By Jenny McCoy
A recent analysis from the Federal Reserve Bank of St. Louis reveals two uncontrollable factors that can affect both your paycheck and your savings: your parents’ race and education.
In the report, released in February 2018, St. Louis Fed economists crunched data from the Federal Reserve's 2016 Survey of Consumer Finances, which asked 6,254 families about their demographics and financial standings.
The biggest takeaway from this two-generation analysis: your income and your overall wealth-accumulating power are strongly influenced by your parents’ race and whether they went to college.
The analysis showed that adult children of white, college-educated parents have the most built-in economic advantages. According to data from 2016, the children’s median income by middle age was $113,618 and their median net worth was $374,640—nearly three times the median income ($41,518) and 14 times the median net worth ($26,718) of non-white adults with non-college-educated parents.
This gaping discrepancy between the former and latter groups is what the authors describe as a form of payout from “winning the birth lottery.”
“These are pretty stark outcomes,” said Ana Hernandez Kent, study co-author and policy analyst for The Center for Household Financial Stability at the Federal Reserve Bank of St. Louis. “You can’t pick if your parents have college degrees.”
Previous studies have showed the importance of your own education in determining your financial outcomes. Race has also been proven to influence both financial standing and access to a college degree. Research has found that, even when raised in similar neighborhoods among families with similar wealth, black boys go on to earn less money as adults than 99 percent of white boys; and students of color also face disproportionate challenges to achieving higher education. But this was the first time that the analysts had considered how parents’ education might factor in, too.
“We didn’t know what to expect,” said Hernandez Kent. And when the results came in: “It’s pretty shocking that just knowing someone’s parents’ education can tell you a lot about their wealth and income.”
The most notable finding, said Hernandez Kent, came from comparing middle-aged people from the most advantaged backgrounds (i.e., whites with at least one parent who completed a 4-year college degree) with those from the most disadvantaged background—i.e., non-whites whose parents did not complete a 4-year college degree. If you are white with parents with college degrees, but don’t get a college degree yourself, the study found that you will still earn 9 percent more income and have 58 percent more wealth than a person of color who does get a college degree, but whose parents did not.
“College clearly is important,” the authors wrote, “but contrary to conventional wisdom, your own college education does not completely level the playing field. The birth advantage (or disadvantage) remains.”
There are a few reasons why parental education may have such a strong influence on an individual’s income and wealth, the authors hypothesized. For starters, college-educated parents, who in general are wealthier than non-graduate parents, likely provide their children with greater monetary transfers (in gifts and bequests) and more intensive investments from a young age, particularly in education.
Adult children of college grads also scored higher on a test of financial literacy, are more likely to save money regularly, are more likely to take risks to earn a higher return on their investments and are more likely to attend college themselves—all factors that impact one’s financial stability. Notably, the study did not analyze parental wealth as a factor, so it’s unclear which, if any, of these outcomes are directly tied to growing up in a wealthy family.
“If you start out with these big advantages, they just continue to help you out,” said Hernandez Kent.
Over a lifetime, these advantages can translate into better health. Both income and wealth are strongly linked to health outcomes: the greater your income and wealth, the lower your likelihood of disease and premature death.
The gaping economic and health outcome disparities created by the effects of the birth lottery will require complex and significant policy shifts to close. One St. Louis Fed official previously proposed nationwide expansion of childhood development accounts (i.e., community- and government-sponsored savings accounts in a child’s name that are usually restricted to higher education), as well as economic policy that helps parents build savings and liquidity, as two promising places to start.