When it comes to wealth inequality in the US, I am so aware of the huge disparity, that I thought I had previously posted about it. Apparently I haven’t, so here it goes.
The Headlines
The headlines about inequality often focus on inequality in income. Although this is severe, it is quite misleading. A household income of about $480k puts you in the top 1 percent, which is about 8 times the median household income of $59k. This is based on 2015 data from the IRS. The evolution of earnings of the 1,2,5 and 10% based on the IRS data can be seen below.
Source: Bloomberg
I think in this sense people don’t see as much disparity because that figure may seem reachable for someone who runs a small plumbing business, has their own law practice or is a mid to high level executive at a medium to large company.
Reality is Worse When it Comes To Wealth
However, depending on what source you look at, the low end of the 1% of net worth is around $10 million which is 100 times the median net worth of a US household which is about $100k. The below breakdown is from the site DQYDJ (Don’t Quit Your Day Job) and is based off of Federal Reserve data from 2016, which is the latest available.
Source: dqydj.com
To give you an idea of what it would take to get to that figure by just working a regular job for an employer, a 1% household in terms of income at around $500k would have to consistently save and invest 50% of their income in the stock market at a 10% return for about 20 years before they reach the 1% of net worth.
Many people achieve the 1% in income for a household, think of two lawyers in New York or San Francisco who marry each other. Before those high powered professional couples pat themselves on the back for “making it” though, they should realize the 1% in net worth takes millions in earnings, years of high income and high savings, or both.
For this reason, I think the 1% of net worth may look much less attainable for the above average hard worker and gives a stronger indication of the real disparity that has differentiated the rich from the rest. To put it in context again, the 1% in net worth can easily achieve the 1% in net income while essentially doing nothing (i.e. not working) and pay lower taxes on those earnings than someone busting their hump at their own business or in middle management.
The Millionaire vs the Penta Millionaire
In a recent post I talked about the prevalence of millionaire households and how these households were primarily made up of regular folks who were diligent savers and investors.
The new rich though, rather than the retired rich or working rich, may be known as the penta millionaires, or those with a net worth over $5 million.
Source: Business Insider
I suppose this term may be just for the somewhat rich to distinguish themselves from the unwashed masses of regular folk like teachers and accountants who manage to make themselves millionaires through saving and investing.
Indeed, as noted above, $500k a year is not likely to put you in the 1% net worth club by itself, even if you are a diligent saver and investor. To get you to the vaunted $10 million threshold of the 1% of net worth, you would need something that grows faster or makes you as much money as being the CEO of a big company, and that is likely to be your own business.
Entrepreneurs Rule the 1%
It’s no wonder that studies show that the prevalence within the ultra high net worth community (those households with financial assets of $30 million or more) of business owners, is many times higher than that of the general public. A successful business can be either a cash cow which brings in tons of income for its primary owner or, if they prefer not to pay themselves to exorbitantly, can have value through the equity that the primary owner holds.
I am fascinated by the income and wealth disparity and what is driving it. It seems that every few months, a new site pops up with rich visuals and even better data sets to show how inequality is evolving and shaping things in the US and in the world.
To speak to my previous point about business ownership having a key role in making the super wealthy, take a look at the composition of wealth across different segments of the wealth spectrum, from the bottom 25% to the top 1%.
Source: equitablegrowth.org
Business equity and net other financial wealth make up the bulk of wealth for the 1% in net worth. The “net other financial wealth” is likely made up of both public and private securities since the richest 1% own more than half of all stocks traded on the stock market.
Source: inequality.org
Putting This in Context
I have focused on the 1% so far, but many people have been drilling down even further to discuss the breakdown within the 1%, which you can see below.
Source dqydj.com
The 1% has pulled away from the rest of the population but it’s the 0.5% and the 0.01% that have really pulled away over the years.
It isn’t an illusion of inflation either, although the US and rich countries have always had inequality in income and wealth, the average household wealth of these top groups on an inflation adjusted basis since 1983 has also taken off.
Source: inequality.org
With the median age of the 1% in net worth being in their 60’s, unless the current generation comes up with some stellar inventions that propel the next decades of prosperity and growth to levels similar to the dot com days of the 90’s, we are on the verge of a slower growth period with a huge amount of wealth being transfered once those rich elders move on to rich people heaven. In fact, we are probably already starting to see it as I pointed out in a previous post as the average age of those with a net worth of $25 million has dropped from 58 to 47.
How Will This Affect Us and Should We Care?
Although I don’t think we are on the verge of a communist revolution, I think the public has woken up to the unfairness of the system and the plateauing quality of life many have experienced in the middle class.
This has and will, continue to translate into more divisive and bitter partisan politics as the fringes get more extreme: the masses of workers who want a fair chance and to feel like the system is not rigged against them, and the super wealthy, who have the wealth and influence to bend the system to their advantage.
In addition, despite all that I have shared I haven’t even touched upon the inequality within racial groups, between the educated and non educated or the disincentive to work and motivation that this type of disparity brings.
Indeed, what may worry many who exceed the $10 million mark in net worth is how to keep the money from sapping their motivation, or their children’s drive, as discussed in this article here.
For this reason, wealth planners and financial advisors are increasingly turning to the field of psychology to manage their clients estate planning and spending habits rather than just laying numbers in front of them. These problems will only increase as the resentment towards the super rich grows as the public discourse worsens. Many in the 1% of net worth have the paradox of wanting to remain much better off and have a leg up on everyone else, while at the same time not being socially isolated due to the resentment of their wealth from much of the population.
The rich should not be punished for achieving great wealth, but a tax system and a political system that is more fair for everyone is in everyone’s interest in the long run, even for the rich.
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