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 		 [Unlike income inequality, wealth inequality along racial lines in
the US has received relatively little attention. This column presents
new evidence on the changing landscape of relative wealth among
whites, blacks, and Hispanics between 1983 - 2016]
[https://portside.org/] 

 THE DECLINE OF AFRICAN-AMERICAN AND HISPANIC WEALTH SINCE THE GREAT
RECESSION  
[https://portside.org/2019-01-01/decline-african-american-and-hispanic-wealth-great-recession]


 

 Edward Wolff 
 December 23, 2018
VOX CEPR Policy Portal
[https://voxeu.org/article/decline-african-american-and-hispanic-wealth-great-recession]


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 _ Unlike income inequality, wealth inequality along racial lines in
the US has received relatively little attention. This column presents
new evidence on the changing landscape of relative wealth among
whites, blacks, and Hispanics between 1983 - 2016 _ 

 , 

 

While many studies have documented the wide disparity in income
between whites on the one hand and African-Americans and Hispanics on
the other, the gap in wealth is even greater. In seminal work on the
subject, Oliver and Shapiro (1995) document and analyse the sources of
the wealth differences between blacks and whites and discuss some of
the deleterious effects of low wealth on the wellbeing of black
families – including access to decent housing and education, poor
health, lower longevity, and the like.

The racial disparity in standard wealth holdings in the US, after
fluctuating over the years 1983 to 2007, was almost exactly the same
in 2007 as in 1983 – with a ratio of mean wealth between the two
groups of 0.19 (see Wolff 2017 and 2018 for more details). Median net
worth among black as well as Hispanic households was close to zero
over the whole time period, as were the ratios of median wealth
between minority and white households. However, the Great Recession
from 2007 to 2010 hit African-American households much harder than
whites, and the ratio of mean wealth between the two groups plunged
from 0.19 in 2007 to 0.14 in 2010 (see Figure 1). Indeed, the mean
wealth of black households suffered a 33% decline in real terms (see
Figure 2). White wealth, in contrast, declined by 12%. The relative
(and absolute) losses suffered by black households from 2007 to 2010
are to a large extent ascribable to the fact that blacks had a higher
share of homes in their portfolio than did whites and a much higher
debt-net worth ratio (0.55 versus 0.15). These factors led to a wide
disparity in annual real rates of return on their respective
portfolios (-9.92 versus -7.07%). Between 2010 and 2016 there was no
change in the racial wealth gap.

FIGURE 1 Ratio of mean net worth by race and ethnicity, 1983-2016

FIGURE 2 Mean net worth by race and ethnicity, 1983-2016 (1000s of
2016 dollars)

Hispanic households made sizeable gains on whites from 1983 to 2007.
The ratio of standard mean net worth grew from 0.16 to 0.26, the
Hispanic homeownership rate climbed from 33 to 49%, and the ratio of
homeownership rates with white households advanced from 48 to 66%.
However, in a reversal of fortunes, Hispanic households got hammered
in the years 2007 to 2010, with their mean net worth plunging in half,
the wealth ratio falling from 0.26 to 0.15, their homeownership rate
down by 1.9%, and their net home equity plummeting by 47%. The
relative (and absolute) losses suffered by Hispanic households over
these three years were also mainly due to the much larger share of
homes in their wealth portfolio and their much higher leverage (a
debt-net worth ratio of 0.51 versus 0.15). These factors led to a
large difference in real returns over the years 2007 to 2010 (-10.76
versus -7.07% per year).  Unlike black households, there was a
rebound in Hispanic wealth from 2010 to 2016 and the ethnic wealth
ratio went up from 0.15 to 0.19, though still well below its 2007
peak.  

Differential leverage and the resulting differences in rates of return
on net worth played major roles in accounting for the relative
collapse of the wealth of minorities over the Great Recession. The
high positive rate of return among black households explained about
three quarters of the advance of their wealth from 2001 to 2007, while
the negative return accounted for 78% of the ensuing collapse from
2007 to 2010. Among Hispanics, it accounted for 59% of the gain in the
first period and 57% of the drop in the second. Racial differentials
in returns accounted for 43% of the relative wealth gain of black
households from 2001 to 2007 and 39% of decline from 2007 to 2010.
Disparities in returns played a somewhat smaller role in explaining
changes in the ratio of mean wealth between Hispanics and whites. Over
the years 2001 to 2007, they accounted for 33% of the relative wealth
gain and over the years 2007 to 2010 for 28% of the relative
drop-off.    

The standard definition of wealth (net worth) includes marketable
assets such as housing and other real estate, bank deposits and money
market accounts, securities, corporate stock and mutual funds, defined
contribution (DC) pension plans, including IRAs and 401(k)s, and
unincorporated businesses. What if we now include Social Security
wealth and defined benefit (DB) pension wealth to obtain a broader
measure of wealth? Augmented wealth is defined as the sum of
conventional net worth, DB pension wealth, and Social Security wealth.
DB pension wealth is defined as the present value of the discounted
stream of future DB pension benefits and Social Security wealth in
analogous fashion is the present value of the discounted stream of
future Social Security pension benefits. When the definition of wealth
is so expanded, the wealth gap markedly shrinks. 

There was a profound alteration of the private pension system after
1989, with a dramatic rise in DC pensions and a corresponding decline
in DB pensions. However, the take-up rate in DC coverage was much
greater for whites than the two minorities, with the share of
households with DC plans climbing from 26% in 1989 to 60% in 2016
among whites, from 16 to 34% among blacks, and from 13 to 31% among
Hispanics. The percentage with DB pensions declined for all three
groups. All in all, the proportion holding any pension wealth went up
from 62 to 72% among whites, from 40 to 50% among blacks, and from 31
to 40% among Hispanics.  

In 2016, there still remained sizeable gaps in retirement wealth (the
sum of pension and Social Security wealth) and augmented wealth
between minorities and whites, though these gaps were considerably
smaller than those in standard net worth. The ratio of pension wealth
(the sum of DC and DB pension wealth) of African-Americans to whites
was 0.3 (see Table 1). This difference largely reflects disparities in
pension holdings. The gap in Social Security wealth was much smaller
– a ratio of 0.6. Overall the retirement wealth of the former was
45% that of the latter.  Over time, the black-white ratio of pension
wealth went more or less steadily downhill, from 0.45 in 1989 to 0.3
in 2016, while the ratio of Social Security wealth went uphill, from
0.44 to 0.6. As a result, the racial gap in retirement wealth was
about the same in 2016 as in 1989. The ratio of pension wealth between
Hispanics and whites was 0.22 in 2016. The ethnic discrepancy in
Social Security wealth was about the same as the racial difference, as
was the gap in retirement wealth. Almost in parallel to the racial
discrepancies, the Hispanic-white differential in pension wealth
enlarged, that in Social Security wealth narrowed, and the ratio in
retirement wealth was about equal in 2016 and 1989. 

TABLE 1 Ratio of mean retirement and augmented wealth, by race and
ethnicity, 1989-2016

_Source_: Author's computations from the 1989, 2001, 2007, and 2016
SCF. 

The most notable finding is the ratio of augmented wealth between
blacks and whites was 0.27 in 2016, about double the ratio in standard
net worth.  While the black-white ratio of mean net worth declined
between 1989 and 2016, the ratio of augmented wealth was about the
same in the two years. Social Security made the difference, since the
ratio of mean net worth plus DB pensions between the two fell from
0.22 to 0.18. Likewise, the ratio of augmented wealth between
Hispanics and whites was greater than that of net worth – 0.28
versus 0.19 in 2016. The ethnic ratio of augmented wealth was a bit
higher in 2016 than in 1989, as was the ratio of net worth. 

The main reason for the lower wealth gap in augmented wealth than net
worth between minorities and whites is that the portfolio composition
of augmented wealth was much more heavily tilted toward Social
Security among the former. In 2016, Social Security wealth comprised
46% of the augmented wealth of blacks and 44% among Hispanics,
compared to 20% among whites (see Table 2). Pension wealth made up 23%
among African-Americans, compared to 21% among whites and 16% among
Hispanics. Correspondingly, net worth (excluding DC pensions) was
more important for whites, accounting for 59% of their total wealth,
compared to 31% among blacks and 40% among Hispanics.  Over time,
pension wealth (particularly DC wealth) rose in importance for whites
but remained more or less constant for blacks and Hispanics. Social
Security wealth, in contrast, rose as a share of total wealth for
blacks, remained constant among Hispanics, but fell among whites. 

TABLE 2 Portfolio composition by race and ethnicity, 1989-2016
(percentage of augmented wealth)

_Source_: Author's computations from the 1989, 2001, 2007, and 2016
SCF. 

This study highlights the importance of Social Security in the
minority community. In 2016, Social Security made up a much greater
share of total (augmented) wealth of minorities than of whites. On a
policy note, efforts to curtail Social Security payouts will have a
much more deleterious effect on the finances of the two minority
groups than among whites. 

References

Oliver, M L, and T M Shapiro (1995), _Black Wealth/White Wealth:  A
New Perspective on Racial Inequality,_ Routledge.

Wolff, E N (2017), _A Century of Wealth in America,_ Harvard
University Press. 

Wolff, E N (2018), “The Decline of African-American and Hispanic
Wealth since the Great Recession,” NBER Working Paper No. 25198.

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