth, nearly closing the white/“other” gap. Differences in intergenerational transfers are found to account for 13 to 16 percent of white/non-white private wealth gaps, although much of the influence of these transfers likely works through the human capital channel. Policies that successfully increase skills, employment, earnings, and pension coverage among low-wealth Black and Hispanic families will make important contributions to closing wealth gaps.