Wealth Inequality

Wealth inequality is one of the more misunderstood and sensationalized topics of the day.  

Wealth inequality is defined as the uneven distribution of wealth across households.  In a fair society, shouldn’t households have an equal amount of wealth?

 

No. Wealth inequality is a necessary condition of our society.

 

Why?  Wealth inequality is primarily an age driven phenomenon and is largely the result of pre-retirement aged people accumulating assets to fund their retirement. Young adults don’t really have much wealth as they usually have lots of debt and little in the way of savings.  Older adults approaching retirement have had many years to pay-off debts, accumulate savings, and see their investment portfolios and homes appreciate in value.  The chart below includes relatively new data, but shows a very well established long term wealth building story.

 

Student debt also contributes to the wealth inequality  story.  School loans skew the net worth statement (a.k.a. the Balance Sheet which shows Total Assets – Total Liabilities = Net Worth) as college debt is treated as a liability, but a college education is not treated as an asset.  This accounting treatment is unlike a mortgage that is offset by a house or a car loan that is offset by a car.  Long story short, a college education is generally good for a young person’s resume, but not good for their Balance Sheet.

Wealth inequality is also a topic that lends itself to some pretty sensational headlines.  Very sensational if you don’t think through the details or data beneath the headlines.

 

According to household net worth data from 2017 compiled by the US Census, there were approximately 31 million young households (‘young’ where the head of household is 35 years or younger) each with a net worth of under $5,000.  Jeff Bezos of Amazon is worth $113 billion. And this $113 billion is after his divorce—just let that sink into your head brain for a minute. 

 

So Jeff Bezos’s wealth exceeds the combined wealth of 31 million households!  One man worth more than 31 million families!  Very sensational until you realize that Jeff Bezos is an extraordinarily rare person (extraordinarily rare in terms of wealth, intelligence, and luck) and that group of 31 million young households includes many future millionaires and maybe a future billionaire or two.