In recent weeks, the growing economic disparities between younger and older Americans, as well as between whites and families of color, received a lot of media coverage. Yesterday, my colleagues Signe-Mary McKernan, Eugene Steuerle, and I told the Treasury Department’s Financial Literacy and Education Commission what we know about these trends and what we think can be done to address them.
The commission is charged with the very important role of educating the public about the complexities of personal finance, and as a part of that, maintaining an informative web site and hotline. We hope the knowledge we shared today can help the commission in its vital mission.
So first things first: how wide are the wealth gaps? Pretty wide.
Let’s start with a broad look across the wealth distribution.
Using data from the Federal Reserve’s Survey of Consumer Finances, we saw that the average American family’s wealth doubled between 1983 and 2010. However we also saw that only the wealthiest households saw anything like that level of growth.
Indeed, while the top 20 percent of wealth holders had an average wealth increase of 120 percent between ’83 and ’10, middle-wealth families only got 13 percent wealthier. On the other end of the distribution, the bottom 20 percent actually saw their relative wealth plummet, from an average debt of $400 in 1983 to an average debt of $17,000 in 2010.
Looking at the data through the prism of race shows a similar gap.
As white people transition from their 30s to their 60s, their average household wealth continually builds. Families of color, on the other hand, don’t have the same increasing trajectory and the disparity gets more pronounced the older people get.
For example, when Americans are in their 30s and 40s, whites have about three-and-a-half times more wealth than African Americans and Hispanics. By the time they reach their early to mid-60s, near the peak of their wealth accumulation, whites have about seven times the wealth of these groups.
The question is why? The answer is that African Americans and Hispanics are less likely to acquire traditional wealth building assets, such as homes and retirement savings.
Getting on a firm path to wealth building can be more difficult for families of color. African American and Hispanic families, for example, are about five times less likely than white families to receive large gifts or inheritances that could be used for major family investments like a down payment on a home or attending college.
The data also show that age is an important factor in wealth accumulation disparities.
Members of the baby boom and silent generations on average acquired a lot more wealth than Americans who were the same age a quarter century ago. For example, the average wealth of today’s Americans aged 56 to 64 is more than twice the amount held by people in the same age range in 1983.
Today’s Americans under 40 haven’t done nearly so well. People in their late-20s to late-30s have 21 percent lower wealth than those in the same age range 25 years ago.
So why do younger Americans have less wealth than prior generations had at their age?
The answers have to do with home equity and student loans.
- Home equity fell by roughly 60 percent between 2007 and 2010 and a lot of younger Americans bought their first home just before the housing crash, when home prices were at their peak, or close to it. So when the housing market crashed, these homebuyers were the hardest hit.
- Ranking only behind mortgage debt, student loans are the second largest source of debt for today’s Americans in their late-20s to late-30s. By way of comparison, student loans were a relatively small component of debt for their counterparts in the 1980s.
And large student loan debts can be especially debilitating by delaying traditional wealth-building behaviors, such as: homeownership, retirement savings, and building a rainy day fund.
So what can be done to help these vulnerable groups?
A great place for the Financial Literacy and Education Commission to focus is on finding innovative ways to prevent young Americans from burying themselves in student loan debts that are likely to prevent them from making wealth-accumulating investments after they finish school.
But teaching financial literacy at younger ages is also critical. The earlier in life a person begins to build wealth, the more time those assets have to compound and become more valuable. So the key is to teach more people to make sound financial decisions earlier in life.
Building a national financial education strategy that permeates throughout our financial and academic institutions can get more people off on the right foot and headed towards a more secure financial future.