The Racial Gap Widens and Policymakers Turn Their Backs

Christian E. Weller, University of Massachusetts, Boston, posted on

People need wealth to weather an emergency and to create economic opportunities for themselves and their families. Yet, wealth has always been very unequally distributed in the United States, especially by race and ethnicity. The racial wealth gap has in fact grown in recent years. Consequently, many African-Americans, Hispanics, and large parts of the Asian-American community have been increasingly economically vulnerable and losing out on opportunities for upward mobility.

The need for policy interventions to reduce the racial wealth gap has long been clear and has only grown since the Great Recession ended in 2009. But little has happened and is unlikely to happen in the near term. Worse, the current policy direction could actually widen the racial wealth gap, not shrink it.

Communities of color have a lot less wealth than whites do. On average, working-age African-Americans owned $72,987 (in 2013 dollars) from 2010 to 2013, compared to whites’ $564,426. Whites then had almost eight times the wealth of African-Americans. In that same period, working age white households had 5.7 times the wealth of their Hispanics counterparts. And, the average white household in the bottom half of the income distribution had 1.4 times the wealth of the average Asian-American household in the bottom half of the income distribution during those years.

Such wealth gaps exist because of different access to beneficial savings, varying contributions to savings, and gaps in fees for financial services and in interest rates. Communities of color, for example, are much less likely than whites to be homeowners and to have a retirement plan from their employers. Communities of color thus often do not have access to the various tax and other benefits that come with those savings.

Moreover, people contribute to savings by paying the principal on a mortgage, adding to a retirement plan, having an employer contribute to a retirement plan, or inheriting wealth. Since communities of color are less likely to be homeowners and have retirement plans, they and their employers are also less likely to participate in these kinds of benefits.

Communities of color are also less likely to inherit money, and when they do the amounts inherited are lower than for whites. Communities of color tend to be good savers, but they fall behind in their wealth because they receive less help from the government, employers, and inheritances.

Finally, communities of color tend to pay higher fees for savings accounts and face higher interest rates on their debts than whites do, reducing the money they earn on their savings and slowing wealth growth. The wealth gap also gets wider with age as communities of color fall further and further behind whites over time.

Notably, the racial wealth gap grew right after the Great Recession. Communities of color lost their homes and jobs, and thus their retirement plans, at a faster rate than whites did. When the housing and stock markets recovered, communities of color had less access and could make fewer contributions than whites.

The average white household had 5.6 times the average African-American wealth, for example, from 2001 to 2007. But, it had 7.7 times the average African-American wealth from 2010 to 2013. Data for Hispanics and lower-income Asian-Americans similarly show increases in the wealth gap from before the Great Recession to its aftermath.

Comprehensive, newer data on the racial wealth gap are not yet available, but the wealth gap likely didn’t shrink much. The homeownership rate for all households has fallen since 2013, but faster for communities of color than for whites.

The gap in retirement savings plans has remained steady for private-sector workers during that time. And costly debt – especially car and student loans – has risen for all households, but especially among communities of color, thus slowing their wealth growth more so than for whites.

The racial wealth gap has always been large, leaving communities of color economically behind. Policymakers could start to address this widespread economic insecurity through more sustainable homeownership opportunities, much easier access to retirement savings plans, redesigned and more efficient tax incentives for people to save, and greater consumer protections from high fees.

Yet, Congress and the Trump administration have set out in the opposite direction and could make things worse. Congress has already made it harder for cities to offer new, low-cost retirement savings accounts to people without such employment benefits. The Trump administration has also delayed the so-called conflict-of-interest rule, which would have better protected savers from excessive costs in their retirement accounts.

Further, Congress and the administration want to eliminate important mortgage safeguards and substantially weaken the Consumer Financial Protection Bureau, even though it has helped to level the playing field between savers and big banks. And, if the so-far unsuccessful efforts at health care reform are any indication, tax reform will increase the inequities in tax incentives, giving the least help to those who need it the most. Collectively, these movements will leave many – especially communities of color – struggling to build real wealth.

Christian E. Weller is a professor of public policy at the McCormack Graduate School of Policy and Global Studies at the University of Massachusetts, Boston and a Senior Fellow at the Center for American Progress.

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