Deconstructing the Racial Wealth Gap Across Generations: It’s not just about inheritance

2020 was the year that “racial wealth gap” entered the mainstream lexicon. And one of the most important consequences of this discussion was that many people came to appreciate how the legacy of discrimination permeates down through generations. There was a new appreciation of how wealth transferred from older generations forms the foundation for the next generation to succeed economically. And how the absence of such a legacy fuels the inequality that we see today.

This is not new news of course. This excellent brief from the Brookings Institute describes the long-lasting effect of inheritances over generations. Unsurprisingly, the experience has been different for Black and white households.

But it is not just about whether a person inherits an economic asset (a home or an investment portfolio). As the Brookings brief also points out, wealth begets wealth in a myriad of ways. It is a virtuous circle when you are on the “right side” of it, and a vicious circle when you are not. Let’s pull on that thread a bit more…

Start with an obvious example, college education. [1] Higher income parents can save for their children’s education lessening the need for student loan debt. More insidiously, a higher income household will live in a neighborhood with better public schools (or pay for private tuition), increasing the likelihood that their children will go to college and perhaps even benefit from merit-based scholarships.

Consider parents and grandparents who can invest modest, but crucial, amounts in their young adult children’s entrepreneurial endeavors that create a springboard to future wealth. Or grandparents who, because of their wealth, are in robust health with no need for wage income through their retirement years. Consequently, they may be available to take on childcare duties for their young grandchildren. This act alone can allow parents to invest as much as $24,000 annually that they would not otherwise have been able to. I could go on at length enumerating the variety of ways that a wealthier household perpetuates that wealth through generations, even absent an actual inheritance.

What’s more useful is identifying and supporting specific public policies that target the inability of many parents — whether Black or not — to build future wealth for their children.

Here are a few that come to mind immediately:

· Affordable college education. This means increased taxpayer funding for higher education that leads to lower tuition and more grant aid. Student loan debt forgiveness addresses a symptom; it is not a lasting solution. Innovative ideas such as “Baby Bonds” (which can also be used for a home purchase) are another way to bridge this particular gap.

· Affordable childcare. This not only allows families to re-deploy resources to future wealth building, it also opens up opportunities for parents to advance their own education and skills.

· Universal high quality public elementary and high school education. It is simply not acceptable that families are shut out of the opportunity for quality education based on income.

· Broader down payment assistance for first time homeowners. I do have personal qualms about the seemingly relentless focus on home ownership as the “American Dream.” However, I will not rail against the empirical fact that owning a home, because it is a forced savings mechanism, is the most realistic way that most people can build wealth that can be handed down to the next generation. With home prices far outpacing wage growth, it simply is not realistic for many people to amass a useful down payment.

The list could go on of course. For example, there are existing initiatives to put more start-up funds into the hands of new entrepreneurs; which ones are effective and scalable? Wealthier elderly parents are less of a financial burden on their adult children; what does this imply for Medicare’s inability to cover any aspect of long term care? My intent here is to call attention to just a few opportunities for public policies that can level the playing field, by responding specifically to how higher income (not necessarily rich) parents are advantaged in creating an economic foundation for future generations.

[1] Yes, I know. Sometimes college does not “pay off” and trade school can be an excellent choice. However, research has repeatedly shown that lifetime earnings are higher for college graduates and I don’t see that changing in our knowledge-based economy. That said, whether economic return should even be the barometer of the value of a college education is, in my view, very much open to debate. Another story for another day.

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