FREE NEWSLETTER
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.
I don’t hear anyone talking about, what happens to the massive amounts of USD that are created by the FED out of thin air? Whose pockets are getting lined by those trillions?
This article makes a lot of sense. I think it’s been said that one secret of Warren Buffett’s success is simply longevity. Most of his wealth came after 50. My own parents were on generous pensions and saved quite a bit after 65.
This is interesting because you always hear concerns about outliving your income, as though longevity is a bad thing for creating generational wealth. For example, if I’m 80 I can pass $400,000 down to my heirs today, if I’m 90 I can pass only $200,000 down 10 years later. My dying early creates more value to my heirs. Even if I am so wealthy I don’t need to tap into my investments, that money can still grow if I die and pass it down. I have not considered the effect of taxes. I understand also that there’s no guarantee the heirs won’t spend the money instead of letting it grow. It just does not seem obvious to me that living longer contributes to wealth.
If the compound growth of your portfolio during retirement can exceed the rate at which you withdraw funds for living expenses (your “burn rate”), you may enjoy a rising net worth if you live a long life.
Of course, if your burn rate is too high, you may leave more for your heirs if you die sooner rather than later.
The article tries to point out the increasing share of national wealth held by seniors in their 70s and beyond. It doesn’t address inherited wealth which can certainly continue to grow if invested wisely.
While there may be some truth to the premise of this article, I doubt that it is a major reason for income inequality in the US. The the top 1% threshold is highest for those in the 55-59 age group ($17.5 million) versus 12.6 million for those 70-75, 12.8 million for those in the 75-80 age group and $9.9 million for those 80+.
https://dqydj.com/average-median-top-net-worth-percentiles-by-age/
Longer lives and more years of compounding can elevate some older folks into the upper tiers of American wealth. It is certainly not the sole reason for wealth inequality, but it is a factor to consider.
Inequality is inherent in humanity. There are tall people and short people. There are no short people playing pro basketball. In fact, there are very few abilities that are distributed equally. Mostly, we can all walk and talk, see, hear, and feel. Some have better vision, are faster, and speak better. I have difficulty drawing a straight line with a pencil and ruler. Focus, discipline, drive and intelligence are just a few of the qualities necessary for success. Yet people have them in unequal amounts.
When you take this inherent individual inequality and add geographical inequality in that some locations have more resources available, and then add capitalism, an economic system that distributes resources to the most efficient and productive, you end up with unequal distribution of wealth.
Yet, I don’t think you can fix things by redistribution of wealth. There are many stories of lottery winners blowing away their sudden wealth. And, in many wealthy families wealth erodes over generations as the new generations lack the combination of abilities that produced the wealth for the first generation.
You cannot create equality of results. If you could set up a big test kitchen with a thousand stations, and provide the ingredients and a recipe to a thousand people, you would not end up with a thousand equal loaves of bread. You can buy a thousand loaves of bread that are equal to distribute to a thousand people, yet someone still has to make and bake the bread.
Where people possess different abilities, and where some abilities are valued above others, economic outcomes will vary. It’s an imperfect reality but preferable to the alternative. When equal outcomes are the aim, some are penalized (or worse) to benefit others. The leveling that necessarily comes with equal outcomes stifles human striving and excellence and requires enforcement by nomenklaturas made up of people who somehow manage to end up more equal than everyone else. History is full of examples of repression and destroyed lives when equality of outcome is paramount. Equality of opportunity and equality before the law, imperfect as they are, seem to have a better track record in promoting human flourishing.
What gets lost sometimes in the equality of opportunity versus equality of outcome discussion is the part played by individual’s choices. Equality of opportunity can only be leveraged when we choose and act wisely. Yes, people are born into circumstances that have them in a hole to start — poverty, an unstable home life, a lack of good examples or mentors in one’s life, and abundance of misfortune. Granted, that’s a lot to overcome, and some never do. But we aren’t powerless. We have the power at least to choose. We can choose to exercise self-discipline, to delay gratification, to avoid criminal activity, to work regularly, to work for stable family situations in our adult lives. Our choices matter and can improve our chances of achieving good, maybe great, economic outcomes. Not “billionaire good” in most cases, but good enough that we can take pride in what we have overcome and achieved, while viewing the success of others not with resentment and envy but admiration and respect.
All to say, while I think it’s right to emphasize equality of opportunity, let’s also emphasize, or re-emphasize, what it takes to take advantage of the opportunities. To me, that starts at the family level, and that’s the level at which we are failing. Maybe we are better off talking honestly about what is breaking down there and how to fix it than we we are banging on about income inequality.
Your key sentence here is “provide the ingredients and a recipe”. The problem is that many people aren’t provided the ingredients or the recipe. The ingredients are the basics of life, like food, shelter, security, quality healthcare, economic opportunity. The recipe is education. By accident of birth, geography, skin color or economic status, some people have more access to those ingredients and that recipe than others. They have a better opportunity to bake that bread. Many people simply have little to none, regardless of their native abilities.
That’s where equality comes in. Not redistribution of wealth, but full access to everyone to use their abilities to bake that bread.
Absolutely. We should be concentrating on equality of opportunity, not equality of outcomes.
Unfortunately, a substantial segment of American society opposes even that, as we have seen with recent legislative and legal events. In my opinion, the initiative for equality of opportunity is now in full retreat.
The issue of inequality is one of my hot buttons because the rhetoric is incredibly misleading. Yes, there is inequality, but no it has nothing to do with poverty which is often mention in the same discussion as inequality. They are separate issues, poverty is a problem, inequality is not. It has been with us since the Stone Age. Inequality does not take from anyone. In fact, quite the opposite.
Todays best know billionaires have created hundreds of thousands of jobs in the US and abroad. They have improved our lives, created entire new industries and many of them give back directly to society. We have a net gain from great wealth in most cases.
Two Senators are now pushing legislation to limit the tax advantages of 401k plans and IRAs claiming they provide an unfair worker subsidized advantage to the wealthy and billionaires while low income Americans struggle to save for retirement.
It seems both have forgotten the income and benefit limits in such plans specifically designed to limit tax benefits for higher income people. I suspect that Musk and friends have little interest in a 401k plan or IRA. But that does not stop the rhetoric.
Other groups say we need a wealth tax to fight poverty and inequality, but fail to point out exactly how that would work and how a new tax to reduced inequality to “acceptable” levels would reduce poverty- nor do they define “acceptable.”
Poverty like inequality has been with us forever. Reducing poverty to the lowest possible level is necessary and it seems we have been trying for decades, maybe not in the right ways, but we keep trying.
However, when the next innovator comes along, creates the next major advance for all of us to benefit from and the stock market makes him or her an overnight billionaire and adds to inequality, it still will have nothing to do with poverty.
Richard, like you, I feel that It’s easy to look at the skewed distribution of wealth in America and conclude that it’s both unfair and a flaw of capitalism. But really, can it be any other way? Even in socialist economies, the ruling elite are wealthier and enjoy more privilege than the average citizen.
I agree that poverty is a separate issue. The best antidote to poverty that I’m aware of is better education for all young people. Unfortunately, America hasn’t done a good job in this area.
This is a true assessment. Education will lead to access and information. The remaining piece of the puzzle is power but that is the topic of another day 😉
Here is the link about billionaires and 401k plans.
All discussion about wealth and inequality have a hidden (and sometime, sinister) agenda behind it.
I’m confused by your comment. Expound please.