In the world of money and investing, we often refer to the power of compounding in terms of compound growth. Albert Einstein even referred to compound interest as the eighth wonder of the world, and for good reason. Building wealth with compounding growth takes time. But here in the US, our history has involved a somewhat uncomfortable, but significant piece of the wealth-building puzzle that’s completely out of an individual’s control – race.
While compounding works in the favor of a patient investor putting their dollars to work, in order to grow for their future self, we all must recognize that some have been able to enjoy the benefits of a free society, and the financial possibilities that come with it, for far longer than others.
In today’s America, we recognize that this is a sensitive issue for some to acknowledge, but an important one to discuss nonetheless. And a far more painful one for those affected by it on a daily basis, than for those uncomfortable with discussing it.
What if something you have no control over, ended up excluding generations of your ancestors from participating equally in society? From owning any land? From being able to vote? From getting an equal education? From a fair and equal justice system? From marrying who you love? From being able to earn a living doing what you love?
What if the 8th wonder of the world, which us in the world of investing and personal finance love to put on a pedestal, has actually worked in reverse for many in our own society for far too long, to no fault of their own? What’s stopping us from acknowledging our uncomfortable history of wealth inequality and a growing racial wealth gap, and doing something to improve outcomes for those disproportionately impacted by it? These are complicated questions, but let’s start by looking backward a bit…
A problem older than America itself
Juneteenth (June 19th), officially became a Federal holiday in 2021. While we are often taught in school that President Lincoln’s Emancipation Proclamation marked the end of slavery, it wasn’t actually until two and a half years later on June 19, 1865, that federal troops arrived in Texas and declared all slaves officially free. However, former slaves quickly learned that freedom would have a very different definition for them, than for White Americans.
An official end to slavery in the US was only the beginning of a painful pursuit of equality that continues to this day for far too many Black Americans. Following the Civil War, the period of Reconstruction in the South led to Jim Crow laws, which lasted until the 1960s, ensuring in that time that Black Americans would be held back from the ability to build a life for themselves and wealth for future generations.
If we take a step back even further, we see that the roots of racial economic disparity in today’s America actually began growing the moment African slaves first arrived in the colonies in the 1600s. North American slave labor laid the foundation for European settlers to obtain land, profit from that land, shape a political system, and ultimately create enormous wealth for themselves and future generations living in what today has become the most powerful economic engine in human history.
A four century head-start
While wealth inequality is a wide-ranging issue that can be broken down by many different socio-economic factors, it’s arguably no more glaring than when we look in particular at the role race has played in the widening gap.
Wealth and income inequality are often discussed synonymously, and while there is an obvious correlation, it can be helpful to distinguish between the two as separate issues. Wealth inequality is a far bigger problem today just about any way you look at it, largely due to the accumulating effects of centuries of income inequality.
Take a glass of water for instance. Income is like the water you pour into the glass. Wealth is the water that was already there to begin with. When you start with an empty glass and need a drink every time you’re thirsty (lose a job, emergency expense, medical bills, general bad luck, etc.), you’re often starting back at square one, beginning to refill an empty glass.
If your glass has any water at all in it to begin with, thanks to generations of your ancestors before you having economic and political advantages, then you are unlikely to ever truly go thirsty. You have a buffer – a cushion of support that is always there and unlikely to spill. That is wealth. And the water glass for Americans of European descent has largely been at least somewhat filled from even before the nation’s founding.
Many will argue that they themselves, while not Black, have never received an inheritance of any kind and have had their own major setbacks and seemingly endless challenges financially. This argument can often miss the point. While poverty is not uniquely a minority issue, it undeniably impacts minority families and individuals to a far greater extent in this country than white families and individuals.
On the other hand, having wealth, as expressed in terms of a positive net worth over $1 Million, is very much an achievement that far more white families are able to attain, compared to Black or Latinx families for instance. There are many reasons for this wide disparity, rooted in our history.
The wealth gap, by the numbers
A 2019 report from the Institute for Policy Studies had some alarming findings on the topic of race and wealth inequality. For instance:
- From 1983 to 2016, the median Black family saw their wealth cut in half after inflation. This compares to a 33% INCREASE for the median White household. In that same period, the number of households with $10 million or more grew by 856%
- The median Black family today has roughly $3,600 to their name, or just 2% of the wealth of the median White family.
- By 2050, it is estimated that median White wealth will be roughly $174,000, while Black median wealth will fall to just $600. At the current rate, by 2082, median Black family wealth is on track to reach $0.
- 37% of Black families have zero or negative net wealth, compared to just 15% of White families
- The Forbes 400 richest Americans own more wealth than the entire Black population plus a quarter of the Latinx population combined.
- Systemic discriminition has made Black families 20 times more likely to have zero or negative wealth than to have $1 million, while white families have an equal likelihood of either.
Throughout US history, generation after generation of Black Americans have disproportionately started with an empty or nearly empty glass, trying to play catch-up with a group that gave themselves a centuries-long headstart in compounding their wealth, and their ability for their wealth to create more and more wealth for future generations. A system designed specifically to benefit one group of people, was also intentional about holding back others, and in particular – Black Americans.
Housing segregation and redlining
One of the clearest examples of the intentional exclusion of Black families post-slavery is in housing segregation. Owning a home and/or land is a foundational step in building and growing wealth. But housing discrimination was woven into the fabric of American society from the beginning. By the mid 1900s, the creation of the 30 year mortgage and suburban housing developments led to a boom in wealth creation for lower and middle class White families.
But discriminatory practices like redlining, made it impossible for Black Americans to find the same opportunities. White families largely fled urban centers and their money followed, thanks in large part the G.I. Bill after World War II, which was denied to Black veterans. This exodus led to a severe lack of funding for inner city schools, transportation, public safety, access to quality food, healthcare, etc. These practices were widespread and held back Black Americans from pursuing their own American Dream of home ownership.
While things have certainly improved in recent decades, we have a long way to go. In 2020, 72% of White families owned their own homes, but only 43% of Black families did, which is actually a decline from a decade earlier, in 2010. It’s also much harder for Black Americans to get a mortgage, with just 21% of Black households having a credit score of 700 or more. This compares to more than 50% of White households.
The effects of housing segregation are lasting and can clearly be seen today in virtually every major urban core in the country. Here is a great and brief explainer on the topic that we encourage you to watch: (Warning: explicit language at the beginning)
Education segregation and discrimination
While the Supreme Court officially ended the practice of school segregation following Brown v. Board of Education in 1954, we still very much have a segregated public school system to this day, thanks in large part to the housing discrimination practices mentioned above.
Public schools are primarily funded by property taxes. The more valuable the homes in an area are, the more property taxes collected. The more property taxes collected, the more funding there is for schools, higher teacher salaries, and overall community resources. When White families began leaving cities for suburban areas in the mid 1900s, urban property values plummeted and suburban areas thrived. Black and other minority families who were largely left out of the American Dream of owning a home, were left with crumbling urban infrastructure, lack of political representation, and deteriorating schools.
Discrimination in the justice system
This issue really deserves a post of its own, but in terms of its impact on the racial wealth gap specifically, it can’t be left out of this particular discussion. A single mistake, particularly as a young Black man in America, can drastically alter the entire course of one’s life, to a far greater extent than a White peer.
Black Americans are 5.9 times more likely to be incarcerated than White Americans. It’s often cited that one in every three Black boys born in the year 2001 could expect to go to prison in his lifetime. This reality is an obvious contributor to the wealth gap.
With limited income opportunities and a lack of economic mobility in many Black-majority communities, desperation often leads to more crime. More court appearances likely means more overworked court appointed attorneys representing them. Which tends to lead to more convictions and harsher sentences. It’s a vicious cycle that’s very difficult to get out of.
Disparities in Retirement Savings
Limited income, home ownership, education, and general economic mobility also means significantly less lifetime earning, which ultimately means a major gap in retirement savings between Black workers and White workers. In fact, Black workers earn, on average, roughly 15% less than White workers, with significantly wider disparities among industries.
One of the greatest retirement savings vehicles available to workers in the US is the employer-sponsored 401k. However, access to these plans is also widely unequal. In 2019, two thirds of White workers had access to retirement plans at their place of work, compared to just about half of Black workers.
Participation rates also show a significant gap. When a 401k is available, White workers are far more likely to use them. According to a recent study by T. Rowe Price, roughly 58% of White workers with access to a 401k at work, enrolled and contributed to the plan. This compares to just 41% of Black workers.
Lower participation means missing out on an employer match (if offered), which on average is about 4.7% of a workers salary. This means even more future retirement savings left on the table.
In terms of the actual makeup of retirement savings among groups, Black investors tend to hold the majority of their savings in low risk vehicles like cash, bank savings accounts, money market funds, government bonds, and high cost insurance products. On the other hand when it comes to growth assets that have proven to hold the greatest wealth generating potential over time (like stocks), White investors own far more. In fact, just 9% of Black savers own any stocks at all, compared to 36% of White savers.
The pandemic has likely only made the retirement savings gap worse for Black Americans. While arguably necessary measures at the time, in order to prevent a deep recession, loose monetary policy from the Federal Reserve in response to an unprecedented economic shock, ended up pushing up the prices of high risk assets like stocks, and hampering returns of the lower risk assets that make up the majority of Black savers’ assets.
Closing the gap
The terms “systemic racism” or “institutional racism” are often misinterpreted as an accusation that anyone involved in, or benefiting from, the current system and status quo is therefore racist. That’s not a productive way to look at the issue.
Systemic racism essentially means that in this country, throughout our history we have built up institutions, laws, and an economic system that tends to produce widely disproportionate outcomes for people based largely on race. This is true despite what may have at times been the best intentions of the people working within these institutions.
Unfortunately, they often weren’t the best intentions at all. Acknowledging these facts is not an admission that you, or even your family before you, are/were directly responsible for these outcomes. It also should not take away from all the very real and true good America represents in the world, despite our uncomfortable origins and imperfections, which exist everywhere. But it is an essential step in finding reasonable resolutions that are likely to take time.
We can do hard things in this country. We always have. But far too few Americans truly understand these issues and their origins, or have the desire to. Without that understanding, the status quo will likely remain. Share these facts if you feel you’ve learned something, and form your own opinions about them.
We recognize the sensitive nature of the facts laid out here, but greatly appreciate the chance to share them with our readers and clients. As we celebrate this Juneteenth holiday, it’s important to take an open-minded and honest look at our past.
At blooom, we recognize that our financial system is broken in many ways for many people. And as a part of this system, we have a responsibility to shed light on these issues and contribute to resolutions. Our mission has always been to be disruptive of the status quo and to play a role in improving financial outcomes for those traditionally ignored in our industry. We believe we’ve made significant progress in reaching those who need unbiased, affordable financial advice the most, but there is so much more work to be done.
¹ All figures from 2019 report.
Published on June 19, 2022