Author Topic: Generational Wealth: Why do 70% of Families Lose Their Wealth in 2nd Generation  (Read 295 times)

rcjordan

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buckworks

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There's a saying that describes this: "Shirtsleeves to shirtsleeves in three generations."

rcjordan

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'My grandfather rode a camel, my father rode a camel, I drive a Mercedes, my son drives a Land Rover, his son will drive a Land Rover, but his son will ride a camel'

ergophobe

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I smell a rat. Or rather, I think this is a fairy tale or parable, not a research study.

That article has no data whatsoever and cites not a single source.

As far as I can tell, the author is just making sh## up to make readers of Forbes feel:
 1) worried so they are in a mood to purchase said services and make sure their offspring's offspring remain wealthy as a simple accident of birth (note tips #3 and #4 require hiring a financial/legal professional)
 2) totally comfortable with the current status of wealth distribution in America, because families are cycling out of the upper class every two generations, which is completely at odd with what we observe.

It's a story that matches people's biases and what they *want* to be true.

What does just a little digging into the body research from economists and sociologists show?

Here's an article from the Federal Reserve that looked at actual data:
https://www.federalreserve.gov/econres/notes/feds-notes/how-does-intergenerational-wealth-transmission-affect-wealth-concentration-20180601.htm

Quote
The observations above on inheritance and inter vivos gift receipt by income and wealth suggest that the flow of intergenerational transfers likely has an important role in explaining the wealth concentration... In aggregate, the SCF data confirms the findings from the older literature about the direct contribution of intergenerational wealth transfers to wealth accumulation. As shown in the last column of Table 2, if we assume that the inflation-adjusted return on transfers received is 3 percent, we estimate that 26 percent of total wealth can be accounted for by intergenerational transfers. Using a real interest rate of 5 percent, the estimated share of wealth accounted for by intergenerational transfers jumps to 51 percent.

So in the rating system of the political fact checkers running from true to "pants on fire," I rank the original claim as "pants on fire." It's also pernicious in terms of what it makes people believe about the relationship between wealth and effort and who "deserves" what.

Here's the killer stat from that study though: If you were born into wealth, there is a 12% chance that YOU (not your parent or grandparent) started a successful business. If you are NOT born into, there is only a 3% chance YOU started a successful business. In other words, wealthy people are four times more likely to launch a business that makes them more wealthy. Why? Simple - wealthy people can afford to take risk and fail. Yes, some of them fail repeatedly and slide down the economic ladder, but in actual fact, most of them hold steady or climb up.

That, by the way, overwhelmingly correlates to what I have observed among the people I know. Even when the next generation doesn't go to college and has a somewhat misspent youth, in most (but not all) cases, they land on their feet. I know some notable exceptions that fit the pattern in the original article, but they are more the exceptions than the 70%.

Examining the Black-white wealth gap
https://www.brookings.edu/blog/up-front/2020/02/27/examining-the-black-white-wealth-gap/

Quote
Economists Darrick Hamilton and Sandy Darity conclude that inheritances and other intergenerational transfers “account for more of the racial wealth gap than any other demographic and socioeconomic indicators.”

The intergenerational transmission of wealth in rich countries
https://voxeu.org/article/intergenerational-transmission-wealth-rich-countries

Quote
In contrast, increasing the proportion of recipients of large transfers generally increased overall wealth inequality.

See also
Intergenerational Wealth Mobility and Racial Inequality
https://journals.sagepub.com/doi/full/10.1177/2378023119831799
« Last Edit: January 10, 2022, 09:37:50 PM by ergophobe »