Squared Away Blog

December 11, 2012

Black Families Struggle to Build Wealth

It is extremely difficult for black Americans to accumulate wealth they can pass on to their children.

Getting to the heart of this concern is new research by the Urban Institute.  The Washington think tank found that while blacks excel at converting the gifts and inheritances they receive into even more wealth, the size and frequency of these bequests are much smaller than for whites, perpetuating a wealth gap that has existed since emancipation.

“In the news, you hear about the racial income gap, but the racial wealth gap is so much larger, and it’s not improving,” said Signe-Mary McKernan, a senior fellow at the Urban Institute and co-author of the new study.  Smaller inheritances and gifts in African-American families “are hindering their opportunity and wealth accumulation,” she said, about her findings.

Median wealth for black families is $18,181 – white family wealth is $122,927, and Hispanic wealth is $33,619.

But the real question is, why is white wealth seven times larger than black wealth? The researchers found that blacks are five times less likely to receive family bequests than are whites, and their inheritances are $5,013 smaller.

McKernan’s research employed standard statistical methods by holding factors such as income and education constant in order to highlight the racial aspect of differences in wealth.

But Lester Spence, a political science professor at Johns Hopkins University who sometimes conducts statistical analysis in his research, said such analysis fails to fully capture the significant impact of factors such as the social and cultural barriers facing black Americans.

“All of those factors end up leading to a dynamic where the wealth gap is far larger than the studies indicate,” he said. “The studies basically boil that stuff away.”

Take homeownership. Houses are Americans’ largest single financial asset, but house prices typically appreciate more in suburbs dominated by whites. This benefits a white heir who inherits his parents’ house more than it would a black heir. But if the neighborhood isn’t controlled for, it’s difficult to ascertain the impact it may have.

Or consider a typical black middle-class family in Detroit – like Spence’s family growing up. His father, a Ford autoworker, owned a house, saved for retirement, sent three children to college – and helped them financially when they became parents, said Spence.

Yet his father felt excluded from white circles of Ford employees who talked about their investments, he said.  When his father asked a white coworker to share information, “The guy didn’t answer him.”

“When whites get jobs, they can move to nicer suburbs, and their schools will place their kids in decent colleges, and they’ll be able to make [more] money, whereas for non-whites every aspect of that is a dice throw,” said Spence, a father of five.

Inheritances are responsible for 12 percent of the wealth that blacks accumulated – a large share, especially in the short time studied, 1999 through 2007.  The study shows that black Americans do more with less.  When they receive a $1,000 inheritance, they use it to create an additional $700 in wealth, compared with only about $300 created by whites.

For poor and low-income blacks, McKernan in prior studies has identified other institutional barriers to wealth accumulation such as asset limits on means-tested government programs.  And the federal safety net – food stamps, the Earned Income Tax Credit, Temporary Assistance for Needy Families – supplements incomes, rather than wealth creation, she said.

“What helps people get out of poverty and stay out of poverty and move to the middle class is education and homeownership,” she said.

McKernan and Spence agree on that.