Five Ideas to Support Families amid Growing Wealth Inequality

March 03, 2022

This post is the last in a six-part series titled “The State of Economic Equity.” This series examines the challenges facing vulnerable workers this year and possible ways to improve their economic security and resiliency in an economy reshaped by the pandemic.

Wealth inequality has risen steadily (PDF) over the past few decades and has continued to increase with the economic rebound from the COVID-19 recession. While various groups are, on average, better off financially than they were prior to the recession, looming economic pressures—including rapidly rising prices, costly child care and housing, and the expiration of various forms of debt relief—raise concerns about some families’ economic security in 2022. What are some ideas that could help strengthen these families’ financial standing and the economy, considering the link between wealth inequality and challenges to economic growth?

Unprecedented Government Aid Kept Low-Income Families Afloat

Evidence shows pandemic-related relief and recovery efforts by the federal and state governments in the form of liquidity or cash assistance (unemployment assistance, stimulus checks, a temporarily expanded child care tax credit) and moratoriums (student loan repayment, foreclosure) were instrumental in helping low- to middle-income families stay financially above water. Expansions in the unemployment insurance system, for example, were able to target those most in need and were progressive in that lower-income individuals received more than 100% of lost income while those at the higher end of the income distribution received less. Similarly, stimulus checks provided a large boost to low- and middle-income families’ account balances, though much of those gains were quickly used.

Notwithstanding, the average real wealth—assets less liabilities—of the lowest-income families was fairly stable through 2020 and by the third quarter of 2021 had increased by 10% in real terms compared with the fourth quarter of 2019, prior to the pandemic, as seen in the figure below. Growth in the combined quantity and value of nonfinancial assets, including real estate (the largest portion of these families’ assets, at 47% in the third quarter of 2021) accounted for much of these gains.

Top Two Income Groups Saw Largest Growth in Average Real Wealth

Charts show average wealth index

SOURCES: Federal Reserve Board’s Distributional Financial Accounts and authors’ calculations.

NOTES: Values are adjusted for inflation to 2021 dollars. The COVID-19 recession began in February 2020 and ended in April 2020.

Rising Stock Market Provided Boon to Higher-Income Families

While households in the two highest income quintiles saw their average inflation-adjusted wealth fall 6% to 7% at the beginning of the pandemic, they quickly recovered those losses and then made additional gains; by the third quarter of 2021, they had 17% to 20% more wealth than in the fourth quarter of 2019. The highest-income group increased wealth by over half a million dollars, on average, while the lowest-income group gained only $13,000. (See the table below.) Such uneven advances meant that wealth inequality between the lowest- and highest-income families grew relative to the beginning of the pandemic, as evidenced by diverging lines in the figure above.

Average Real Wealth by Household Income
Income Percentile
Group
2019:Q4 2021:Q3 Difference
0%-20% $139,000 $152,000 $13,000
20%-40% $190,000 $216,000 $26,000
40%-60% $338,000 $382,000 $45,000
60%-80% $680,000 $813,000 $133,000
80%-100% $3,172,000 $3,719,000 $547,000
SOURCES: Federal Reserve Board’s Distributional Financial Accounts and authors’ calculations.
NOTE: Values are rounded to the nearest $1,000 and are adjusted for inflation to 2021 dollars.

Households in the two highest income tiers benefitted greatly from housing market growth and especially from stock market growth. Asset values derived from equities, which make up one-third of the top tier’s assets, increased a substantial 32%, on average, between the fourth quarter of 2019 and the third quarter of 2021. They increased a similar amount (36%) for the second-highest income tier, though they represented only 13% of this group’s assets, on average.

Addressing Wealth Inequality and Strengthening Families

Given recent and persistent trends toward wealth inequality and the phasing out of government assistance related to COVID-19, promoting financial stability remains a pressing issue for families vulnerable to eviction, hunger, job loss or limited access to critical health benefits. While average wealth rose since the onset of the pandemic, such growth was not representative of the typical (i.e., median) family’s experience, and many families continue to struggle. Following are some new and some reimagined ideas experts have suggested to address wealth inequality:

  1. Promoting financial stability. One idea is to consider restoring or commencing means-tested financial assistance to help stabilize families in need—particularly through housing and food assistance, child tax credits and loan forbearance. This could include enhancing existing automatic stabilizers (around unemployment insurance benefits) and creating new ones (such as those directed towards states and economically vulnerable households).
  2. Helping families build emergency savings. In addition to achieving positive cash flow, families’ capacity to save for unanticipated expenses has proven critical to both economic resiliency and steps toward longer-term asset accumulation and economic mobility—such as strategies to help families save for rainy days. Moreover, continued experimentation with so-called “side car (PDF)” emergency savings accounts attached to restricted retirement and college savings accounts may help families meet short- and long-term saving goals.
  3. Building wealth for workers and future generations. Several proven and promising strategies could help working families and future workers accumulate wealth, including reducing the cost of college (PDF) and expanding alternatives to a four-year college degree (PDF); offering student loan relief; matching savings for college and retirement at tax time (PDF); and advancing homeownership and small-business ownership (PDF) opportunities. For future generations, state-based 529 college savings accounts (PDF), “baby bonds” and similar strategies could be promoted to automatically and progressively create savings and investment accounts at birth for all kids.
  4. Protecting the wealth that families have accumulated. Similar to current safety net policies that protect against income losses, policies could be considered that at least partially protect against wealth losses (PDF). More broadly, the current social insurance system (PDF) could be updated to reflect 21st century economies.
  5. Considering new sources of wealth creation and property ownership. Ideas for creating new sources of capital and ownership that do not entirely depend on labor market income were recently featured in a book published by the Institute for Economic Equity and the Aspen Institute. Ideas included the creation of a Citizen’s Wealth Fund (PDF), a data dividend (PDF) and measures to build wealth by pursuing antitrust measures (PDF).

The average wealth of many families was bolstered because of a strong housing market, stock market and government aid. However, wealth inequality increased because the highest-income families experienced faster growth than the lowest-income families. The ideas examined here can help temper the effects of growing inequality by supporting the immediate needs of struggling families and increasing the economic resiliency of all families during and beyond 2022. Subscribe here to receive Institute updates as we continue this work.

About the Authors
Ana Hernández Kent
Ana Hernández Kent

Ana Hernández Kent is a senior researcher with the Institute for Economic Equity at the Federal Reserve Bank of St. Louis. Her research interests include economic disparities and the role of systemic biases and historical factors in wealth outcomes. Read more about Ana’s research.

Ana Hernández Kent
Ana Hernández Kent

Ana Hernández Kent is a senior researcher with the Institute for Economic Equity at the Federal Reserve Bank of St. Louis. Her research interests include economic disparities and the role of systemic biases and historical factors in wealth outcomes. Read more about Ana’s research.

Ray Boshara
Ray Boshara

Ray Boshara is a senior advisor and assistant vice president of the Institute for Economic Equity at the Federal Reserve Bank of St. Louis. He is also a senior fellow in the Financial Security Program at the Aspen Institute. Read more about Ray's publications.

Ray Boshara
Ray Boshara

Ray Boshara is a senior advisor and assistant vice president of the Institute for Economic Equity at the Federal Reserve Bank of St. Louis. He is also a senior fellow in the Financial Security Program at the Aspen Institute. Read more about Ray's publications.

This blog offers relevant commentary, analysis, research and data from our economists and other St. Louis Fed experts. Views expressed are not necessarily those of the St. Louis Fed or Federal Reserve System.


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