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

Abstract

In light of a recent surge of interest in the topic of “generational wealth” and its potential to close racial disparities in wealth, this paper revisits an older literature with updated data and methods. Previous research found that inherited wealth contributed only modestly to racial disparities in wealth, or even reduced those disparities, but suffered from numerous shortcomings. This paper uses more recent data (through 2019) that recovers intergenerational transfers not reflected in prior research. We also include the asset value of defined benefit pensions – a source that accounts for 15 percent of all household wealth and is of particular importance for non-white households – into our measure of wealth, and exploit nonparametric decomposition techniques. Despite these innovations, our findings are consistent with earlier research that intergenerational transfers can account for a relatively small share of the racial disparities in wealth that we observe in the data. When no other controls are included, we find that differences in intergenerational transfers account for 13 to 16 percent of white/non-white private wealth gaps. When we control for lifetime earnings, workplace pensions, and a handful of additional human capital variables, the marginal contribution of intergenerational transfers shrinks considerably, but the combined portion of the racial wealth gap that is explained rises to 80 to 90 percent. Policymakers interested in helping households build wealth are advised to look to ways that would enable them to boost the earnings that they receive over their lifetime.