Accountants looking into expanding their services to financial consultation might want to pay attention to a report on how divisions along racial and ethnic lines factor into wealth and income distribution in the U.S.
A recent study by the Urban Institute on wealth and income from 1963 to 2016 makes clear that while overall wealth in the U.S. has risen across the board, there’s a disproportionately lower increase among blacks, Hispanics and other nonwhite populations.
Why is that? It’s a combination of income inequality, gaps in earnings, homeownership disparities, retirement savings or the lack thereof, student loan debt and “lop-sided” asset-building subsidies, according to the Urban Institute.
This naturally raises myriad opportunities for thought leaders in accounting and financial planning: types of retirement and savings programs and how to change them, how to get more kids into college without tens of thousands of dollars in debt, how to improve homeownership rates and so on.
The Urban Institute, in fact, offers its own suggestions on how to diminish wealth inequality and racial wealth gaps:
- Limit the mortgage interest tax deduction. Use the money to offer a credit to first-time home buyers.
- Set up automatic savings in retirement plans.
- Reduce the need for student loans but still support college success.
- Offer universal savings accounts for kids.
- Reform safety net program asset tests. Why? Because they can prevent or hamper savings for low-income families.
- Offer subsidies to promote emergency savings.
“By more efficiently and equitably promoting saving and asset building, more people will have the tools to protect their families in tough times and invest in themselves and their children,” the institute concluded.
Indeed, the federal government spends more than $400 billion to support asset development, but that typically benefits higher-income families, the Urban Institute finds. Most homeownership tax and retirement subsidies go to the top 20 percent income-earners, while the bottom 20 percent get less than 1 percent.
Blacks and Hispanics who typically earn lower incomes get far fewer of these benefits.
Low-income families, though, can make use of various food and cash assistance programs, but those are income-based and don’t bolster savings. In fact, many discourage savings because families won’t qualify for benefits if they have a few thousand bucks saved up, the institute finds.
Here’s a snapshot of what the study reveals:
The fewer bucks that come into the household widens the wealth inequality. (Income being the money coming into a household while wealth is the family assets — real estate, businesses, savings — minus debt.)
The Urban Institute looked at private income (earnings and dividends) and cash government benefits, and found that incomes of families at the top of the heap rose about 90 percent from 1963 to 2016. But families at the bottom saw their incomes go up less than 10 percent.
Families near the bottom (at the 10th percentile) went from generally having no wealth to being about $1,000 in debt. Families in the middle more than doubled their wealth, while those at the 90th percentile had a fivefold increase. And those who have more wealth than 99 percent of the rest of us saw their wealth increase sevenfold.
The average wealth of white families in 1963 was $121,000 more than the average wealth of nonwhite families. By 2016, that had widened to $919,000 for white families compared to $140,000 for black families and $192,000 for Hispanics.
Whites grow more wealth than blacks or Hispanics do, and that increases as they age. In their 30s, whites average $147,000 more in wealth than blacks, or three times as much. By their 60s, whites have more than $1.1 million more than blacks, or seven times as much.
Think of this as the snowball effect. The less you earn, the less you can save. A white guy can average $2.7 million in lifetime earnings compared to $1.8 million for a black guy and $2 million for a Hispanic. Women fare even worse. A white woman can average $1.5 million over her lifetime compared to $1.3 million for a black woman and $1.1 million for a Hispanic. “These disparities partly reflect historical disadvantages that continue to affect later generations,” the institute’s report states.
Homeownership Benefits — or Maybe Not
Setting aside the housing and financial crash of the so-called Great Recession — largely the function of mortgage fraud and over-amped housing prices — homeownership is a great way to build savings in the way of equity. For white families, that is. In 1976, 68 percent of whites owned their own home while 44 percent of blacks and 43 percent of Hispanics did. In 2016, that gap had narrowed a bit for Hispanics but widened for blacks. And even if whites, blacks and Hispanic families had similar incomes, the whites still owned more homes.
Retirement and Student Loan Debt
Here’s another snowball coming at you. In 2016, white families had about $130,000 more (six times as much) in liquid retirement savings than blacks and Hispanics. This becomes more critical as defined-benefit (pension) plans go away in favor of 401(k)s.
But it’s about more than just income, the Urban Institute finds. Black and Hispanic families have less access to various retirement savings plans and don’t participate as much when they do.
As for student loans, the average black family has carried more such debt than whites since the mid-2000s. In 2016, 42 percent of black families with the head of the household in the 25 to 55 age group had student loan debt compared to 34 percent of white families. White families also are five times more likely to get big gifts or inheritances than blacks.
About Terry Sheridan
Terry Sheridan is an award-winning journalist who has covered real estate, mortgage finance, health care, insurance, personal finance, and accounting and taxation issues for newspapers, magazines, and websites. A Chicago native and former South Florida resident, she now lives in New England.