Will Asset-Building Policies Lead to Equity? Applying the Racial Wealth Audit

Posted February 15, 2016
By the Annie E. Casey Foundation
Blog racialwealthaudit 2016

In a recent brief, the Foun­da­tion rec­om­mend­ed four pol­i­cy pre­scrip­tions to help all fam­i­lies build assets and sav­ings while reduc­ing the racial wealth gap — that is, the sig­nif­i­cant dif­fer­ence in net worth between white fam­i­lies and fam­i­lies of col­or. But how would we know whether these poli­cies could real­ly be suc­cess­ful in pro­mot­ing greater equity? 

The Racial Wealth Audit™, devel­oped by the Insti­tute on Assets and Social Pol­i­cy at Bran­deis Uni­ver­si­ty in part­ner­ship with Dēmos, was key to answer­ing this ques­tion. The Foun­da­tion com­mis­sioned an analy­sis of two of our rec­om­men­da­tions — expand­ing access to the fed­er­al myRA retire­ment sav­ings pro­gram and invest­ing in a sav­ings account for every child at birth — and found a marked and, in some cas­es, sub­stan­tial reduc­tion of the racial wealth gap, depend­ing on the lev­el of invest­ment in those policies.

In the past, we haven’t real­ly had the tools to show how a giv­en pol­i­cy will pro­duce the effects we want for all chil­dren and fam­i­lies,” said Bead­sie Woo, a senior asso­ciate who leads the Foundation’s invest­ments focused on increas­ing fam­i­ly sav­ings and assets. The Racial Wealth Audit allows us to quan­ti­fy what it will real­ly take to close gaps in sav­ings and assets that have exist­ed for generations.”

Our pol­i­cy brief called for expand­ed access to and par­tic­i­pa­tion in myRA, a no-fee, no-risk starter retire­ment account, to increase emer­gency sav­ings for low-income fam­i­lies while help­ing them start a nest egg for retire­ment. To exam­ine how dif­fer­ent groups would be affect­ed if the rec­om­men­da­tion was pur­sued, Bran­deis experts devel­oped sev­er­al mod­els show­ing min­i­mum, mod­er­ate and max­i­mum effects on the racial wealth gap, using 2013 data from the Fed­er­al Reserve Bank’s Sur­vey of Con­sumer Finances. 

The analy­sis showed par­tic­i­pa­tion and sav­ings lev­els mat­ter great­ly to the poten­tial effect of expand­ing this pro­gram. If 100 per­cent of the tar­get group — work­ers ages 3564 with­out employ­er-pro­vid­ed pen­sions — par­tic­i­pat­ed and saved the max­i­mum amount of $15,000, the gap in net worth between white and Lati­no fam­i­lies would nar­row by 7 per­cent, and the one between white and African-Amer­i­can fam­i­lies would close by 4 per­cent, while increas­ing net worth for all. But even if only half of the tar­get group par­tic­i­pat­ed and saved at a more mod­est rate, there would still be small improve­ments in equity.

The children’s sav­ings account analy­sis was more chal­leng­ing. No such pro­gram exists in the Unit­ed States, requir­ing the researchers to test a range of sce­nar­ios. They set­tled on four main mod­els, start­ing with a com­mon base — the poten­tial net worth of young adult house­holds (ages 1834) today if uni­ver­sal, pro­gres­sive children’s sav­ings accounts had been estab­lished in 1979. They assumed that even though every child would have an account, the great­est amount would be invest­ed in chil­dren grow­ing up in house­holds with no more than $5,000 in net worth. For house­holds with greater net worth, the pub­lic invest­ments would decline incrementally.

This analy­sis found that children’s sav­ings accounts could pro­duce a sig­nif­i­cant reduc­tion in the racial wealth gap. If at least $1,250 were invest­ed in every child — and up to $7,500 in chil­dren from low-income fam­i­lies — the gap in net worth would fall by 28 per­cent between white and Lati­no fam­i­lies and by 23 per­cent between white and African-Amer­i­can fam­i­lies. If up to $60,000 was invest­ed in house­holds with less than $5,000 in sav­ings, the net worth gap between Lati­no and white fam­i­lies would close com­plete­ly, and the gap between African Amer­i­cans and their white coun­ter­parts would nar­row by more than 80 percent.

It’s grat­i­fy­ing to see that all fam­i­lies can ben­e­fit if we pur­sue the right pol­i­cy solu­tion to build assets,” said Woo. It’s even more excit­ing to see that we real­ly can reverse the trends that have dis­ad­van­taged fam­i­lies of col­or for so long.”

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