COMMENTARY ABOUT America’s wealth inequality seems to be everywhere. According to Wikipedia, as of 2021’s fourth quarter, Federal Reserve data indicate that the top 1% of households hold 32.3% of the country’s wealth.
Meanwhile, Pew Research Center reports that the median wealth of the richest 20% of American families increased by an inflation-adjusted 45% between 1998 and 2007, while the median wealth of middle-income families rose just 16%.
And then there’s the Federal Reserve Bank of St. Louis, which reported that in 2019 a family needed a net worth of at least $1.22 million to be in the top 10% of wealthy families. These folks collectively owned 76% of household wealth. By contrast, a family needed at least $122,000 to land in the middle 40%, and this 40% of the population collectively owned 22% of U.S. wealth.
Some commentators argue that this skewed wealth distribution is partly the result of tax advantages that aren’t available to the less wealthy. For instance, accumulated wealth is often taxed not at income-tax rates, but rather at lower capital-gains rates. Others point to tech billionaires and complain about them owning a disproportionate share of the country’s wealth.
But there may also be a less politically divisive reason for America’s wealth concentration: longevity.
Richard McKenzie, a professor emeritus of economics at the University of California, Irvine, has written that advances in medicine and better health care have increased the lifespans of the elderly—a considerable financial advantage, since longer lives mean more time to save and invest. Today’s retirees are able to compound their investments for longer than prior generations.
The author offers an example: Consider a healthy 65-year-old retiree with a $1 million portfolio invested in an S&P 500-index fund. If our retiree can leave the portfolio untouched for 10 years and earn an average after-inflation return of 7.2% a year, the portfolio would double in value to $2 million—even if no new savings are added.
A $1 million portfolio would land you in the top 12% of wealth holders. A $2 million portfolio would land you in the top 6%. Result: The greater our wealth at 65, and the healthier and longer-lived we are, the more wealth we could potentially amass, pushing us into the top tiers of American wealth.
Critics of America’s skewed wealth distribution shouldn’t overlook the impact of those age 70 and older. These folks constitute 16% of the population—and they hold $35 trillion in wealth.
