Tag Archives: Income Mobility

A week and a half ago I posted about the distribution of wealth in a controlled population of people that were EXACTLY like one another.  Exactly.  They contributed to 401ks the same, they saved for houses the same, they worked at the same wages and got raises the same.  The result, after just 15 years of life?

…the poorest third of people control less than 20% of the net wealth while the richest 14% control more than 20% of the net wealth.

6/15th’s of the poorest control less money than the top 2/15ths.

I have expanded my model to include home ownership.  Again, this is done with the assumption that ALL people do the EXACT same thing in the same way.  They buy a house at the same time, in the same housing market and the home they buy is worth the same.

Here’s what we get:

Again, the money shot:

The control of wealth explodes after year 15.  That’s when my peeps buy a house.  What was a net worth growing by about 30k a year now grows much quicker; near 40 or 50k a year.  And this is just by buying a home.

So, after 30 years, where is the wealth?

The total wealth is $14,112,947 with a quintile at $2,822,589.

The lowest quintile.  That group of people that control the bottom 20% of the wealth in this equal society, defined equal society, compromises fully HALF the people in that society.  The bottom HALF of our population controls just 20% of the wealth.    The top 3/30, or 1/10th or 10% control 20% of the wealth as well.  In fact, the top 3% controls as much wealth as the bottom 33%.

And we’re just 30 years into the life of the exactly average 18 year old.  We’re just at 48 years of age.  We haven’t even begun to take into account poor choices or good choices.  This model is assuming that all kids make the exact same choices with their money, career and finances.

And we STILL have “wealth distribution” issues.

Occupy Wall Street is having an impact.  There’s little doubt that they have generated much conversation and debate.  Some think that the impact they’ve had is positive; others negative.  For me, it’s focused the debate on income distribution, income mobility and wealth distribution.

We’ve talked about the GINI.  That’s the tool, in general, that measures distribution.  It could be World Series Titles or brown hair.  It could be the letter “W” in license plates or it could be income.  And I’ve come to the conclusion that the GINI, as reported by the major players, isn’t reporting anything useful.  The GINI measures income per family.  And all families aren’t created equal.

So, next up is wealth.  This time I built a thought experiment.  A simple and crude one to be sure, but, based on feedback, could be refined.  In fact, it’s my goal to refine it as I go.  The idea is to create a world that is as equal as possible.  I’ve built a population that is the same in every regard.  They make the same, save the same and spend the same.  And they advance the same.  Given such a world, what does income and wealth distribution look like?

Let’s look at wealth.

I assume a number of things.  All in the name of equality:

1. 1000 people per year
2. A starting salary of $30,000
3. A raise of 3% a year.
4. Progressive living: roommate-own apartment-saving for home
5. Progressive retirement savings – none to 401k
6. Rent and food don’t increase in real terms
7. People only have living and food expenses.  And save ALL other money.

If we start at year 1 and continue to build our population, it looks like this for the first 15 years:

The graphics are tough to see without clicking through.  Lemme give ya the money shot:

Using the gross assumptions above, I have identified the “Total Worth” of the individuals year over year.

Each row above represents another cohort advancing and the previous year taking it’s place.  That is, this year’s “Year Ones” becomes next year’s “Year Twos”, And this year’s “Year Twos” become next year’s “Year Threes”.

We like to break down distributions by quintiles.  Let’s do that.  Let’s break it down by quintile.

If you sum all the wealth of the 15 represented years, you get $2,771,905.  If you divide $2,771,905 by 5 you get $554,381.  The first SIX years of cohort classes don’t equal one single quintile.  On the other end of the spectrum, just 2 cohort classes are at $712,081.  Nearly 40% more than the top quintile.  In other words, more than the poorest third of people control less than 20% of the net wealth while the richest 14% control more than 20% of the net wealth.

6/15th’s of the poorest control less money than the top 2/15ths.

And this in a world controlled by exact equality and accounting for no good/bad decisions.