The Racial Wealth Gap
People of color have faced economic inequality for generations, and the recent wave of Black Lives Matter protests has renewed discussions on these disparities.
Compared to White families, other races have lower levels of income and net worth. They are also less likely to hold assets of any type. In fact, 19% of Black families have zero or negative net worth, while only 9% of White households have no wealth.
Today’s chart uses data from the U.S. Federal Reserve’s triennial Survey of Consumer Finances to highlight the racial wealth gap, and the proportion of households that own different kinds of assets by racial group.
Asset Types Held By Race
The financial profile between racial groups varies widely. Below is the percentage of U.S. families with each type of asset, according to the most recent survey from 2016.
|Family-owned Business Equity||15%||7%||6%||13%|
Vehicles are the most common asset across all racial groups, followed by a primary residence.
However, the level of equity—or home value less debts—families have in their houses differs by race. White families have equity of $215,800, whereas Black and Hispanic households have net housing wealth of $94,400 and $129,800 respectively.
In addition, White households are more likely to hold financial assets such as retirement accounts, family businesses, and stocks. These assets are instrumental in building wealth, and are prominent in the wealth composition of America’s richest families.
With fewer people of color holding these assets, they miss out on higher average returns than low-risk assets, as well as the power of compound interest. These portfolio differences are striking, but they are not the most important contributing factor in the racial wealth gap.
Demographic and Economic Variations
White households are also more likely to have demographic characteristics that are associated with wealth. According to the U.S. Federal Reserve, they are:
- Older, with more than half of households age 55 and up
- More highly educated, with 51% having some type of degree
- Less likely to have a single parent
- More likely to have received an inheritance
For example, 39% of White heads of households have a bachelor’s degree or higher, compared to 23% and 17% for Black and Hispanic household heads, respectively. However, education doesn’t fully explain the wealth inequities.
Enormous wealth disparities exist between families with the same education level. Even in cases where Black and Hispanic household heads have obtained a bachelor’s degree, their families’ median wealth of $68,000 and $78,000 respectively is still lower than the $98,000 median wealth for White families where the head has no bachelor’s degree.
After accounting for demographic factors, researchers still found there were considerable inequities. What, then, could be primarily responsible for the racial wealth gap?
The Income Gap
While previous research found that the wealth gap is “too big” to be explained by a difference in income, a recent study from the Federal Reserve Bank of Cleveland offers a new perspective. Focusing on White and Black U.S. households only, researchers analyzed the dynamics of wealth accumulation over time, as opposed to previous studies that considered short time periods.
They found that income inequality was the primary contributor to the racial wealth gap. According to the model, if Black and White households had earned the same labor income from 1962 onwards, the Black-to-White wealth ratio would have reached 0.9 by 2007.
Moving forward, the study concludes that policy changes will likely have a positive impact if they address issues contributing to income gaps. This includes reducing racial discrimination in the labor market, and creating programs, such as mentorships, that improve environments for specific racial subgroups.
Ranked: The Best and Worst Pension Plans, by Country
As the global population ages, pension reform is more important than ever. Here’s a breakdown of how key countries rank in terms of pension plans.
Ranked: Countries with the Best and Worst Pension Plans
The global population is aging—by 2050, one in six people will be over the age of 65.
As our aging population nears retirement and gets closer to cashing in their pensions, countries need to ensure their pension systems can withstand the extra strain.
This graphic uses data from the Melbourne Mercer Global Pension Index (MMGPI) to showcase which countries are best equipped to support their older citizens, and which ones aren’t.
Each country’s pension system has been shaped by its own economic and historical context. This makes it difficult to draw precise comparisons between countries—yet there are certain universal elements that typically lead to adequate and stable support for older citizens.
MMGPI organized these universal elements into three sub-indexes:
- Adequacy: The base-level of income, as well as the design of a region’s private pension system.
- Sustainability: The state pension age, the level of advanced funding from government, and the level of government debt.
- Integrity: Regulations and governance put in place to protect plan members.
These three measures were used to rank the pension system of 37 different countries, representing over 63% of the world’s population.
Here’s how each country ranked:
The Importance of Sustainability
While all three sub-indexes are important to consider when ranking a country’s pension system, sustainability is particularly significant in the modern context. This is because our global population is increasingly skewing older, meaning an influx of people will soon be cashing in their retirement funds. As a consequence, countries need to ensure their pension systems are sustainable over the long-term.
There are several factors that affect a pension system’s sustainability, including a region’s private pension system, the state pension age, and the balance between workers and retirees.
The country with the most sustainable pension system is Denmark. Not only does the country have a strong basic pension plan—it also has a mandatory occupational scheme, which means employers are obligated by law to provide pension plans for their employees.
Adequacy versus Sustainability
Several countries scored high on adequacy but ranked low when it came to sustainability. Here’s a comparison of both measures, and how each country scored:
Ireland took first place for adequacy, but scored relatively low on the sustainability front at 27th place. This can be partly explained by Ireland’s low level of occupational coverage. The country also has a rapidly aging population, which skews the ratio of workers to retirees. By 2050, Ireland’s worker to retiree ratio is estimated to go from 5:1 to 2:1.
Similar to Ireland, Spain ranks high in adequacy but places extremely low in sustainability.
There are several possible explanations for this—while occupational pension schemes exist, they are optional and participation is low. Spain also has a low fertility rate, which means their worker-to-retiree ratio is expected to decrease.
Steps Towards a Better System
All countries have room for improvement—even the highest-ranking ones. Some general recommendations from MMGPI on how to build a better pension system include:
- Increasing the age of retirement: Helps maintain a more balanced worker-to-retiree ratio.
- Enforcing mandatory occupational schemes: Makes employers obligated to provide pension plans for their employees.
- Limiting access to benefits: Prevents people from dipping into their savings preemptively, thus preserving funds until retirement.
- Establishing strong pension assets to fund future liabilities: Ideally, these assets are more than 100% of a country’s GDP.
Pension systems across the globe are under an increasing amount of pressure. It’s time for countries to take a hard look at their pension systems to make sure they’re ready to support their aging population.
How COVID-19 Has Impacted Black-White Financial Inequality
COVID-19 has worsened Black-White financial inequality, with Black Americans more likely to see negative impacts to their job and income.
How COVID-19 Impacted Black-White Financial Inequality
COVID-19 has disrupted everything from economic markets to personal finances, but not everyone feels its effects equally. When compared with White Americans, Black Americans’ financial situations have been disproportionately affected by the pandemic.
In this infographic from McKinsey & Co., we outline the financial vulnerabilities of Black Americans, their increased usage of financial services since the onset of the pandemic, and their lower satisfaction levels with those services.
Financial Vulnerabilities of Black Americans
Compared to White Americans, more Black Americans say their job and income have been negatively impacted by COVID-19.
|My job has been negatively impacted by COVID-19||My income has been negatively impacted by COVID-19|
Looking forward, Black Americans also report greater job security concerns and have less savings to protect themselves financially. In the event of a job loss, 57% of Black Americans report their savings would last four months or less, compared with 44% of White Americans.
With less of a cash buffer on hand, Black consumers are also more likely to have missed a recent bill payment.
|Skipped at least 1 payment||Partially paid at least 1 bill||Paid in full|
This includes being unable to pay for basic items such as utilities, telephone and internet, and mortgage payments.
How do they begin to manage these challenges?
Use of Financial Services
Black Americans increased their use of financial services more than White Americans.
Banking activities in the past two weeks, per March-June 2020 surveys
|Withdrew cash||Deposited cash||Deposited checks||Contacted bank for service on account||Opened new accounts||Received advice on digital tool usage|
For example, Black Americans were about twice as likely to request account service, open an account, or receive advice on digital tools. In addition, Black families were more likely to leverage a fintech platform and have been more active in opening fintech accounts since the start of the COVID-19 crisis.
However, as Black Americans seek out more financial help, some are not happy with the service they receive.
Satisfaction with Financial Services
Overall, Black families are less satisfied than White families across all types of financial activities. These differences were most pronounced for digital tool advice, where 38% of Black Americans were dissatisfied or very dissatisfied, compared with just 12% of White Americans.
Even though Black people were less satisfied with banking services, they were more likely to say that bank performance was above their expectations. This may suggest that expectations are lower for Black families than they are for White families.
Black Americans were also much less likely to trust their financial advisor.
|Do not trust/losing trust||Indifferent||Gaining trust/trust|
From March-June 2020, the percentage of Black people distrusting their advisors rose from 12% to 32%. Over the same time period, White people’s distrust of financial advisors remained stable at 10%.
A notable exception: White and Black Americans were both satisfied with fintech providers. Only 5% of White Americans and 8% of Black Americans expressed some level of dissatisfaction with fintech companies.
Time to Examine the Financial System?
COVID-19 has perpetuated Black-White financial inequality. Data shows that Black families are more likely to be financially vulnerable, and increase their use of financial services during the COVID-19 crisis. However, they are less likely to feel satisfied with these services.
Financial institutions can urgently review their remote and in-person customer service procedures to ensure the needs of all families are being met.
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