Essay No. 1: Race, Ethnicity and Wealth

The Demographics of Wealth
How Age, Education and Race Separate Thrivers from Strugglers in Today's Economy
Essay No. 1: Race, Ethnicity and Wealth


Hello. The St Louis Fed established a Center for Household Financial Stability in 2013 to research and otherwise draw attention to the balance sheets of struggling American families. A balance sheet shows what a family saves, owns, and owes, their wealth or their net worth. Families with healthy balance sheets are more economically stable and more likely to move up the economic ladder. And when families are economically strong, so is the economy.

This year, the center is examining the demographics of wealth. We will publish several papers on the roles that race, education, and age increasingly play in determining whether someone is a thriver or a struggler. In fact, a new economic divide is emerging between thrivers and strugglers, one that Bill and Bryan will say more about in a minute. Our primary data source is the 40,000 families who have been interviewed over 25 years through the Federal Reserve's Survey of Consumer Finances. This survey provides the nation's most comprehensive picture of American families' balance sheets and financial behavior over time.

Thriving families typically earn above average incomes, make sound financial choices, and accumulate significant wealth in the long run. Typically, these are families headed by someone who is middle aged or older, White or of Asian descent, and with at least a college degree. Families in these groups, whom we call thrivers, represent about one in four families. They own about 2/3 of the economy's wealth, however, despite being just 1/4 of the population.

The other 3/4 of the families are in groups that are struggling. They are accumulating little or no wealth. Together, they own about 1/3 of the country's wealth, far less than they did 25 years ago. In comparison to the thrivers, they are younger and less educated, make less conservative financial choices, and earn average or below average incomes. They are also more likely to be Black or Hispanic.

the focus of our first paper in this series. With few exceptions, the financial patterns evident in 2013, the most recent year for which we have data, echo those apparent throughout the period since 1989, at least among Whites, Hispanics, and Blacks. Asian families have changed the most, moving away from the relatively low wealth levels of Hispanic and Black families toward the higher level of Whites. Given the remarkable increase in educational attainment by younger Asians in recent decades, virtually all measures of their income and wealth will surpass those of Whites eventually.

In 2013, the median wealth estimate for Whites was about $134,000. For Asians, it was $91,000. For Hispanics, it was just $14,000, and for Blacks, it was even less at $11,000.

The picture looks a bit different when you look at just income, which is a major factor in wealth accumulation, but certainly not the same thing, despite what many people think. Black and Hispanic families earn about 40% less income than Whites. This time, Asians rank above Whites. The median family income among Asians has, in general, grown faster than median White incomes since 1989.

One of the secrets to wealth accumulation is avoiding too much risk when building a balance sheet. A strong balance sheet shows liquidity, and by that, I mean cash in reserves for emergencies. It also shows a mix of assets and a manageable level of debt. There should be a prudent trade off between risks and rewards.

Whites and Asians have much more liquid balance sheets than do Hispanics or Blacks, on average. These cash reserves buffer a family against financial shocks that could lead to high-cost borrowing, distressed asset sales, or costly default on debts. White and Asian families also have a greater share of their assets invested in financial assets and business assets, which provide both asset diversification and higher average returns in the long run than a portfolio consisting mostly of tangible assets, like a house or cars.

And whites and Asians have about half as much debt as Hispanic and Black families as a share of total assets.

So how do we explain these racial disparities when it comes to wealth? Two possibilities are that the thriving groups tend to be older and better educated on average than the strugglers. In fact, the heads of White families are older on average than those of Asian, Black, and Hispanic families.

And it's true that both White and Asian families, on average, have more education than do Black and Hispanic families. But on closer examination, these two factors, age and education, account for only a small part of the difference in wealth accumulation among Whites, Asians, Blacks, and Hispanics. There must be other reasons for these differences.

Yes. There, in fact, appear to be many other reasons for these enormous gaps in wealth along racial and ethnic lines. Others who have researched these differences in wealth have examined the potential effects of current and past discrimination, cumulative disadvantage, early childhood learning experiences, prenatal environments, and many other factors. These explanations, however, fall beyond the scope of our expertise and our ability to assess them based on the survey of consumer finances.

In our subsequent presentations, we will say more about our research into the roles played by education and age and wealth accumulation. We hope you read the entire report about race and ethnicity and stay tuned for our upcoming reports on education and age. Together, we hope that these reports shed light on who's thriving and struggling today in America and why. Thank you.

Executive Summary

This first essay in the "Demographics of Wealth" series examines the connection between race or ethnicity and wealth accumulation over the past quarter-century. As with subsequent essays, this one is the result of an analysis of data collected between 1989 and 2013 through the Federal Reserve's Survey of Consumer Finances. More than 40,000 heads of households were interviewed over those years.

Our key findings in this essay:

  • When looking at median family wealth (assets minus liabilities), the ranking of the four racial or ethnic groups did not change order between 1989 and 2013. White families ranked first, followed by Asian families, Hispanic families and black families.
  • In inflation-adjusted dollars, the median wealth of a white family in 1989 was $130,102. In 2013, it was $134,008. For an Asian family, the two medians were $64,165 and $91,440. For a Hispanic family, they were $9,229 and $13,900. For a black family, they were $7,736 and $11,184.
  • Although the financial patterns over this period have changed little for whites, for Hispanics and for blacks, they have changed dramatically for families headed by Asians. Asian families' median income already has surpassed that of whites, while Asians' median wealth soon will surpass the white median level, most likely because of the remarkable increase in educational attainment by younger Asians in recent decades.
  • Median Hispanic and black wealth levels are about 90 percent lower than the median white wealth level, yet median income levels of Hispanics and blacks are only 40 percent lower. The larger wealth gap could be due to Hispanics' and blacks' investing in low-return assets like housing, as well as to borrowing at high interest rates. Hispanics and blacks could also feel less of a need to save for the future because society's progressive old-age safety-net programs will replace a relatively larger share of the normal incomes they earned during their working years.
  • Whites and Asians have stronger balance sheets—a key factor in wealth accumulation—than do Hispanics and blacks. The balance sheets of the former show more liquidity and asset diversification and less leverage (debt as a share of assets).
  • On our financial health scorecard—designed to measure whether a family is making sound, everyday-financial decisions—whites and Asians fared much better than Hispanics and blacks. The gap was even wider when restricting the comparison to just middle-aged, well-educated families in each of the four groups.
  • Age and education would seem to be logical explanations for the persistent differences in wealth accumulation across the racial and ethnic groups. However, an analysis of the data indicates that these two factors play only small roles in explaining the gaps. In particular, holding constant the age and educational attainment of a family head, racial and ethnic differences in average financial-health scores correspond closely to differences in the groups' median wealth levels.

Read all the essays and watch all the videos in this series »

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