By John Sabelhaus & Jeffrey P. Thompson

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.

Source @SSRN