2008-05-20

Economic Mobility — What Are Your Chances of Moving Up, Really?

Can you really improve your financial situation? This question can be approached in many different ways—absolute vs. relative, as measured by earnings vs. income vs. wealth, and so on. If you read (or write) personal-finance blogs, the answer is inevitably yes. After all, if the answer were no, what would be the point of reading (or writing)?

But what are your chances? Can you really improve your financial situation in the way contemplated or described as the American Dream?

There have been a lot of studies using economics and statistics and other math that I don’t really expect to understand all that well, and they seem to agree that you can certainly improve your financial situation at least some. (See “Economic Mobility in the United States” (at the Urban Institute) (discussing several studies on income mobility).)

And there has been more study and research done by the Economic Mobility Project, culminating in the relatively recent report, Getting Ahead or Losing Ground: Economic Mobility in America. There has been some blog discussion of this already. (See, e.g., Economic Mobility and The American Dream (at Get Rich Slowly); Read This if You Were Born Into Wealth (at Wise Money Decisions).) Here’s just a sample of some key findings of the report:

  • About 66% of Americans have higher incomes than their parents.
  • About 34% of Americans have sufficiently higher incomes than their parents that they are considered to have moved up “one rung on the income ladder.”
  • Education plays a strong role in economic mobility.
  • Americans’ income and wealth positions are heavily influenced by the position of their parents.

Is that encouraging? Limiting? Frightening?

I thought I’d look at the chances of improving your financial situation per the American Dream from the perspective of where you started out from, i.e., your parents’ financial situation, and measuring by wealth. One section of the Economic Mobility Project report addressed this specifically.

It looked at various sets of data and considered wealth simply as “assets minus debt” (excluding non-liquid retirement assets and the value of future payments such as Social Security and pensions). Breaking the 2004 data out into percentiles, this was the distribution:

WEALTH DISTRIBUTION
(NET WORTH IN 2004)

Percentile

2004

2007 (converted)

10th

$200

$219

25th

$13,300

$14,598

Median

$93,100

$102,189

75th

$328,500

$360,570

90th

$831,600

$912,787


(The 2007 “converted” numbers were generated using Measuring Worth, based on the difference in the Consumer Price Index between 2004 and 2007.)

So let’s say, under the American Dream or whichever dream you might choose, the goal is to get to the top bracket—around $900,000. The report includes an analysis of what percentage of folks reach that top bracket, broken out by the bracket where their parents were. Unfortunately, the report changed gears and reported this in terms of quintiles instead of percentiles. So stuck with that, we’re looking at trying to get to the top quintile—which presumably equates to a number somewhere between about $360,000 and about $900,000.

CHANCES OF REACHING THE TOP WEALTH QUINTILE

Starting Point (Parental Wealth Quintile)

Percent of Children Reaching Top Wealth Quintile

Bottom

7%

2nd

12%

Middle

15%

4th

26%

Top

36%


So for folks whose parents were at the bottom quintile—meaning net worth lower than $14,000—7% reached the top quintile. For folks whose parents were at the top quintile, 36% reached the top quintile—meaning it’s not at all a given that people replicate their parents’ financial situation.

How do those chances look? They actually look okay to me. If your parents had a net worth of less than $14,000, just playing odds, your chances of reaching a net worth of somewhere in the $360,000-$900,000 range are 7%. Ever walk up to a craps table and roll a 7? Your chances of doing that were about 16.7%.

And those are just odds. Chance. Luck. More appropriate when you’re betting on something over which you don’t have control.

Since you have input on your own situation, you’re not really stuck with odds, in my opinion. If you could figure out what determined the fate of that 7% (or whichever number applies to you)—what they did that helped them move from their parents’ quintile of wealth to their own top quintile of wealth—your chances should go up quite a bit.

And there may be some answers to that.

Professors Steven Venti and David Wise wrote an article called, The Cause of Wealth Dispersion at Retirement: Choice or Chance? In it, they looked at people’s wealth at or near retirement—around ages 51-61. And they tried to determine what impacted how much money people had accumulated by that time.

What they found was quite interesting. When you broke out the groups by different measures, such as income or lifetime earnings, there was still a wide dispersion of wealth at retirement. In other words, for people who had very low incomes, by the time they retired, some had very little money, some had a fair amount, and some had a lot. And for people who had very high incomes, by the time they retired, some had very little money, some had a fair amount, and some had a lot. One might have expected that the people who had high incomes would have a much greater weighting of people who retired with lots of money—but they didn’t.

Venti and Wise concluded:

[A]t all levels of lifetime earnings there is an enormous dispersion in the accumulated wealth of families approaching retirement. In the United States it is not only households with low incomes that save little. A significant portion of high-income households also save very little; and not all low-income households are nonsavers. Indeed, a substantial portion of low-income households save a great deal. Within income deciles, very little of the dispersion in wealth can be explained by household attributes that may have limited resources available for saving. Nor is much of the dispersion explained by investment choices. Thus the primary determinant of the dispersion of wealth at retirement is evidently the choice to save or spend while young. We find no evidence that chance plays a large role.

What I think they’re saying is: if you look at what people actually did, it wasn’t their income, investment choices, or luck that tended to determine how much wealth they accumulated—it was their decision to save.

If you combined Venti’s and Wise’s findings with the Economic Mobility Project findings, I would expect to find that the people who moved up to the top “rung” of wealth were savers. If you save, who knows how much you improve that 7% or whichever number? How much do you need to improve it to make saving worthwhile? Would you save more if you knew you’d have a 25% chance of becoming (relatively) wealthy? 50%? If you save, and especially if you start young, your chances of moving up to the top rung of wealth are real and attainable.

At least that’s what I think. What do you think?


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