As the national conversation about racial disparities continues, it’s important to ensure that we are including solutions to address the racial wealth gap. In 2016, the median white family had ten times the wealth of the median Black family. That means if the median wealth of your white neighbor is $171,000, the median wealth of your Black neighbor is $17,150.
Wealth matters in times of economic crisis because it can provide a financial cushion for households experiencing hardships. Black people face an almost impossible treadmill in building wealth and recovering from financial downturns. These disconcerting numbers worsen for Black women; the median net worth of white men is 100 times that of Black women.
The ratio of white family wealth to Black family wealth is higher today than it was at the beginning of the 21st century. Dire economic inequality has severe consequences for future generations: even when Black parents achieve relative stability, almost 70 percent of middle-class Black children are likely to fall out of the middle class in adulthood.
Systems have excluded Black people from the traditional pathways to wealth, whether that be through home ownership or access to credit. Wealth disparities in the U.S. are persistent and growing, and the staggering size of the wealth gap reveals the accumulated effects of both economic realities, like stagnant wage growth, and systemic racism and gender discrimination.
The tools that exist today to support people on these well-established pathways are often designed with more privileged customers in mind, are distributed in ways that don’t reach people living on lower incomes, and are built on assumptions about trust and credibility that do not hold for large segments of the population.
Unprecedented Focus
Following the death of George Floyd, America entered an undeniable era of racial reckoning, with efforts to end racism in everything from business to education.
Leaders in the financial sector have an unprecedented opportunity to do their part in closing the racial wealth gap. As Darren Walker, president of the Ford Foundation, said, “Corporations wield enormous amounts of power in society. In order to see lasting social change, leaders in the private sector must begin to think of their own business plans as plans for good as well as profit.”
Innovative Wealth Building Tools
To this end, Commonwealth is embarking on a new generation of innovative wealth building tools and pathways suitable for the 21st century. We know that no single tool or path is right for all people or for every stage in one’s financial journey.
In line with Commonwealth’s vision to make wealth possible for everyone, we are exploring the potential to improve existing wealth pathways, and innovate in uncharted paths that will have a significant impact on people’s lives, the wealth gap, and society as a whole.
To help realize this next generation of wealth building tools, we have created a Wealth Building Blueprint that includes seven areas of focus for our own work: Credit building, shared ownership, stock market investing, employee stock ownership, microbusiness, data, and cryptocurrency. Across these seven areas, Commonwealth’s work aims to:
- Reduce barriers to entry for all pathways to wealth;
- Improve traditional pathways to wealth; and
- Develop new 21st century pathways to wealth.
Below we’ve highlighted just two examples of pathways that provide a significant opportunity to reduce barriers to wealth building and expand wealth building pathways for Black and Latinx people:
Micro-business
In the first two months of the pandemic, Black-owned businesses closed at more than twice the rate of their white counterparts’ businesses. One reason for this was that Black-owned businesses were more likely to operate in sectors that were severely affected by the COVID-19 pandemic shutdowns, such as retail and food. Longstanding unequal access to credit and mainstream financial institutions is another reason.
- Black- and Latinx- or Hispanic-owned businesses are more likely to be unbanked or underbanked.
- Businesses in majority-Black and majority-Latinx neighborhoods are the most cash-constrained but the least likely to have existing accounts or relationships with traditional banks.
- Black-owned businesses are less likely than white-owned businesses to receive approval for financing at banks, even after taking into account the company’s characteristics (i.e: size, revenue, etc).
- Black-owned businesses are more likely to be discouraged from applying for financing.
The good news is that these impacts, and the reporting about them, have led to action by both financial institutions, large corporations, and policymakers offering financial relief.
The task now is to ensure that these new funds are spent on initiatives that address the specific needs of low-to moderate-income (LMI) Black business owners. This requires initiatives that include a deep and nuanced understanding of the financial wants, needs, and aspirations as both individuals and business owners. We propose that it also requires supporting lenders to reimagine what types of business, business models, and business owners can grow businesses that will support the growth of generational wealth, not just pay today’s bills.
Investing
Investing is another example of a traditional pathway in our Wealth Building Blueprint that is especially poised to help build Black wealth. Black equity ownership is far behind white ownership of equity. Sixty percent of white U.S households own stock of some form, whereas only 30% of Black households do. This disparity persists among lower-income households as well—56% of white households without a college degree own stocks vs. just 31% of Black households of the same education level. Most people are first exposed to stock ownership through their retirement plan at work. However, employer-based retirement plans are not accessible to 55% of workers in the bottom quartile of average wage.
In 2009, Ariel/Hewitt conducted a major study focusing on disparities across racial and ethnic groups in 401(k) savings plans, using data from 2007 that encompassed nearly 3 million employees at 57 large U.S. companies. Even within groups of similar age and income, Black and Hispanic workers had lower participation rates and, conditional on participation, lower contribution rates to retirement plans. Yet 70% of Black people report that they are slightly, moderate, or mostly comfortable making investment decisions.
Current societal and market conditions are ideal for innovation to make the investment ecosystem more accessible to new investors, especially Black people. In 2020, Commonwealth talked with lower-income Black people about the barriers that prevent them from building wealth through investing. These insights can inform the design of investing tools intentionally built for these new investors that: 1) reflect their financial lives, needs, wants, and aspirations, and 2) support agency and decision-making power.
Innovating During Crisis is Key
An analysis by the Federal Reserve found that during the recession of 2007-2010, wealth fell by almost 30% for all families. The disparities began to appear after the recession—Black and Latinx families’ wealth continued to fall an additional 20% from 2010 to 2013, while white families’ wealth was essentially unchanged. In fact, over the past 30 years of economic upturns and downturns, median net worth of white households has far exceeded that of Black households. Given the well-documented disparate impact of the current economic crisis, action must be taken now to ensure an equitable recovery following the economic crisis resulting from the COVID-19 pandemic.
While this work carries out a moral imperative for equity, it also holds promise for a significant and untapped market opportunity: “Full financial inclusion of Black Americans would generate about $60 billion in additional annual revenue in the financial sector.”
Download our Wealth Building Blueprint to learn more about making wealth possible for all and how to be part of closing the racial wealth gap. Closing the wealth gap will only be successful if it is done in collaboration with others: industry experts, innovators, fintechs, financial services firms, and employers.