Friday, November 11, 2011

Bottom 99% Are Already Top 1%

I think it is interesting when people show graphs of income inequality over time between the top 1% and everyone else. One thing I think people fail to understand is that the top 1% of today is not the same top 1% of yesteryear. Recent data from the Tax Foundation drives home this point. The Tax Foundation looked at tax returns between 1992-2008 and looked at the top 400 taxpayers. The results are somewhat interesting.

Close to 73% of individuals were only in the top 400 taxpayers for one single year over the 17 year period. Only 3% stayed on the list for 5 years. Only .4% of people stayed on for 15 years and .1% stayed in the top 400 taxpayers for 17 years. This would say only 4 taxpayers were in the top 400 taxpayers for 17 straight years. People might complain that even 4 is too high. The evidence shows that an overwhelming majority of people only stay in the top for a short period of time. One explanation is that people do sell their businesses or they retire and have options that get exercised. So what is actually happening is that people are high income earners and then drop out of the top 1%. In fact, according to

a report entitled “Income Mobility in the U.S. from 1996-2005” 57% of the people in the top 1% had dropped into the bottom 99%. For the top 5% around 46% moved into lower income groups. The major point is that the top 1% or even top 5% are not some elite group that stays constant.

An even better point is that even the bottom 99% have a higher standard of living than many of the people in 10% in other countries. Real per capita GDP over a longer period of time has been increasing. When people complain how things are today the question should be would you rather live today or in the 19th century? The things people had to worry about in the 19th century are much different than things we worry about today. Infant mortality was much higher during this time period. People had to worry more about sanitation and also worry if there would be enough food. People during this time didn’t even shower daily. Today, these are things even the homeless don’t really have to worry about (if they seek a homeless shelter) I have seen people at stores purchasing their groceries with food stamps yet they have IPhones. No one a decade ago had an IPhone. The amazing thing about markets is that it brings creative destruction. Entrepreneurs and inventors figure out what people want and bring it to the masses. Competition keeps out bad products and services while ensuring high quality and low prices. The bottom 99% should be embracing markets and income inequality should be an incentive to want to work hard to get in that top 1% (even if it is only for one year).

"Old Americans are 47 times richer than young"

A story I recently saw was titled “Old Americans are 47 times richer than young”. Data shows that in 1984 people 35 and under had a net worth of $11,521 while people who were 65 and older had a net worth of had a $120,457. This numbers for 2009 show a different picture. The net worth of people under 35 in 2009 was decreased to $3,662. Meanwhile, people 65 and older had a net worth of $170,494 (numbers adjusted for 2010 dollars). What this would say is that older Americans now have a net worth that is 47 times that of younger people. Why are not people shouting about net worth inequality?

What people forget is that people who are 65 have had 30 years more to income to accumulate net worth. It would make sense that older people have more assets than younger people. Also another interesting data point is that 37% of young household have a zero or negative net worth. In 1984, this same percentage was only 14%. Perhaps this generation is spending more than previous generations.

One argument I find very interesting is how we can’t afford to cut back on Social Security payments to senior citizens when the data clearly shows they have a larger net worth than anyone else. A large majority older people are in low tax brackets because they are not working. The income they earn usually comes in the form of dividends, interest, and other fixed income. Not only are these older people using their income from all these sources to live on, but also can sell assets if they need money to live on.

Having a net worth of a little over $170,000 is still not a lot to live on. If you consider health care costs and nursing home costs it could be hard to live with this net worth. If a 22 year old started with a $1 and saved $3,000 per year until the age of 70 invested it in the market (average return of around 7.5% over the long-term), that individual by the time they turned 70 would have $1.34 million. If the individual become ambitious and saved $5,000 per year they would have $2.23 million. I have a feeling very people consistently save year after year. People nowadays have credit cards and can charge almost anything. One of the rules of personal finance is never to put anything on a credit card that you will consume before you get your next bill. The best way really to reduce spending is to just spend the cash you have on hand. This way you feel the “pain” when you pay for things out of pocket. When you buy things on credit you might have an idea of what something costs, but you don’t feel how much it costs. The key to accumulating wealth is saving.