Wealth Distribution in the US

United States of America consists of 50 states and one federal district, with capital in Washington. Unites States has the largest economy in the world, with a nominal GDP of $ 16.8 trillion by the year 2013.[1] The U.S. is a big producer of oil and largest producer of natural gas. It has the second place in the trade after China.[2] Moreover U.S. is the largest financial center in the world with a center in New York. The unemployment is 7.7% by the year 2013, meaning 12 million people,[3] whereas the population represents 315 million. It is a huge country with a huge territory and due to the differences in living standard of the population; the distribution of income and wealth is extremely unequal.

1.1 Current status on wealth distribution

Wealth inequality means the unequal distribution of assets among American inhabitants in the United States. Assets or wealth refers to everything what the family or a person possess minus all debts e.g. the real estate, automobiles, stocks, bonds, businesses, savings, and investments minus all mortgages, vehicles loans, educational loans, financial assets loans etc.[4] According to President Obama (2014) the top wealthiest 1% possesses 40% of the nation’s wealth; the bottom 80% own 7%, which refers to the current state of the wealth distribution. The average employee “needs to work more than a month to earn what the CEO earns in one hour.”[5]

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Wealth is not something to spend on the daily expenditures, it should be a contribution to the income in order to achieve and retain the desired status and standard of living”.[6] Wealth should support current consumption or should be retained to support the future consumption.[7] Moreover, “wealth should be used for short- and long-term financial security, social prestige, and is a tool to get an access to political power, and can be used to produce more wealth.”[8] The more wealth one has, the more power one has, and the less restrictions there are to live the life one likes. Generally the working and middle class finance all standard living costs through income and wages, while the rich are aiming on gaining more wealth, and making more profit of it.[9]

1.2 Historical change of wealth distribution in the US

Changes in wealth from 1989 to 2001

By observing how the wealth of American households changes with the time, one can notice a general increase in wealthier individuals and a decrease in the number of poor households. Moreover the share of households with more debts than assets (negative net worth) significantly decreased from 9.5% in 1989 to 4.1% in 2001.[10]

From 1995 to 2004, one can notice a significant growth among household wealth in the whole U.S., they doubled from $21.9 trillion to $43.6 trillion, which rely not only on the wealthy part of the country but on all residents of America, however the wealthiest of them used that time to make up 89% of this growth.[11] The situation on unequal wealth distribution in the U.S. was always an issue but during this time, wealth became only more unequal, and the wealthiest 25% became even wealthier.

The significant role in an increase of housing wealth played life-cycles. Every baby-boom, people who reached the peak of their careers and the middle aged population contributed a lot to the general increase of wealth throw-out of the U.S., by achieving the comfortable levels of wealth.[12] The other explanation of a strong increase of household wealth is that financing the own houses / flats and cars became more accessible for all classes of population by introducing different financial products like mortgage loans, leasing etc and by introducing some social assistance e.g. granting favorable financial conditions for poor families.

Table 1: Share of wealth held by the Bottom 99% and Top 1% in the United States, 1922-2010

Source: http://www2.ucsc.edu/whorulesamerica/power/wealth.html

Changes in wealth after 2007

During the financial crisis the wealth of the households declined from 2007 to 2009 by a total of $17.5 trillion or 25.5%, which is comparable to one year of GDP.[13] However in 2010 the household net worth improved the performance by growing of 1.3 percent only to a total of $56.8 trillion. Still that growth was not enough to reach the value before the crisis and 15.7 percent is needed to recover.[14]

According to statistics of 2007 the top 1% own 34.6% of the total U.S. wealth. The next 19% possess 50.5%, which means that the top 20% wealthiest possessed 85% of all financial assets, which is incredibly unequal. While the bottom 80% of the US residents owned only 15% of the total wealth.[15] As was mentioned before, the percentage of wealthy people in 2014 even increased.

1.3 Comparison with other countries

The figures of 2013 showed that the wealth inequality in the U.S. was worse than in most developed countries. Moreover according to some figures the United States does not belong in the league of the developed countries due to the unequal wealth distribution. As the U.S. top 10% own 75.4%, comparing with other countries (2014): Australia 50.3%, Canada 57.4%, Denmark 72.2% , Finland 44.9%, France 51.8%, Germany 61.7%, Italy 49.8%, Japan 49.1%, Spain 54%, U.K. 53.3% and Singapore 61.1%, which means that the US has the most unequal wealth distribution among the top 20 developed countries. However there are even some extreme examples like Chile 72.5%, India 73.8%, Indonesia 75%, South Africa 74.8%, Kazakhstan, Russia and Ukraine.[16] In case of Switzerland, Denmark and Sweden the percentage of people with their own houses there is quite low as they tend to rent flats but there is no big difference in population classes like in the U.S.

1.4 Wealth vs. Income

It is important to distinguish two following definitions: Wealth and Income. Income refers to a flow of money (per hour, per week, or per year) which means wages and salaries, i.e. income which people receive through work, retirements and some social aids; whereas wealth refers to the assets owned, e.g. houses, cars, financial assets (stocks, bonds), investments etc.[17] However income inequality is not adequate enough to describe the economic inequality, as it does not replicate the full picture of individual’s economic situation as some people live from their wealth and not from the income.

According to the United States Census Bureau definition income is “received on a regular basis before payments for personal income taxes, social security, union dues, medicare deductions, etc”.[18] By considering this definition it’s clear that the wealthiest families have low income however they earn their money through their assets, which enables them to support their lifestyle. As was mentioned before dividends and bond payments are not included in the classification of income but are the primary source of funding. People in retirement have also little income but a higher wealth due to saving of money during their lifetime, which they hand over to their children and children would be wealthier than their parents due to usage of their assets to earn profit.[19] A low-income household with above-average wealth is not necessarily worse off than a medium-income household with no wealth.[20]

By taking a look on a table below there is a comparison of top 1% and bottom 40% and it is obvious that by having only debts (like these 40%) it is very hard or impossible to create wealth. There is only little exception of people, who created much wealth in one generation, while most of the wealthiest come already from rich families and were born rich.

Who can be this top 1% of the wealthy people in the United States? Most likely these people to be self-employed and they earn most of the income from capital and financial assets.[21] The most common professions are managers, physicians, IT-administrators, lawyers, and teachers.[22] The wealth is not something, which could be gained in a couple of years. There are assets, which are given from parents to the children in order to make more wealth on existing wealth. That’s why top 1% are wealthy U.S. families, which made their business long time ago.

1.5 Mechanism to gain wealth

As was mentioned before wealth is assets like real estates, vehicles, stocks and other financial and non-financial property. While some people save their money the whole life to get a house and all other expenditure go for food, clothes, gas and travels, the others make more wealth out of their wealth and with each generation these families become wealthier.

There rises a question what is the way for a normal average class man to gain wealth? There are some possibilities or buildings established by the Federal Government. There are 401k plans, 403b plans, and IRAs. These tools (pension funds) are so called tax shelters, which were made for working individuals. They transfer pre-tax contributions of earned income to the tax sheltered savings accounts.[23] Contributed assets in Roth IRAs (individual retirement arrangement) are tax free and all interests, dividends, and capital gains are all excluded from income taxes. However in order to invest in these tools, one need a relative high capital and it’s only available for those individuals and families, who can afford to bind their assets for a long time (typically until the investor reaches age of 60).

[1] _ Gross Domestic Product: 4th Quarter and Annual 2013, Bureau of Economic Analysis

[2] _ Inman, economics correspondent “China overtakes US in world trade”

[3] _ Federal Reserve Database-FRED

[4] _ Hurst, (2007)

[5] _ Marsden, (January 26, 2014)

[6] _ Grusky,(2001), page 637

[7] _ OECD (2013) Framework for statistics on the distribution of household income, consumption and wealth, page 120

[8] _ Keister, page 64

[9] _ Gilbert, (1998)

[10] _ US Federal Reserve on wealth distribution in the United States (2006)

[11] _ Zhu Xiao Di. (2007)

[12] _ US Federal Reserve on wealth distribution in the United States (2006)

[13] _ Broder, (2010)

[14] _ U.S. Federal Reserve, (2010)

[15] _ Forbes (2011) by Deborah L. Jacobs

[16] _ http://www.huffingtonpost.com/eric-zuesse/us-is-now-the-most-unequa_b_4408647.html (2013)

[17] _ Grusky, (2001), page 637

[18] _ U.S. Census Bureau, (2005)

[19] _ Keister, (2004), page 65

[20] _ OECD (2013) Framework for statistics on the distribution of household income, consumption and wealth, page 121

[21] _ New York Times (2012)

[22] _ New York Times (2012)

[23] _ 401(k) Resource Guide – Plan Participants – Limitation on Elective Deferrals