Throughout this week, Urban Institute scholars offer evidence-based ideas for policies that can make a difference for communities in Baltimore and beyond grappling with inequality and injustice. Although this series covers a lot of issues, we by no means address all the challenges that matter.
An equitable society—one in which all members are valued, experience just treatment, receive fair compensation for their efforts and contributions, and can reach their maximum potential—is an ideal long heralded in this country. But this ideal has not yet been achieved, and recent trends indicate that inequity is growing, rather than receding. Just as the demography of the country is shifting, with communities of color making up a growing share of the population, the levels of economic and social inequity are climbing.
The very populations that are soon to become the majority have been hardest hit by growing inequity. People of color face both an income gap and a wealth gap compared with white people, but the wealth gap is substantially larger and growing. The average income of white families is twice that of families of color, and this gap has remained relatively steady since the 1980s. However, white families had about five times the wealth of families of color, on average, in 1983 and over seven times by 2013.
While many studies focus on individual deficits when assessing reasons for the disparity in wealth—for example, recommending more financial education—structural barriers play a bigger role. Primary drivers of racial wealth disparities include years of homeownership; income; college education; and wealth transfers including inheritance, financial supports from families or friends, and pre-existing family wealth.
These barriers mean that equal efforts by African Americans and whites yield unequal gains in wealth. For example, discriminatory practices in the labor market result in African Americans being disproportionately segregated into industry sectors (service and sales) that typically do not provide employer-based benefits such as retirement savings plans, tuition assistance, health insurance, and paid sick leave. Consequently, African Americans must use more of their income to provide for these benefits themselves, while whites can save and invest more of their income and receive employer matches. On average, $1 of income yields $5.19 in wealth for whites, but only $0.69 for African Americans.
Children’s savings accounts offer one solution. This concept involves opening a publicly funded bank account for every newborn. Babies born into low-income families would receive larger deposits into their accounts and matching dollars for any private contributions. These accounts would be preserved until the children turn 18 and can then use the funds to invest in long-term assets such as higher education, a home, a business, or a retirement savings plan.
Research has documented that when low- and moderate- income households are provided the same kinds of structures and incentives to save as upper-income households enjoy, these families do save and invest in long-term assets. While the amount of savings that families contributed, on average, were relatively modest, when combined with the initial deposit and matching dollars, and compound interest over time, the accumulation can be substantial. Moreover, low- and moderate-income students with savings accounts of less than $500 are three times more likely to enroll in college and four times more likely to graduate than low- and moderate-income students without savings accounts.
A decade ago, the America Saving for Personal Investment, Retirement, and Education Act (ASPIRE) was introduced in Congress with bipartisan and bi-cameral support, but was not enacted. Such legislation could be an important step in creating equitable access to asset-building opportunities.
Illustration by Adrienne Hapanowicz, Urban Institute