At the American Savings Education Council’s Virtual Spring Partners Meeting, we tackled the topic of Savings and Diverse Communities. We called on experts in academia, the financial industry, and policy circles to highlight research and findings that identify barriers to savings opportunities and trust in financial institutions within minority communities. These experts also discussed possible policy, institutional, and community solutions and strategies that can be used to overcome savings obstacles experienced by minority populations. In this reprise of the highlights of this session, we focus on comments by Ray Boshara, Senior Advisor at the Institute for Economic Equity at the Federal Reserve Bank of St. Louis.
We started by asking what Ray saw as the most prominent barriers to savings and wealth accumulation in diverse communities. While Ray acknowledged the importance of financial literacy and its potential impact on diverse communities, he was most concerned about structural impediments to wealth building among people of color.
Boshara: Financial education is about changing behaviors, about empowering folks to make the best financial choices. So, there’s an assumption that your wealth outcomes reflect your choices: If you’ve made good choices, you have more wealth. If you didn’t make good choices, you have less wealth.
While we believe financial education is important, and that consumers have the agency to make good choices, we began to question that assumption at the St. Louis Fed with regards to its ability to explain the racial wealth gap. So we compared Blacks and Whites who made similar financial, educational, marriage and other choices. And did we find did that this eliminated the racial wealth gap? Not very much. While our choices naturally explained some of the racial wealth gap, just over 80% of the racial wealth gap remained when we compared Blacks and Whites who made similar choices. That suggests that financial education and making good choices can move the needle: those who make good choices will have more wealth than those who don’t. However, it’s not going to come close to eliminating or seriously addressing racial wealth gaps.
Ray sees three primary structural barriers: 1) Fundamental barriers to wealth creation, 2) Low returns on assets for people of color; and 3) A “Black Tax.”
Boshara: First, fundamental barriers: the racial wealth gap—Blacks have about one dollar in wealth for every eight held by whites—has essentially remained unchanged over the last generation, despite progress on post-secondary education, political representation, and voting rights. We have to remember that wealth begets wealth; it’s harder to build wealth unless you have some to begin with, whether from your parents or with the help of government incentives. Black parents usually had neither, so they are far less able to pass down wealth to future generations. So, a prominent barrier to wealth accumulation—if not the most important barrier—is the cumulative effect of previous generations of people of color being overwhelmingly prohibited from accumulating wealth in the first place.
Second, low returns on assets: college and home ownership generate lower returns for Black Americans relative to their White counterparts. With regards to college, we find that Blacks are far less likely to get into Science, Technology, Engineering, and Math (STEM) programs than Whites because of different levels of academic preparation. This ultimately leads to less income and wealth. Secondly, Blacks are far more likely to take out student loans and to have higher debt balances when they do. Repayment of this student loan debt displaces the ability to accumulate other forms of wealth, such as a home or retirement account. A study by Pew showed that a dollar of student loan debt leads to a $7 reduction in wealth.
When it comes to home ownership, Blacks buy their homes later in life, and in areas that don’t have as much value. They also buy homes that don’t appreciate at the same rates as that of their White counterparts, and their mortgage financing terms tend to be less favorable, too. All of those things add up to having less returns from college and home ownership than Whites.
Finally, what has been sometimes called the “Black tax” is a factor. Wealthier Black Americans are far more likely to share their wealth more broadly among extended family than whites are. There was a study out of Brandeis University showing that 45% of black college graduates gave financial support to their parents compared to only 16% for whites—that is, the “Black Tax.”
Ray acknowledges that financial literacy and education can play an important role, but that solutions must also be structural in nature:
Boshara: Let me be very clear here: I’m all in favor of financial literacy, financial capability, and empowering consumers to make the best choices possible. However, my concern is that the behavioral aspects are a bit oversold, and that there are stronger forces to consider. The emphasis on financial literacy puts too much on consumers to make good choices. And we have far more financial choices to make, and a more complex financial system than we did a generation or two ago. I would like to see us keep the emphasis on making good choices, of course, but we also need to spend more time on enabling policymakers, employers, and financial institutions to create more good choices for people to make. In other words, we should be talking about how institutions behavior as much as we talk about how individuals behave.
One institutional change—one that would also scale-up financial literacy and make it more real and salient—would be to automatically give kids real money to invest. That’s one reason nearly 10 states create or will soon create a 529 college savings account at birth for each of its newborns. Also, we can harness technology to more effectively to do things like help people manage their cash flows. Emergency savings is also essential for both financial stability and upward economic mobility for families. It is remarkable how much research has emerged in the past five years demonstrating how critical it is to get short term savings right in order to solve for the lack of long-term savings. The two need to work together, as they are in retirement savings “side car” experiments. It’s important to break down the silos and bring near-term savings and long-term wealth accumulation together.
In our next installment in this series, we will examine the unique challenges faced by immigrants and refugees, Hispanic communities, as well as native American populations as shared by Reilly White, Associate Professor of Finance, Endowed Bank of America Lecturer and Daniels Fund Ethics Fellow at the University of New Mexico.