New Research on How Wealth Inequality Limits Economic Opportunity

The Urban Institute has a new report out today that looks at America’s wide(ning) racial wealth gap: research shows that while white Americans have on average double the income of black Americans, they have more than six times the wealth. The report demonstrates that wealth inequality is actually increasing, not decreasing over time. Watch Signe-Mary McKernan, one of the report’s authors, explain the dynamics of the gap in this short, engaging video:

The real problem in the long term, McKernan points out, is that racial wealth disparities limit access to economic opportunity. Wealth provides the foundation on which families enter and remain in the middle class. As the report explains, “traditionally powerful wealth-building vehicles” such as retirement savings or homeownership have near and long-term benefits: they help families weather economic downturns and offer future generations a stepping stone to greater economic success.

The authors are quick to note that the recent Great Recession did not cause these racial wealth gaps, but did exacerbate them. Annie Lowrey for the New York Times wrote about the report over the weekend, pointing to a range of ways in which characteristics of the Recession disproportionately burdened households of color. Discriminatory lending in the lead-up to the collapse of the housing market, racially disparate experiences with unemployment, and hugely divergent outcomes from investment in retirement savings all played a role in widening the gap between black and white wealth. As Lowrey notes: “On aggregate, the value of black families’ retirement accounts shrank 35 percent between 2007 and 2010, while white families’ accounts actually gained 9 percent over the same period.” 

Federal asset-building policy has a key role to play in addressing these disparities. As we’ve written about extensively, the U.S. tax code subsidizes the development of assets for higher-income and higher-wealth people in myriad ways, while leaving lower-income and lower-wealth people largely to fend for themselves. For example, 80 percent of retirement benefits delivered through the tax code accrue to the wealthiest 20 percent of Americans. Policies like the mortgage interest deduction, tax-advantaged retirement savings, and the overall differential in the taxation of income vs. wealth compound wealth disparities over time. 

As our Assets Report infographic depicts, one of the biggest barriers to building savings for retirement stems from the lack of access to retirement savings accounts. Account access and participation is highly variable by race: 55 percent of white workers, 48 percent of black workers, and 32 percent of Latino workers participate in a retirement plan, for example. In a new report we released today, Aleta Sprague looks at one state’s efforts to democratize access and strengthen the stability of retirement savings options. California recently passed legislation to “establish automatic retirement accounts for all workers in the private sector who do not otherwise have access to a workplace retirement plan.” This effort will hopefully reduce wealth disparities in California and provide a blueprint for improving retirement savings options for all Americans down the road.

These reports have a key principle in common: they both highlight the need for intentional and effective policy design to end the racial wealth gap.  The current state of wealth inequality in the U.S. is not a natural phenomenon; rather, the racial wealth gap emerged out of exclusionary and racially discriminatory policies that became embedded within our society and policy framework over time.

Thus, the racial wealth gap represents both a challenge and an opportunity for researchers, advocates, and policymakers. The challenge is to identify each component of this structural inequality and make the case for ending it. The opportunity is to create and fully realize the society most Americans deeply want to believe we live in: one in which families and individuals who work hard can save up and make strategic investments in their and their children’s futures and not be met with structural racialized impediments to success. To be sure, these disparities have deep historical roots in the U.S. and it will take significant time and collaboration to reverse the trend of racial wealth inequality we see today. However, relatively modest policy changes in the short term will have an immediate impact, generating greater asset-building potential for future generations and pushing the needle forward on equality of economic opportunity.