Posted on 28 July 2011.
There is no doubt that the decline of the housing market and the great recession that followed took its toll on the pocketbooks of most Americans, but a study released today by the Pew Research Center found that it had a far more negative impact on the wealth of minorities than whites.
The study, which was conducted using newly available data from 2009, revealed that median wealth of white households is 20 times greater than that of black households and 18 times more than Hispanic households, the largest gap in the quarter century since the government first published such information.
Household wealth, or net worth, is the accumulated sum of assets minus the sum of debt, and is different from household income, which is the inflow of wages and other sources of earning. From 2005 to 2009, median wealth fell by 53 percent among black households, to about $5,677, compared to a 16 percent decline among white households, who have an average net worth of $113,149.
With unemployment at record levels in the African-American community, and the economy at a virtual standstill, this staggering divide has the potential to become an abysmal chasm. What can black households do to turn these disheartening statistics into opportunities to advance their financial strategies and increase their family’s net worth?
It’s important to examine some of the factors that led to this wealth gap to gain a better understanding of what can be done to address this issue. Historically, minority families have bought into the notion that the best way to accumulate wealth is by purchasing a home, according to Haidee Cabusora, the director of services at The Financial Clinic, a nonprofit financial development organization dedicated to helping the working poor in New York City. In the early 2000s, many Black and Hispanic families attempted to build their assets by buying homes, which went down in value once the bubble burst. These families went into the recession that followed the housing market crash with fewer assets, which led them to seek out other sources of income, including credit cards with high interest rates, and this increased their debt to asset ratios.
“Unfortunately, the new study findings don’t surprise me at all,” adds Cabusora. “Another cause of the wealth gap is that lower income families, which are disproportionally Black and Hispanic, tend to move jobs more often, and don’t have the opportunity to participate in important work savings plans like 401(k) and other matching programs offered by employers, which allow individuals to build assets more quickly.”
In February, a survey conducted by Washington Post, the Kaiser Family Foundation and Harvard University Poll found that that just 46 percent of blacks and 32 percent of Hispanics have IRAs, 401Ks or similar accounts, compared to the nearly 65 percent of white Americans who have them.
Only one in four African-Americans and just one in six Hispanics own stocks, bonds or mutual funds compared to about half of white workers, and if the patterns hold, a large number of the nation’s minority retirees could be faced with tough choices during their twilight years. Cabusora says that signing up for retirement savings plans is not only a wise idea, but it is essential to building household wealth over an extended period of time, and that minority families should consider this as a option for increasing their net worth.
A recent study from the National Bureau of Economic Research found that 46 percent of Americans who said their household couldn’t come up with $2,000 in 30 days without possessions, which means that many families are having trouble paying for day-to-day expenses, and the last thing on their minds could be saving for retirement. If contributing to a 401(k) is not a viable option, there are other simple steps that families can take to build their assets and ensure that they have a savings reserve for emergencies and special purchases like college tuition and retirement in the future.