February 24, 2016

The Privilege of Investing in our Kids and the Racial Wealth Gap

By Yunju Nam, Darrick Hamilton, William A. Darity, Jr., and Anne E. Price

America’s racial disparities in wealth are enormous. The white-to-black disparity in median net worth – the value of what a family owns over and above what it owes is 19 to 1.  (For a detailed description of this issue, see Hamilton and Darity’s Oct. 7, 2015 Urban Matters posting, “The Stark Black and White of America’s Wealth Divide.”) 

This vast wealth divide has deep, long-term implications. One consequence is that when black children become adults, they are far less likely than their white counterparts to get financial help from their parents for higher education – a disparity that has financial implications over the course of the adult child’s life and reinforce unequal socio-economic status across generations.

Our recent report, “Bootstraps Are for Black Kids,” illustrates how this plays out. We used data from the Panel Study of Income Dynamics (PSID) that consisted of almost 900 whites and just over 500 blacks between the ages of 35 to 46 in 2013, and who were children or step-children of household heads in the 1984 PSID sample. We are able to track whether an inter-generational financial transfer was made from parents to support an adult child’s costs of higher education – a widely accepted indicator of an investment in a child’s human capital.

White adult children – whose families have substantially more wealth – are more than twice as likely to receive financial support for higher education. Specifically, we find that 34% of white adult children received some financial help, compared to just 14% of black adult children. The reason for this divide is an enormous pre-existing structural disparity in black and white economic resources. Beginning with chattel slavery on through the foreclosure crisis in the aftermath of The Great Recession, the U.S. has a long history of racially disparate treatment and policy that has limited the capacity of blacks to accumulate and pass wealth from one generation to the next.

In spite of these realities, black families use comparatively meager financial resources to help pay for their children’s higher education. The median wealth of black parents who provide financial support for their adult children’s higher education is about $25,000. In contrast, the median wealth of their white counterparts who did not provide financial support was nearly 300% larger, almost $74,000, while the median wealth of white parents who did provide financial help was nearly $168,000 – about 675% greater than black parents who did provide support. Commitment to education has been a hallmark of black history in the USA, and these findings show that this tradition remains strong today.

We also found that parental financial assistance matters. Blacks and whites who received parental financial support for education experience better outcomes in homeownership, income, and household wealth than their counterparts who never received such support. 

Yet, despite our finding that over a quarter of the black adult children who received parental help attained a graduate degree, stark racial differences in both income and net worth persist. The median household income of blacks who got parental financial support for education is only about half that of their white peers ($58,583 versus $105,281), and their median household wealth is less than 20% that of their white peers ($17,300 versus $74,000) for this young adult population.  

So here is an inescapable conclusion: While black parents of modest means often unselfishly manage to assist their children in the pursuit of higher education that support alone is insufficient to produce dramatic upward mobility. It definitely does not translate into closure of the racial wealth gap. Indeed, the most certain route to economic security as you enter adulthood is to be born into a family with ample financial resources. 

Of course we don’t choose the family in which we are born. That’s why we advocate for the public provision of substantial Child Trust Accounts (“Baby Bonds”). These accounts could provide opportunities for asset development for all newborns regardless of the financial position of their families at birth. Child Trust Accounts would provide capital for young adults, enabling them to begin a lifetime of asset building and economic security.

Yunju Nam, Ph.D., is an associate professor in the School of Social Work at the University of Buffalo at the State University of New York. Darrick Hamilton, Ph.D., is an associate professor of economics and urban policy at the Milano School of International Affairs, Management and Urban Policy, and the Department of Economics, The New School for Social Research, both at The New School. William A. Darity, Jr., Ph.D., is the Samuel DuBois Cook professor of public policy, African and African American studies, and economics and the director of the Samuel DuBois Cook Center on Social Equity at Duke University. Anne E. Price, M.A., is managing director and chief asset officer at the Insight Center for Community Economic Development.