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The most beautifullest thing in this world just might be compound interest.
It’s how an investor might describe racks on racks on racks. As my math-challenged brain understands the magic, make steady contributions to an interest-earning account, let the interest accumulate, which then earns more interest.
When reminded of the salary gap for black women — which translates to $21,900 less per year compared with white men — I think about compound interest. Or more specifically, the stolen chances to take advantage of it. Because focusing on the income gap obscures the real damage.
Over a 40-year career, a sister’s salary gap translates into a loss of more than $877,000. What would happen if just $10,000 of those annual losses were exposed to the beauty of compound interest?
What would happen is that in 40 years at 8 percent interest, compounded annually, she’d have more than $2.7 million. That’s more than enough to do as the Good Book instructs and leave an inheritance for your children’s children.
Intergenerational wealth remains out of reach for most black families, thanks to a legacy of discrimination, made worse by gargantuan federal subsidies that benefit high-income families the most, such as the mortgage interest deduction.
The income gap gets far more attention than the wealth gap, although the latter is larger, said Signe-Mary McKernan, a senior fellow and economist at the Urban Institute, which focuses on social and economic policy.
Wealth is “not just money in the bank, it’s insurance against tough times,” McKernan said. “It’s the capital to build a small business. It’s savings to retire on. It’s a springboard into the middle class.”
The racial wealth disparity is worse today than 50 years ago. In 1963, the average white family had about $136,000 of wealth and the average black family about $19,000. In 2013, the average white family had close to $678,000 in wealth, compared with $95,000 for African-Americans.
The divide between white women and black women is even more disheartening: The median wealth for white women in 2007 was $45,400, compared with $100 for black women and $120 for Latinas.
True, low-wage women suffer most from the wage gap, but so do middle- and upper-income women. Two recent examples come from my field of journalism.
At Dow Jones, which owns The Wall Street Journal, the average white male employee makes $631 more per week than a black female employee. Equity would mean that a black woman would take home $32,000 more each year. At The Washington Post, white male reporters bring home $110,000, or $8,000 more per year than reporters who are black women.
The size of the lifetime wage gap depends in part on where you live, too. The gap between black women working full time year-round and their white male peers is $1.6 million and $1.2 million in the District of Columbia and New Jersey, respectively.
If black women want to earn close to what white men do, they’ll have to move to one of the whitest states, Vermont, where the lifetime wage gap falls to $132,000.
More education isn’t the cure-all Horatio Alger fans would have you believe. While black women are enrolling in college at historic rates, a black woman with a master’s degree only makes a few thousand more than a white man with an associate’s degree.
Neither the income nor the wealth gap can be explained away by experience level, occupation, careers interrupted by caregiving or consumption patterns.
The solutions, McKernan of the Urban Institute said, include replacing the mortgage interest deduction with a credit for first-time homebuyers and automatic contributions to retirement plans.
Asked for some good news, McKernan said that regardless of what the income gap is for black women and people of color, most low-income families can set aside something to build wealth. Or in other words, the best revenge is stacking that paper.