When it comes to ending wealth disparities, many programs and policies focus on changing the behavior of low-income individuals by encouraging savings or improving financial education. These efforts can be helpful for participating families, but they have failed to close wealth gaps on a larger scale. Why?

Researchers Sara Chaganti of the Federal Reserve Bank of Boston and Alexis Mann of Brandeis University, formerly of the John T. Gorman Foundation, argue in a new paper that wealth gaps are largely driven by systemic and structural issues, rather than individual decision-making. They also present several “strategic imperatives,” or alternative ways for communities who have historically faced racism and discriminatory policies to build wealth.

The paper is called “The Importance of Wealth to Family Well-Being: Seeding Innovation to Address the Structural Roots of Inequality.”

“My hope is that we can recenter the conversation around the structural drivers of wealth inequality and think about how to counter them,” said Chaganti, deputy director of research in the Boston Fed’s Regional & Community Outreach department. “And for people who haven’t had access to (traditional) avenues of wealth-building, we want to broaden the number of pathways available to them.”

Wealth gaps impact economic growth

The paper defines wealth as the value of what a family owns minus what it owes. It says that unlike income – which families typically use to meet immediate living expenses like groceries or rent – wealth provides protection against financial emergencies. The researchers write that it’s also used to make investments, which can lead to upward mobility.

“Wealth is usually accumulated over time … and large amounts of wealth can give us quite a bit of power,” Chaganti said.

“Passive wealth,” such as an inheritance or homeownership, plays a significant role in household wealth accumulation, the researchers write. But they say slavery and discriminatory policies and practices like redlining have barred many Black families from building this type of financial security.

“What we’re seeing is not a consequence of people just going out for coffee instead of putting money aside,” Chaganti said.

Wealth disparities also continue to impact the economy, she added.

“In order for the economy to grow, everyone needs to be able to participate,” Chaganti said. “When a group of people have experienced disinvestment for generations, (and) they don’t have as many resources available to buy a home or other things they need … that’s going to affect everyone.”

Researchers discuss alternative pathways for building wealth

Mann and Chaganti write that strategies aimed at closing wealth divides should consider several “strategic imperatives” that can lead to wealth creation:

• Promoting access to collective ownership models, such as employee-owned businesses or cooperative home ownership, can provide alternative lower-cost entry points for families to begin building their assets while reducing risk to individual investors.
• Improving access to assets that appreciate can help families obtain investments that will become more valuable over time, instead of lead to debt. For example, down-payment support and access to prime-rate mortgages can help homebuyers avoid high monthly payments and financing costs.
• Since most families’ wealth lies in their homes, it’s critical to maintain property value and ownership. Programs that prevent foreclosure, assist with home upkeep costs, and offer families guidance as they navigate financial systems can help protect and grow wealth.

“(The imperatives) are not a fix for existing systems and structures that drive wealth divides,” Chaganti said. “But they are ways to build significant wealth for people who haven’t had access through other avenues. I’m hoping we can continue to think about more pathways like these.”

The researchers added that “raising the floor” alone – or helping people at the bottom of the wealth distribution gain more money – is not enough to close the wealth gap.

“Promoting financial inclusion is central to redressing wealth gaps, but it only addresses one side of the gap,” they said. “Raising the floor for low-wealth families is not equivalent to closing the gap. Wealth inequality is a function of the full distribution of white and Black wealth. … (C)losing the Black-white wealth gap requires increasing Black wealth across the full distribution, not just at the lower end.”

Read the full paper on the John T. Gorman Foundation website.