Federal Reserve Quantifies Financial Impact of Having White, College Grad Parents Aged 41-60

Chris Gaetano
Published Date:
Mar 7, 2018

A new report from the Federal Reserve Bank of St. Louis says that families headed by white college graduates between the age of 40 to 61 years old have three times the income and six times the wealth as the median family overall. What's more, the report estimates that over half of this advantage over the population medians ultimately can be attributed to those inherited characteristics, not effort or education. The Federal Reserve came to this conclusion by looking at its data from the triennial Survey of Consumer Finances, which was designed to be nationally representative so as to more safely generalize about the population as a whole. 

"There is, of course, no way to know for sure in any individual case how much responsibility for a particular income or wealth outcome to assign to effort versus endowment. We proceed instead by examining differences across demographically defined groups. If there are economically and statistically significant differences between the median income and wealth of two groups that differ only on one inherited demographic characteristic, such as parents’ education, then we attribute those group income or wealth differences to forces related to the inherited characteristic rather than to individuals’ own efforts or education," said the report. 

In order to do this, the study divided the sample into successfully smaller groups in four steps. The first step divided all families into three age groups, then subdivided each of those into two racial and ethnic groups, resulting in six groups. They then subdivided each according to the college-attainment status of the respondent's parents, eventually creating 12 groups. Then they subdivided these groups according to the college degree status of the respondent, resulting in 24 groups. Once the groups were isolated, they were able to compare and contrast income and wealth between groups.

"A fact laid bare by our demographic framework is that inherited demographic characteristics are very important determinants of adult outcomes like education, income and wealth. The typical member of the most favored group ... had 14 times as much wealth as the typical member of the least favored group, even before one’s own educational attainment is taken into account. This wealth disparity is completely arbitrary in the sense that no one in either group chose his or her own parents. Similarly, [the analysis] shows that the typical member of the demographically favored group received an income of $113,618 (the 80th percetile), compared to $41,518 (the 40th percentile) among the least favored group. This income multiple of 2.7 times for the typical member of the favored group could be described as a payout from 'winning the birth lottery,'" said the report. 

While these features have a predictive effect, according to the study, they do not necessarily equal destiny. Isolated from other factors, a college education alone was found to lead to an increase of about $31,000 in median net income and about $251,000 in median net worth. However when race (and only race) was accounted for, predicted income increased by $19,000 but predicted wealth decreased by $382, relative to all families. 

"After taking into account inherited characteristics, obtaining a college degree boosted the income rank of the median family in this group by 14 rungs above the percentile predicted from inherited demographics alone and lifted the median wealth rank 25 rungs. In other words, the typical family in this group can attribute more than half of its advantage over the population median income to its own educational accomplishments and all of its superior wealth position—and then some—to having a college degree," said the report. 

The report further pointed out that the impact of a college education on those whose parents never went to college, while lower in absolute numbers, was still more significant when the parents did not have one. For a white family with highly educated parents, the head of household completing a college degree increases median net wroth by 8 percentile ranks. By contrast, when the only difference is that the head of household's parents did not have college degrees, this increase was 17 percentile ranks up. Similarly, when race is the only thing that differs, families receive a 12 percentile boost in income distribution (though wealth is unaffected).

Of course, the Federal Reserve also noted that the fewer of these demographic traits a family has, the bigger the penalty to income and wealth. This means that, before their own education is taken into account, families headed by someone who is middle-aged, of a race or ethnicity other than white and whose parents were not college grads begin with a predicted income rank 10 rungs below the population median and a wealth rank 17 rungs below the median. 

Finally, the report also pointed out that, even for those with families possessing all the favorable demographic traits, not completing college carries a large penalty.

"Relative to the income and wealth that would be predicted based on their inherited demographic characteristics alone, those who fall short of their parents’ college education are likely to slip decisively downward in the overall rankings—by 16 percentiles in income and 18 percentiles in wealth rankings for middle-aged families. Nongrad family heads whose parents likewise did not obtain college degrees drop by less than 10 percentiles in both income and wealth rankings relative to levels predicted by inherited characteristics alone," said the report. 

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