Wealth supports individuals and families in innumerable ways. In the form of homeownership, wealth facilitates school and neighborhood choice. In the form of financial assets, wealth is essential for managing financial emergencies such as sudden medical expenses. Wealth also begets wealth as financial assets may also facilitate higher education, homeownership, retirement, and the possibility of offering an inheritance to future generations.
Among policymakers and the general public alike, there has been a growing awareness of the persistent Black-White wealth gap. From 1983 to 2019, the average White households held 5 to 7 times the amount of net wealth of Black households; this gap has remained fairly constant over time. The average wealth gap between Hispanic and White households has received less attention, but is also persistent. Over the same period (1983-2019), average White households held between 5 to 6 times the amount of net wealth of Hispanic households. The median gaps are even more stark given how many Black and Hispanic households have no wealth. In 2019, the median White household had nearly 17 times as much net wealth as the median Black household and 11 times as much net wealth as the median Hispanic household.
What about the different components that comprise wealth? Research on racial wealth gaps often address “net worth”, meaning assets minus debts. But even in the examples discussed earlier, we can see that different forms of wealth are important for different reasons. Different forms of wealth may have different patterns over the life course as young adults experience the financial changes that come with finishing schooling, starting full-time work, or growing families. While homeownership has been the primary pathway to wealth building in the US, declining homeownership rates and a changing economy suggest that financial assets are increasingly important.
How have current millennial young adults accumulated wealth amid the many economic changes and challenges of the past few decades? Many, if not all, of the hallmark transitions in young adulthood involve financial changes: pursuing education, transitioning into work, or starting a family. Research has shown how racial disparities in student debt accumulation emerge and widen among young adults who ever enrolled in higher education. However, we know less about how young adults build wealth at this life stage and whether racial wealth gaps start to emerge in young adulthood. Because of the compounding nature of interest, racial disparities in wealth (and debt) accumulation at this stage of life set the course of racial disparities in middle- and later- life.
Our recent research sought answers to these questions about how racial wealth gaps emerge in young adulthood. We analyzed survey data that measured various types of assets of debts for millennial young adults at ages 20, 25, 30, and 35.
We found that substantial Black-White and Hispanic-White gaps in net worth, financial assets, and home equity emerge by age 35. Overall, there is slow growth in young adults’ assets between ages 20 and 25. However, by age 35, White young adults have seen exponential growth in their assets, Hispanic young adults have seen modest growth, and Black young adults have seen minimal growth. At the median (as opposed to the mean), these racial wealth gaps are much smaller, suggesting that some extremely advantaged White young adults may exacerbate racial wealth gaps on average.
Racial gaps in financial assets widen faster than corresponding gaps in other components of net worth. Even though many people think about homeownership as the most important piece of wealth building, our analysis showed that financial assets contribute more than home equity to exacerbating net worth disparities. Among this recent millennial cohort, diverging financial assets play an important part in expanding racial wealth gaps in young adulthood.
Compared to the racial gaps in positive assets, the racial gaps in debt are not as wide. This suggests that debt—student debt, among other types of debt—erodes the minimal positive assets that Black young adults accumulate. Other research has suggested that for Black young adults, debt signals financial exclusion while for White adults, debt facilitates wealth accumulation.
Young adulthood is a time when racial disparities in wealth emerge and begin to widen dramatically. In particular, a minority of very advantaged white young adults are responsible for widening racial wealth gaps in young adulthood. Given all the recent changes in young adulthood milestones and transitions in the Covid-19 pandemic, it will be important to continue to revisit these questions in the future.
As different forms of wealth are governed by distinct social and economic processes, no single policy may be sufficient to expunge them in their entirety. Accordingly, addressing racial wealth disparities will take a multi-pronged effort.
- Student debt cancellation – In recent years, researchers, policymakers, and everyday Americans have advocated for the total (or substantial) cancellation of student debt. This policy decision may have the largest effect on savings accounts as the reoccurring student debt payments have inhibited many Americans from saving for the future. As Black college graduates are the most burdened by student debt, this decision may provide the most relief for their savings accounts.
- Raising the minimum wage – Research has shown that raising the minimum wage substantially narrows the Black-White wage gap. While debt cancellation would eliminate debt but keep wages the same, raising the minimum wage would increase people’s income. The increase could increase savings, especially when coupled with debt cancellation.
- Baby bonds – This idea entails providing every newborn with a government-funded savings account that is managed by the government until the newborns reach adulthood. The amount of money initially dispersed into this account would be dependent on income, whereby lower-income families receive the highest dispersals. These funds are then invested and managed by the state until the child is old enough to access them. The amount amassed in these accounts could then be used to pay for college or make large investments such as buying a home or starting a business.
Ellen Bryer is a Postdoctoral Research Associate in the Annenberg Institute at Brown University. She can be reached at ellen_bryer@brown.edu.
Alexander Adames is a Presidential Postdoctoral Research Fellow in the Department of Sociology at Princeton University. He can be reached at adames@princeton.edu.