The Racial Wealth Gap and Today’s American Dream

February 21, 2018

Data suggest dramatic differences in financial well-being by race

By Erin Currier and Sheida Elmi

There is a growing recognition among Americans that moving up the income ladder in the United States can be challenging: As recently as 2014, only 23 percent of Americans believed that it’s common for someone to start poor, work hard, and become rich, which was down 16 percentage points from just five years earlier.

The data back up this perception, making clear that many Americans born into the bottom fifth of the economic ladder never make it to the middle, let alone the top. The problem is particularly acute for families of color—and especially African American families—who are not always able to climb the economic ladder in the same way as their white peers. In 2014, 51 percent of respondents to the nationally representative Survey of American Family Finances, conducted by The Pew Charitable Trusts, said their households were financially secure. But there were significant differences by race: While 54 percent of white households reported feeling financially secure, the figure dropped to 37 percent for black households.

Perhaps not surprisingly, then, one key metric of financial security—liquid savings, or money held in checking and savings accounts, unused balances on prepaid cards, and cash saved at home—also differs drastically by race. While the typical white household, in Pew research from 2014, had 31 days of income in such savings, the typical black household had just five days’ worth.

The racial gap goes beyond liquid savings, extending to financial assets—investments and retirement savings in addition to liquid savings—as well. In 2014, a quarter of black households would have less than $5 if they liquidated such assets, compared with the bottom 25 percent of white households—which would have as much as $3,000 after asset liquidation. And though having at least one household member with a college degree improves all family balance sheets, the benefits of education are also unevenly distributed by race and family structure. Among survey respondents who were college-educated, in a couple, and had no children, typical white respondents in 2014 had more than three times the wealth—a household’s total assets minus total debts—than their black counterparts. (See more about these differences with Pew’s “Portrait of Financial Security” interactive.) A similar gap holds for homeownership—a main driver of wealth—in the United States: According to the U.S. Census Bureau, the white homeownership rate as of the fourth quarter of 2017 was 72.7 percent, while the black homeownership rate was 42.1 percent—the largest such disparity since World War II.

These household differences roll up to the community level, where families often live next to people of the same race and with similar education and income levels—creating neighborhoods segregated by socio-economic status. In fact, Pew research has shown that three-quarters of the residents of low-poverty neighborhoods are white, compared with just a third of those in high-poverty communities. Likewise, researchers at UCLA have found that schools in the South are now as segregated as they were about 50 years ago. This matters because research by Pew and others has shown that metro areas with the highest rates of economic segregation also experience the lowest rates of economic mobility; their residents are less likely to move up and down the income ladder over time than are those in areas with more economic integration.

The Generation X population in the United States, born between 1965 and 1980, provides more evidence of a racial gap in economic mobility, which is influenced by many factors, including family structure and educational attainment as well as race. Gen Xers are now adults in their prime working years, so they’re likely to have completed their education and started families—and research shows that theirs may be the first generation in recent U.S. history to fall behind previous generations in wealth accumulation. Race is critical in this story: Simply put, Gen Xers raised at the top of the income ladder—by financially comfortable, well-educated parents, almost all of whom are white—become financially comfortable and well-educated themselves; Gen Xers raised at the bottom of the ladder have the opposite family background and economic outcome, and are statistically far more likely to be black than those at the top of the ladder. Four in 10 Gen Xers who remain at the bottom of the economic ladder, in fact, are black.

The persistent wealth gap between black and white households remains a challenge, especially as the U.S. population becomes more racially diverse. The data serve as a call to action for policymakers, community leaders, employers, and philanthropists to work together to find ways to create a more equitable system for this ever more diverse population. There will be no single, simple solution. The answers will be complex and difficult. But the time has come to identify the programs and policies that can help families improve their financial lives—and promote economic mobility for all.

Erin Currier is a director and Sheida Elmi is a senior associate with The Pew Charitable Trusts’ financial security and mobility project, which conducts original research on the balance sheets of U.S. households to assess the degree to which short-term financial security relates to longer-term economic mobility.