An recent article in Reuters discussed research that shows that relative to other groups, middle class African-Americans save and invest less. This is interesting for two reasons: first, it is one example among many of the power that culture has over economic behavior of individuals and nations, second, the explanations provided by the authors demonstrates the pervasive power of political correctness.
Culture is not just food and rituals, but the predominant values, norms and behavioral patterns in groups that has a major impact on social, economic and political life. For example, the private and public savings rate in East Asian countries was much higher than that that of the United States and Western European nations. Furthermore, a study found that when presented with the option to participate in a 401K, Asian-Americans were more likely than whites and other groups (of individuals of the same income level) to participate. It appears that African-Americans lie at the other end of the culture spectrum. When we analyze a host of other socio-economic phenomena, such as the pursuit of education, the rate of out of wedlock births and crime we find similar rankings (from optimal to more problematic): Asian-Americans, Whites, Hispanics and African-Americans. I believe that the underlying factor is: future vs present orientation. In other words, those who are oriented towards the future are more likely to save, invest, pursue education, avoid having children outside of refrain from committing crime than their present oriented compatriots.
Regarding the cause of the savings rate, the authors of the article provided the following explanation:
"African-Americans distrust the financial system because it has excluded them for so long" and “have not effectively engaged" them. While these may be viable factors, the fact that the author does not even explore the possibility that culture and values may be a factor, demonstrates the pervasive manner in which political correctness narrows debates. If he was intellectually honest, he would note that Asian-Americans were also excluded from the financial system for years and not engaged by investment firms, yet they have surpassed European-Americans in their savings and investment rate. Hence, his explanation is limited to say the least. While political correctness may spare feelings, it limits our capacity to generate viable solutions to pressing social and economic ills.
Why don’t blacks save more?
APR 12, 2011 16:33 EDT
Yet another survey confirms what we already know: Blacks don’t save as much as their white counterparts.
According to Prudential’s new study — the African American Financial Experience — 60 percent of African-Americans have less than $50,000 in company retirement plans and only 23 percent have more than $100,000. They’re also three times more likely to raid their 401(k) or other retirement plans to meet immediate financial needs, the study says.
Prudential’s findings echo research by Ariel Investments, which looks at middle class blacks. (According to Ariel’s July 2010 study, the median assets blacks have retirement plans is about half the amount that whites have accumulated: $56,000 compared to $106,000.)
This issue has not gone unnoticed in corporate boardrooms. One company that is trying to narrow the retirement savings gap among minority workers is McDonald’s, which uses some unconventional (along with very traditional) methods to get black and Latino employees to save for retirement.
Some highlights from Prudential’s research:
African-Americans are more likely than the general population to cite charitable donations as an important goal (68 percent vs. 55 percent). College education — without debt — is also important.
Only two in 10 African-Americans believe that they are on track to meet their planning and savings goals for retirement, and nearly twice as many say they are way behind or haven’t even started.
African-American decision-makers tend to be more independent learners when it comes to finances, relying on books, financial websites, financial seminars and conferences and their employers for information. They also show a high interest in learning about financial issues through faith-based organizations.
African-American women are driving financial decisions in their households. Of the African-American women surveyed, 72 percent indicated that they are the primary financial decision-makers in their households and do not share financial decision-making equally. This compares with 69 percent of African-American men, and 54 percent of the general population.
African-Americans are nearly twice as likely to have a dream of starting a small business as those in the general population (35 percent vs. 19 percent), and view starting their own small business as a path to financial freedom. However, more than half of those with an interest in starting a small business say a lack of capital has been the primary hurdle to getting started.
Why don’t blacks save more? Experts say African-Americans distrust the financial system because it has excluded them for so long. In fact, 78 percent of respondents to the Prudential survey said they feel financial services companies “have not effectively engaged the African-American community.” Most of them do not use or have access to financial advisers.
That’s a big problem for the minority community, in general. And with America’s ethnic make-up changing rapidly, the color of money is changing, too.