The Senate Small Business and Entrepreneurship Committee today gathered researchers, small business owners, and government leaders to talk about solutions for closing the racial wealth gap and empowering minority-owned businesses to grow and thrive.
This is a pressing matter for policymakers because, as things stand, we’re headed in the opposite direction.
Research I conducted and published with my colleagues Caroline Ratcliffe, Eugene Steuerle, and Sisi Zhang shows that the racial wealth gap is substantial. In fact, it is three times larger than the racial income gap. This distinction is important because wealth is where economic opportunity lies.
Wealth isn’t just money in the bank, it’s insurance against tough times. It’s tuition to get a better education and a better job. It’s capital to start and build a small business. It’s savings squirreled away for retirement. In a nutshell, it’s a springboard to the middle class.
Our research shows that as wealth accrues over peoples’ lives, the wealth gap just gets wider. In their 30s and 40s, white people have roughly three-and-a-half times more wealth than people of color. By the time they reach their 60s, the peak of their wealth building years, that gap has doubled.
In particular, African American and Hispanic families are far off the wealth-building pace of white families.
They often miss out on traditional wealth-building opportunities such as homeownership and retirement accounts. Part of the reason is that they are five times less likely to receive a large gift or inheritance, which could be used to pay for education, a down payment on a home, or to launch a business.
Widening the racial wealth gap even further are federal subsidies delivered through the tax code. Tax benefits such as the mortgage interest deduction and preferential treatment of retirement savings primarily benefit high-income families, leaving behind African American and Hispanic families who have and earn less.
In order to tackle the growing wealth gap, Caroline Ratcliffe and I recommended five steps to the policymakers on the panel:
- Make homeownership tax subsidies more equitable. Homeownership has long been the primary saving mechanism for low- and middle-income families and can be a stepping stone to the middle class. A first-time homebuyer's tax credit targeted to low-wealth families could help reduce the wealth gap.
- Promote retirement savings through automatic individual retirement accounts (IRAs). Many low-wage workers do not have an employer-sponsored savings plan. Legislators should establish a program where employers that do not offer plans could use their payroll system to automatically deposit a portion of employees’ earnings into an IRA. Any employee who did not want to participate in the program could take steps to opt out. This is an important design feature, as automatic enrollment in 401(k) programs has been found to substantially increase 401(k) participation.
- Reauthorize the Assets for Independence program. The Assets for Independence program is the primary source of funding for individual development accounts (IDAs). These are personal savings accounts directed toward low-income households to help them save for investments in education, small businesses, or homes by matching earned income deposits and providing other program supports. Research suggests that IDAs have helped maintain homeownership. For example, foreclosure rates for homebuyers who bought through an IDA program were one-half to one-third the rate of other low-income homeowners in the same communities.
- Increase access to high-quality education for low-wealth families. As mentioned above, African American and Hispanic families less frequently receive a large gift or inheritance that could be used for important investments, such as higher education. Public policies that subsidize education could enable families without these resources to go to college, boosting their earning capacity and their ability to accumulate wealth.
- Improve access to small business capital for low-wealth minorities. Self-employment can patch income shortfalls, improve earnings growth, and diversify a family’s wealth base beyond homeownership and retirement assets. But access to capital continues to be more difficult for minorities, who are less likely to receive conventional small business loans or large gifts.
The racial wealth gap is large and formidable, but with strategic thinking and cooperation on the part of policymakers, small business owners, and researchers, we can begin to close the gap and make America a land of more equitable opportunity for future generations. Photo: Signe-Mary McKernan of the Urban Institute testifies before the Senate Small Business and Entrepreneurship Committee