Racial Wealth Disparities: Reconsidering the Roles of Human Capital and Inheritance

Abstract

In this paper, we present updated measures of racial disparities in wealth using the most recent data from the Survey of Consumer Finances (SCF), augmented by household-level estimates of defined benefit (DB) pension wealth developed by Sabelhaus and Volz (2020). Including this important asset, we find that racial wealth disparities are smaller than the numbers typically discussed in other research or in the media, but the disparities remain substantial. The paper proceeds by exploring two specific factors that have long been identified as playing potentially important roles in generating disparities in wealth by race, namely differences in earnings (education/human capital) and intergenerational transfers in the form of inheritances and inter vivos gifts. We contribute to the existing literature by introducing several data innovations in the exploration of these factors using the SCF. We augment the SCF data with individuallevel lifetime earnings histories (developed by Jacobs et al. 2020Jacobs et al. , 2021 and enhanced measures of intergenerational transfers (developed by Sabelhaus 2018, 2019). We also create an expanded set of variables that reflect the range of pension coverage and generosity across workers. With all three of these new data components, we use non-parametric decomposition techniques to estimate their contributions to racial wealth gaps between white and non-white families. Differences in lifetime earnings, pension generosity, and a handful of other human capital and work-related variables explain threequarters of the white/Black wealth gap and 80 to 90 percent of the white/Hispanic gap. Reweighting white family wealth to match the distribution of human capital traits of families of "other" races (including Asian, Native American and other groups) raises counterfactual white wealth to the level of "other" family wealth, nearly closing the white/"other" gap. Differences in intergenerational transfers are found to account for 13 to 16 percent of white/non-white private wealth gaps, although much of the influence of these transfers likely works through the human capital channel. Policies that successfully increase skills, employment, earnings, and pension coverage among low-wealth Black and Hispanic families will make important contributions to closing wealth gaps.

What Role for ‘Generational Wealth’ in Explaining Racial Wealth Disparities?

“…Only 39 percent of those having received an inheritance or inter vivos transfer plan to leave a substantial estate themselves. Less than half (44 percent) of those planning to leave a sizeable estate have received an inheritance (Sabelhaus and Thompson, 2022). If only 4 in 10 of the 32 percent who receive an inheritance end up leaving an estate, then we will see just 13 percent of the third generation inherit some portion of the wealth that was held during their grandparents' generation.…”

“…Second, we calculate the share of wealth reported at the time of the survey that might, according to a range of assumptions on returns to and consumption of bequests, be accounted for by inheritance. Third, we present some statistics exploring the 16 Thompson and Suarez (2019) also evaluate some broader indicators of financial support from family that could potentially help explain racial wealth disparities-discussed in greater detail below in footnote 15-which are not addressed in this paper but are addressed at length in Sabelhaus and Thompson (2022).…”

“…The decomposition technique we use estimates the private wealth of white families after reweighting the white sample so that it has the same distribution of traits (in this case intergenerational transfers) as non-white families. 19 The extent to which the white/non-white 18 For those receiving particularly large gifts, however, the lasting intergenerational legacy of bequests looks somewhat different (Sabelhaus and Thompson 2022). Among recipients of inheritances or inter vivos transfers (ever received, 3 percent growth) in excess of $300,000, the share planning to leave a sizeable estate rises to 50 percent compared with just 22 percent among those receiving transfers of less than $25,000.…”

“…The additional factors that we consider here are the lifetime earnings variables developed for the SCF by Jacobs et al (2022), current earnings, number of years on current and longest held past jobs and years worked full time, as well as a series of variables capturing pension plan coverage and generosityincluding current as well as past job plans for both employees and self-employed. See Sabelhaus and Thompson (2022) for a more complete discussion of the lifetime earnings and the employment-based pension variables. Demographic controls include age, the number of children in and out of the home, family structure, number of siblings, and age of parents and whether they are living.…”

“…Thompson and Suarez (2019) hypothesize that expectation of future financial assistance is a likely indicator for past receipt of assistance and employ it as a proxy for additional family financial support. In the working paper related to this paper (Sabelhaus and Thompson 2022), we explore this variable and find that, conditional on inclusion of human capital controls, it contributes little to explaining racial disparities in wealth. More importantly, though, we do not regard this question as a suitable proxy for past receipt of financial assistance from family.…”