Why Income Inequality Hurts Kids and Families

Posted March 11, 2014, By the Annie E. Casey Foundation

The American Dream – the idea that anyone who is determined and works hard can get ahead – has long defined the promise of the United States. Yet the reality is that life chances for Americans are now determined to a significant degree by the wealth of our parents. The dream that hard work and playing by the rules will lead to greater opportunity and a steady climb up the economic ladder is increasingly challenging to achieve, particularly for struggling families.

When the already rich are the prime beneficiaries of economic gains, the playing field is clearly not level, diminishing the chances of economic mobility for the most disadvantaged. Economic inequality in the United States is now at its highest level in nearly a century. Our country has the most unequal distribution of income and wealth of all developed nations. For those who earn low wages and have few to no assets, narrowing pathways to the middle class and diminished hopes of getting ahead threaten the well-being of millions of low-income families and their children.

The Growing Divide

For three decades after World War II, low- and middle-income families saw their incomes grow as the overall economy grew. Income growth was strong and broadly shared. But since the late 1970s, except for a brief period in the 1990s, the incomes of ordinary families have diverged from the economy as a whole: Most income gains have gone to high earners, while incomes for middle- and working-class families have stagnated or declined. In 2011, 48% of income went to the top 10% of earners and 19% of income went to the top 1%; in comparison, the top 1% took home 8% of total income in the 1970s. The country has not experienced this level of income inequality since the 1920s.

The wealth gap is far starker than the income gap. The top 1% own 40% of the nation’s financial wealth, while the bottom 80% own only 7%. Over the last 30 years, the bottom 60% of the population has seen their wealth decline, while the top 5% has grown increasingly richer. Wealth inequality continues to grow and has been exacerbated by the uneven economic recovery. Further, disparities in financial wealth are a prime factor perpetuating racial and ethnic inequities.

Stagnant Economic Mobility

Despite the myth of economic mobility in America, families face the reality that intergenerational economic mobility has not changed much over the last 40 years. If anything, it has declined. Children born to families at the lower end of the income scale have a particularly hard time improving their economic position relative to their parents. In fact, mobility in the United States has become so stagnant; it’s lower than in Canada and many European countries, including the United Kingdom, Germany and France.

In the United States, children born to parents in the lowest fifth of the income scale are quite likely (42%) to end up there as adults. Similarly, children of parents in the highest-income group are very likely to stay there (39%). Upward mobility has proven particularly difficult for African-American families to sustain. Fully 45% of black children whose parents were solidly middle-income end up falling to the bottom of the income distribution, compared with only 16% of their white peers.

The wealth gap is one reason African-American families are more vulnerable to downward mobility: white and black families of similar income levels have vastly different amounts of wealth. Without financial assets, it’s difficult for families to bounce back after a crisis and to sustain hard-won gains from one generation to the next.

Families Need Assets to Invest in Their Kids

While a basic level of income enables parents to provide for their children’s day-to-day needs, assets — such as savings, home equity, life insurance and stocks and bonds — allow parents to offer their children a better future. Research shows that family assets (defined as total net worth and liquid assets such as savings and mutual funds) positively impact academic achievement in grade school, as well as college attendance and completion.

Assets improve outcomes for children in several ways. By helping families weather temporary economic hardships, such as job loss or high medical bills, savings and other liquid assets reduce parent stress and may improve parenting. Assets also give parents the financial means to invest in their children’s education. In addition, savings and asset accumulation reinforce and may help create a more forward-looking, future orientation in parents and children alike. In short, helping families accumulate assets can increase their long-term financial stability, improve economic mobility and bolster children’s chances for success regardless of race or ethnicity.