Silver Spoon or Self-Made? Exploring 23 Years of Wealth Mobility
The concentration of wealth has increasingly become a focal point of public discourse. Intriguingly, the perspective on inequality takes on a different hue when considering the fluidity of wealth distribution. If the ranks of the wealthiest and the poorest are not static but constantly evolving, the nature of inequality becomes less about entrenched hierarchies and more about the movement within the spectrum of affluence. This blog post delves into the concept of wealth mobility, which refers to the shifts in households’ positions in wealth rankings. This analysis not only illuminates the patterns of wealth accumulation but also offers insights into economic stratification and mobility.
In the U.S., the main data source on wealth, the Survey of Consumer Finances, is a triennial cross-sectional survey, which does not allow for studying wealth dynamics. The Panel Study of Income Dynamics (PSID) also collects wealth data, and has since 1999, but this survey does not sample the top 1% households well, See this 2021 paper by Noura E. Insolera, Beth A. Simmert and David S. Johnson for an overview of data comparisons between the PSID and other U.S. household surveys (PDF). even though they own more than one-third of total wealth.
Fortunately, Norway collects extensive wealth and income data on individuals. In a working paper I wrote with Elin Halvorsen, Joachim Hubmer and Sergio Salgado, we used this longitudinal data between 1993 and 2015 for the entire Norwegian population, which includes information on households’ financial and nonfinancial wealth.This blog post is based in part on my recent working paper with Elin Halvorsen of Statistics Norway and Joachim Hubmer and Sergio Salgado of University of Pennsylvania, titled “Why Are the Wealthiest So Wealthy? A Longitudinal Empirical Investigation.”
Today’s analysis concentrates on individuals ages 50 to 54 at the end of the 23-year study period. These individuals are categorized based on their average household wealth during 2014 and 2015, and divided into various wealth percentile groups. Further, we rank them based on their initial average wealth between 1993 and 1994, when the youngest were in their late 20s.
The transition probability matrix presented in the table below illustrates the percentage of individuals in a specific wealth group as of 2015 (represented by the rows of the matrix) originating from each initial wealth group (shown in the columns of the matrix). For example, of the individuals who were in the bottom half of the wealth distribution as of 2015, 63.2% had been at or below the 50th percentile as of 1993.
A scenario of absolute wealth immobility would be depicted by a transition matrix in which each cell of the main diagonal contains 100%, indicating no movement between wealth groups, and the off-diagonal cells contain zeroes, signifying no cross-group transitions.
| Initial Average Wealth Percentile Group | ||||||||
|---|---|---|---|---|---|---|---|---|
| 0 to 50th | >50th to 75th | >75th to 90th | >90th to 95th | >95th to 99th | >99th to 99.9th | Top 0.1% | ||
| End-of-Period Average Wealth Percentile Group | 0 to 50th | 63.2% | 23.2% | 9.4% | 2.3% | 1.6% | 0.2% | 0.0% |
| >50th to 75th | 41.9% | 29.8% | 19.2% | 5.3% | 3.4% | 0.4% | 0.0% | |
| >75th to 90th | 34.6% | 26.1% | 23.1% | 9.0% | 6.2% | 1.0% | 0.0% | |
| >90th to 95th | 30.1% | 22.8% | 22.4% | 11.7% | 10.7% | 2.3% | 0.1% | |
| >95th to 99th | 25.7% | 18.7% | 19.4% | 12.2% | 17.0% | 6.6% | 0.3% | |
| >99th to 99.9th | 20.5% | 14.5% | 15.6% | 9.0% | 18.9% | 17.5% | 3.9% | |
| Top 0.1% | 15.4% | 6.0% | 7.4% | 5.9% | 13.0% | 23.2% | 29.2% | |
| SOURCE: Elin Halvorsen, Joachim Hubmer, Serdar Ozkan and Sergio Salgado, 2023. | ||||||||
| NOTE: For each row, households in a 2015 wealth group are distributed among the 1993 wealth groups from which the households originated. | ||||||||
The Mobility for the Wealthiest Households
The transition matrix reveals a significant level of persistence at the top of the wealth distribution among households headed by those ages 50 to 54. For instance, nearly two-thirds of the wealthiest (those in the top 0.1%) of households as of 2015 were within the top 5% wealth group as of 1993. Furthermore, 29.2% of the wealthiest households were already ranked in the top 0.1% of the wealth distribution initially in their late 20s and early 30s. This suggests that households in the top 0.1% bracket are 292 times more likely to have originated from the same top 0.1% group than the average likelihood across the entire age group.
How Common Are “New Money” Households?
The presence of non-zero values in the off-diagonal cells of the matrix suggests that there is some level of wealth mobility among households. Notably, the bottom row of the matrix reveals that 21.4% of individuals who eventually ascend to the top 0.1% of the wealth distribution began their journey below the 75th percentile. These individuals typically start with minimal or even negative wealth and yet succeed in rising to the uppermost wealth tier. In a previous article for the Regional Economist, these individuals were described as “New Money” households. That piece explored their wealth accumulation patterns by examining their investment choices, the returns they earn from these investments, and their saving habits. We find that higher savings rates and higher returns on wealth primarily drive the New Money fortunes.
Who Ended Up with Below-Median Wealth?
Thankfully, the lower half of the wealth distribution demonstrates less persistence. Households in this segment are only about 1.2 times more likely to have remained in the same wealth group from the beginning. Additionally, 23.2% of these households initially ranked in the next quartile (from the 50th to the 75th percentiles of wealth distribution), indicating a moderate level of downward mobility from their starting positions.
The matrix also presents an intriguing observation: A small proportion of initially wealthy households fall below the 75th percentile after two decades. For instance, less than 2% of households in the lower 50% of the wealth distribution (as shown in the first row of data) originated from the top 5% of the initial distribution, and almost none from the top 0.1%. This contrasts starkly with the significant proportion of New Money households that climb up the wealth ladder. The data indicate that it’s relatively rare for wealthy households to significantly drop in their wealth rankings. Therefore, rapid wealth accumulation appears to be more common than rapid dissaving or squandering.
Conclusion
These results highlight that the wealth dynamics exhibit a substantial degree of persistence at the top of the wealth distribution. Only a small group of households starts with little or no wealth and eventually ascends to the highest wealth tier. And for even a smaller group, its members begin their working lives wealthy, only to experience a substantial decline in their wealth ranking by the time they reach their 50s.
Notes
- See this 2021 paper by Noura E. Insolera, Beth A. Simmert and David S. Johnson for an overview of data comparisons between the PSID and other U.S. household surveys (PDF).
- This blog post is based in part on my recent working paper with Elin Halvorsen of Statistics Norway and Joachim Hubmer and Sergio Salgado of University of Pennsylvania, titled “Why Are the Wealthiest So Wealthy? A Longitudinal Empirical Investigation.”
This blog offers commentary, analysis and data from our economists and experts. Views expressed are not necessarily those of the St. Louis Fed or Federal Reserve System.
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