Women’s Wealth Gap: How The Income Gap Becomes The Wealth Gap
Over the course of a woman’s lifetime, the income gap of 80 cents to the dollar snowballs into a wealth gap of 36 cents for every dollar of wealth owned by a man. Wealth is even more important than income, because it is equivalent to net worth, commonly defined as the difference between assets and liabilities. Net worth equals financial assets such as cash, stocks, and the equity in a home or business minus debts such as a mortgage or credit cards. Wealth matters even more than income, because wealth translates into economic security — the ability to withstand a financial shock, such as loss of income from being laid off or fired from a job, or a large debt incurred from a medical emergency. Wealth can be used as a source of income in retirement, and can be passed down from generation to generation. Women now earn more college degrees at the undergraduate, master’s, and doctoral levels compared to men, but still receive less in wages, and are twice as likely to live in poverty during retirement.
Dr. Mariko Chang is a sociologist who has spent her career researching women’s wealth gap. In 2013, she published a groundbreaking report detailing the extent of women’s lack of financial security and an analysis of how it happens. For example, the median wealth of a single man (across all racial and age groups) is $10,150, while a single woman’s median wealth is $3,210. Race has an observable effect in addition to gender; median wealth for single white men is $28,900 compared to $15,640 for single white women. The wealth gap for women of color is a chasm: $200 for single black women and $100 for single Hispanic women. Viewed from another perspective, for every dollar of wealth that an average man owns, an average woman owns only 36 cents. Women of color only own pennies.
Compounding the problem of unequal pay is what Chang calls the ‘wealth escalator’ and the ‘debt anchor.’ The wealth escalator refers to the fringe benefits that accompany most salaried positions, such as medical insurance and flexible spending accounts, paid time off, stock options and employee stock ownership plans, and access to defined contribution plans such as 401(k)s for retirement savings that employers often contribute to as well. Men are more likely to hold full time jobs that offer these kinds of tax-advantaged fringe benefits, which convert income into wealth at a faster rate than saving income alone can.
The wealth escalator uses pre-tax dollars to indirectly provide things the employee would otherwise have to pay out of pocket for and increases disposable income that can then be saved and invested to create more wealth. Women are more likely to work part-time or hold jobs in low-paying occupations that do not offer these kinds of benefits. Time spent out of the workforce for unpaid caregiving also limits women’s access to the wealth escalator. An example is the divorced single mother who has taken time out of the workforce to provide care for young children — she is likely to experience difficulty finding work that provides both benefits and flexibility, and is twice as likely to work part-time compared to men.
At the same time they are missing out on riding the wealth escalator, women are more likely to be weighed down by the debt anchor. While women have gained greater access to higher education, they also carry higher amounts of student loan debt for a longer period of time. Women’s debt is often financed at higher interest rates, based on their generally lower credit scores, which can turn into a vicious circle. A lower credit score means a lower credit limit; a lower credit limit produces a higher utilization ratio for a given level of debt, which then contributes to a lower credit score.
Home ownership, which is typically thought of as good debt and a way to build wealth through equity, can be a double-edged sword for women. A good example is what happened during the subprime mortgage crisis, where women, and women of color in particular, were targeted by predatory lenders. Black women were 2.5 times as likely to receive a subprime mortgage while Latina women were 1.5 times as likely compared to white men, and both groups were more likely to lose their homes to foreclosure.
Other drags on women’s ability to build wealth include the financial risks associated with divorce and longer life spans. The popular image of a divorced woman living comfortably on her former husband’s alimony is a complete misconception, according to research conducted by London School of Economics professor Stephen Jenkins. Women typically see a 20% or greater drop in income that persists over many years, while men usually experience an immediate and continuous income increase of 30%.
Low-paying jobs, part-time work, the income gap, and time spent out of the workforce also translates into a lower earnings basis used to calculate future Social Security benefits, upon which many older women depend upon as their primary source of income in retirement. In 2014, the average annual Social Security income received by women 65 years and older was $13,150, compared to $17,106 for men. Almost half of all unmarried females (46%) receiving Social Security benefits relied on Social Security for 90% or more of their income. In contrast, Social Security benefits comprise only 34% of single men’s income. The recent increase in ‘gray’ divorce, i.e., after age 50, also hurts women financially because they have less time to recoup lost financial assets, compared to divorce at an earlier age. Divorced women over 50 receive smaller Social Security benefits, on average, than all other single women and men. They also confront a high poverty level of 27%. By comparison, the poverty level for divorced men over 50 is only 11%, two and a half times less.
Women’s increased life spans also work against reaching financial security in retirement, since their money needs to last longer while the income gap and debt anchor make it harder to save for retirement in the first place. Living longer often means increased health care costs, too. According to a study by HealthViews Services, a company that provides research for financial advisors, a healthy 65-year-old woman who retired in 2016 and will live to age 89 can expect to have health care expenses of more than $300,000 on Medicare premiums and out-of-pocket costs for hearing, dental and vision care. The projected cost for men is about $260,000. Those numbers don’t include the costs of long term care or medical costs at end of life, both of which can be exorbitant.
It’s a bleak financial situation that plays out over the course of a lifetime for most women. But why should employers care? In the next article, the financial consequences of women’s wealth gap for businesses will be presented.