Studying the Rich: Wealth More Important than Income

 

Over the past several years, discussions about the rich have focused on the top 1% — those who have more than 99 out of 100 Americans.  But the top 1% of what?

To most people, the most obvious answer is income.  We tend to understand people’s economic situation with reference to their incomes. Income is the money that flows into people’s bank accounts in a given time period (e.g., a month, a year).  People are classified as poor when their incomes fall below the poverty line. We also tend to think that incomes distinguish the rich.  Most Americans think that a $150,000 a year in income is enough to make someone rich.1  

This focus is natural because income is what distinguishes people’s economic situations over the bottom, middle, and even upper-middle reaches of the economic pyramid.  From this presumption, the press began to pin the dividing line between the “rich” and non-rich at around $390,000 a year, the 99th percentile of adjusted gross income reported in 2011 returns.  Who is in this group?

They were executives at non-financial companies, financial professionals, doctors, lawyers and an occupational category that lumps together computer, math, engineering and technical jobs in non-financial firms.

This made the one percent look like the hard-working professionals who operate in your local community.  They are almost regular Joes, but with good jobs.

The Importance of Wealth

Social scientists who study inequality often use wealth (or net worth) to distinguish the wealthy from the rest of society. In many ways, someone with a high net worth is in a much better position that someone who has a high income. Imagine how the economic situations of two hypothetical households would differ. Household A has a median income and a 99th percentile net worth, and the Household B has a median net worth and a 99th percentile income. In all other respects, these households are the same. Their situations would look like this:

A Household with a Median Income and Top Percentile Net Worth versus One with Median Net Worth and a Top Percentile Income

Household Income Net Worth
A $47 thousand $7.9 million
B $696 thousand $81 thousand

Note that these are real estimates.  They represent the top 1% of households (not tax returns), and they are based on survey reports of households’ gross incomes, rather than their adjusted gross income (i.e., it includes income that is exempted or deducted from tax forms’ reported adjusted gross income).  Figures are based on data from the 2013 Survey of Consumer Finances.

Obviously, it would be nice to be either. But who is better off? The household that earns a high income could eventually get to an $8 million net worth, but it would take some good fortune and a long time. A person would have keep that high-paying job or maintain that highly-profitable business for decades to accumulate $8 million in wealth. Meanwhile, a 5% return on that $7.9 million in assets would deliver an income of $395,000. The only reason a high net worth person would report a $47,000 income is (a) spectacularly bad decision-making or (b) accounting tricks to avoid paying taxes.

Income and Wealth are Different

Income and wealth can be quite different. For example, among the 9% of US households worth $1 million or more, about 5% earn less than $36,000 and 10% earn less than $60,500. These are often retirees whose wealth is largely comprised of their home, which is generally a non-performing asset. Although these people show up in the data as being of modest means in terms of income, the truth is that they have access to quite a bit of money if they needed it.

The main reason to distinguish wealth from income is that the wealthy can manage their assets in a way that do not result in income.  When a person’s home values rise or their stock portfolios appreciate, accountants do not count that as income.  It is a capital gain, or asset appreciation.  The wealthy can accumulate wealth with very little income, as long as their assets are rising in value.

Although we focus on income when judging people’s economic situations, their wealth is usually a better gauge of whether or not they are in an economically strong position. High incomes can be fleeting, but it takes some very bad financial decision-making to go bankrupt from a position of high wealth.


  1. Jeffrey M. Jones (2011) “Americans Set”Rich” Threshold at $150,000 in Annual Income” Report. Gallup. December 8.http://www.gallup.com/poll/151427/Americans-Set-Rich-Threshold-150-000-Annual-Income.aspx

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