Four researchers set out to study the causes and consequences of the concentration of wealth in the top 1%, both in the U.S. and globally. Their findings, published in a paper titled Why Are the Wealthiest So Wealthy? A Longitudinal Empirical Investigation include some interesting takeaways.
Wharton finance professor Sergio Salgado, co-author of the paper, explained that the main idea of the research is to characterize the lifecycle dynamics of the richest individuals using high-quality data. “We find that there are two types of super-rich,” Salgado said. “The Old Money, with parents that are rich, and the New Money, who have higher rate of returns and saving rates that bring them to the top.”
While the study tracked the wealthiest across their lifecycle, the researchers chose age 50 as a useful maker to determine how the top 0.1% made their “excess wealth,” or the degree by which their wealth exceeded that of mid-wealth households.
Old Money households could trace their “excess wealth” to:
- Higher saving rates (34%)
- Higher initial wealth (32%)
- Higher returns (27%)
New Money households, who made up a quarter of the wealthiest, worked harder to catch up. Their “excess wealth” at age 50 was explained by:
- Higher saving rates (46%)
- Higher returns (34%)
- Higher labor income (16%)
By comparison, Old Money households’ “excess wealth” was attributed only 5% to higher labor income.
Regardless of whether or not an individual had initial wealth or labor income, the findings showed that the wealthiest people earned their place by taking that money and reinvesting it in risky assets like private businesses, then multiplying returns.
The paper noted that the wealthiest invested “a substantially higher share of their portfolio” in private businesses starting from very young ages. Their share of risky assets (the sum of private and public equity) in their investment portfolio stayed above 80% across all ages and increased up to 89% by age 50.
Equity income was the main source of lifetime income for the top 0.1% in the 50-54 age group (83%). By contrast, households in the bottom 90% of the distribution earned 80% to 90% of their lifetime income from labor services. “A very small fraction of people became rich purely though labor earnings,” Salgado said.
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