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The Role of Stocks and Retirement Accounts in the Black-White Wealth Gap

Numbers on board

By Alyssa Haywoode
January 29, 2024

A new research study suggests one key component of the country’s Black-White wealth gap is differential ownership of stocks, stock-linked assets, and retirement accounts.

“While wealth is generally understood as a combination of income accumulation, home equity appreciation, and family transfer/inheritance, several studies have noted the growing importance of financial assets,” Ken-Hou Lin and Guillermo Dominguez explain in the study, The Rising Importance of Stock-Linked Assets in the Black–White Wealth Gap, which was published in Demography.

Drawing on data from the Survey of Consumer Finances (SCF) and Panel Study of Income Dynamics (PSID), the study found that stocks and retirement had an increasing impact on the wealth gap. In the SCF sample for instance, stocks and retirement accounts explained “less than 20% of the racial wealth gap in 1989, increasing to more than 37% in 2017.”

For the PSID sample the “expansion was even more dramatic… increasing from less than 8% to nearly 38% from 1984 to 2019. For both samples, stocks and retirement contributed the most to the Black–White wealth gap across all wealth components by 2019, surpassing home equity and business ownership.”

This growth is due to increasing differences in how households invest.

“Since the late 1980s, the wealthiest 10% of households have increased investments in financial assets from roughly 10% to more than 20% of their total net worth; among other families with above-median net worth, this share has increased from less than 5% to more than 10%.”

One driver of this shift is that “U.S. cor­po­ra­tions shifted their focus from mar­ket shares and sta­bil­ity to returns for share­hold­ers,” making it more attractive to invest in stocks.

Income differences between Black and White families clearly explain some of the gap, but when authors controlled for factors like income, educational level, and age they still found that meaningful racial disparities in stock ownership and retirement accounts persisted.

“Although the absolute gap is smaller, White households regularly own more than twice as much financial wealth as similar Black households.”

Specific findings include:

  • “College-educated Black households, on average, own half as much financial wealth as their White counterparts”
  • “White households with a head aged 60–65 own more than twice as much in stock-linked assets as Black households in the same life stage with similar characteristics,” and
  • Lower income, younger “White households still own more stock-linked assets than their Black counterparts”

Black households face two disadvantages, the study explains. One is that compared to White households, Black households “tend to own fewer stock-linked assets, which are associated with higher future net worth. Second, Black households receive significantly lower returns on their investments.” More research is needed, the study says, to determine why. These two disadvantages lead Black households to accumulate less wealth than their White counterparts over time, even when the two groups share similar household characteristics.”

The study ties these findings to historic trends in what it calls the “era of financialization,” when financial markets became increasingly important sites “for allocating economic resources.”

This gap is likely to persist, the study says, noting that, “When comparing a matched sample of Black and White households, we find that nearly a quarter of the racial disparity in future wealth can be attributed to White households’ ownership of more stock-linked assets and receipt of higher returns than otherwise similar Black counterparts.”

Understanding more about these disparities, the study concludes, means conducting both more research and more kinds of research.

“Ethnographic research could reveal how racial backgrounds shape families’ interactions with financial institutions and the broader investment community. Data from brokerage and asset management firms or from retail trading platforms could also be used to identify systematic differences in investment behaviors and return between Black and White households.”

Numbers on board

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