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The Limited Role of Intergenerational Transfers for Understanding Racial Wealth Disparities

Author

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  • John Edward Sabelhaus
  • Jeffrey P. Thompson
Abstract
Transfers of wealth between generations—whether through inheritances or inter vivos gifts—are less important in explaining racial disparities in wealth than might be expected. While this factor looms large in the media’s discussions of racial inequality, it explains relatively little of the disparities evident in the data. One reason is that most people, regardless of race, receive no inheritance or other transfer of substantial value. In addition, most recipients of inheritances ultimately consume those bequests and do not plan to leave substantial gifts to their offspring. Further, the assets that account for a large majority of most households’ wealth (employment-based retirement plans and home equity) are not inherited and accumulate slowly over families’ working lives. Using nonparametric decomposition techniques, we show that intergenerational transfers explain only a modest portion of the disparities between white and non-white families. This finding is consistent with prior research, but we improve upon the existing literature in a variety of ways, including augmenting the wealth measure in the Survey of Consumer Finances to account for the value of defined benefit pensions, adding controls for lifetime earnings and the availability and generosity of employer-provided pensions, and capturing some inheritances and inter vivos transfers that are not typically reflected in most studies. When no other controls are included, we find that differences in intergenerational transfers account for 13 to 16 percent of white/non-white private wealth gaps. When we control for lifetime earnings, workplace pensions, and a handful of additional human capital variables, the marginal contribution of intergenerational transfers shrinks considerably, but the combined portion of the racial wealth gap that is explained rises to 80 to 90 percent. Policymakers interested in helping households build wealth are advised to look to ways that would enable them to boost the earnings that they receive over their lifetime.

Suggested Citation

  • John Edward Sabelhaus & Jeffrey P. Thompson, 2023. "The Limited Role of Intergenerational Transfers for Understanding Racial Wealth Disparities," Current Policy Perspectives 95748, Federal Reserve Bank of Boston.
    • Handle: RePEc:fip:fedbcq:95748
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    References listed on IDEAS

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    1. Edward Wolff & Maury Gittleman, 2014. "Inheritances and the distribution of wealth or whatever happened to the great inheritance boom?," The Journal of Economic Inequality, Springer;Society for the Study of Economic Inequality, vol. 12(4), pages 439-468, December.
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    More about this item

    Keywords

    racial wealth gap; inequality; human capital; lifetime earnings; retirement plans; pensions; inheritance;
    All these keywords.

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
    • J15 - Labor and Demographic Economics - - Demographic Economics - - - Economics of Minorities, Races, Indigenous Peoples, and Immigrants; Non-labor Discrimination
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • J32 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Nonwage Labor Costs and Benefits; Retirement Plans; Private Pensions

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