Are black households richer in the South?
In recent research, we discussed the state of Hispanic household finances in the United States. Now we would like to do the same for black households.
At first glance, a major source of the growing racial wealth gap in the United States is simple: many black households continue to have fewer savings and assets than white households. However, there is an important nuance under the surface that deserves consideration.
First of all, despite millions of black leave the South as part of the Great Migration, the South is still where most black families live, and we’ve found it has offered them better financial outcomes over the past few decades. This continues the work our behavioral research team has been doing on how where you live affects savings based on our own analysis of PSID data.
Moreover, when we level the playing field by comparing black and white families with similar levels of income, education, and location, among other factors, the savings rate differences between black and white households disappear and disparities in retirement savings are reduced. This means that the differences are not primarily due to race, but to disparities in social and economic circumstances that could be ameliorated by possible structural and political changes.
Are black households doing better financially in the South?
Across all American households, wealth inequality is growing rapidly, with the impact most concentrated on black households. For example, the median black household in the South saw its wealth decline from $33,000 in 2001 to consistently below $20,000 from 2009 to 2019 (Figure 1). Outside the South, median black households had about 50% less wealth during this period, starting with just $19,000 and falling to less than $6,000 through 2019.
Median white households have also seen steep declines in their net worth — especially outside the South — but those declines have not been as drastic as for black households. As a result, the size of the racial wealth gap between median households has increased.
At the start of this period, we estimate that the median black household typically owned about 25% of the wealth of a median white household in the South. However, this ratio fell to 13% in 2019. The racial wealth gap was much larger outside of the South as a median black household owned only 10% of the wealth of a median white household in 2001 to begin with. and that number has further decreased to just 4% by 2019.
The wealth of black households is invested in low-yielding assets
A general rule of building and maintaining wealth is that spreading it across multiple asset classes (eg, stocks, bonds, collections of value, etc.) can help reduce exposure to financial risk. However, the wealth of black households appears more concentrated in low-yielding assets, such as homes and automobiles, compared to white households, which have more of their wealth placed in non-retirement brokerage accounts.
This trend is consistent with previous research, which concludes that low-income households may be forced to focus on low yielding assets out of necessity. Although the trends are similar by location, the wealth of black households in the South is slightly more focused on tangible assets, such as a home or business, while black households outside the South seem to have more wealth in accounts. retirement and brokerage in the workplace.
Black households save less, including for retirement
One factor that directly aggravates the racial wealth gap is the racial savings gap, which has become consistently large over the past few decades.
Figure 3 shows that the typical Black household saved only about 1-2% of their income between 2001 and 2019, including several years when families were unable to save at all. Median white households, however, saved between 4% and 7% throughout this period. Median black households outside the South have generally saved similar proportions of their income to their Southern counterparts, although in recent years their rates appear to be slightly lower.
Our research found that most black households had no workplace pension plan during the 2001-19 period. There has also been a remarkable lack of growth in median assets in these plans, which increased only slightly from $16,600 in 2001 to $20,000 in 2019. Meanwhile, white household participation in plans Workplace retirement income has remained stable and median assets have doubled from $23,500 in 2001 to $55,700 in 2019.
Income and education boost black household savings rates
When we look at a range of factors that can contribute to black household savings, income and education top the list. These factors have such a significant impact that when we compare two median households, a black and a white, practically similar otherwise, they save at the same rate.
Among median Black households, a 50% higher income is associated with a 0.6 percentage point increase in their overall savings rate and a 0.2 percentage point increase in their retirement savings (Table 4 ), even controlling for education and other factors. Southern black households, in particular, show larger increases in savings linked to higher incomes.
The boost that education gives to savings rates is even stronger. When we compare two households that are otherwise similar in terms of income and other factors, median black households outside the South led by a college graduate save at a significantly higher rate than those led by an adult who does not. did not complete high school. For retirement savings, there is also a higher rate for median black households outside the South headed by a college graduate compared to households headed by an adult who has not completed high school.
Increasing savings is the key
Our results strongly suggest that improving Black households’ access to higher incomes and education could increase their savings rate and thus reduce the racial wealth gap. It would also be helpful if future research reveals which aspects of the South allow median black households to have better financial outcomes than other parts of the United States. The fact that the South has larger proportions of black residents, less urban racial segregationand one lower cost of living offer some important clues.