Intragenerational wealth mobility

What Is Intragenerational Wealth Mobility?

Intragenerational wealth mobility refers to the extent to which an individual's position in the overall wealth distribution changes over their lifetime. It falls under the broader financial category of economic mobility, which examines changes in economic status over time. This concept measures how individuals move up or down the "wealth ladder" during their working years and into retirement planning, considering factors like wealth accumulation and loss. Understanding intragenerational wealth mobility provides insights into the dynamics of personal finance and the persistent nature of wealth inequality.

History and Origin

The study of wealth mobility, including its intragenerational aspect, gained prominence as economists and sociologists sought to understand the long-term dynamics of economic well-being beyond simple snapshots of income distribution. Early economic theories, such as the Life-cycle hypothesis developed by Franco Modigliani and Richard Brumberg, laid foundational groundwork by modeling how individuals plan savings and consumption over their lifetime to smooth consumption. However, these models often focused on aggregate behavior.

More detailed empirical research into individual-level wealth transitions emerged with the availability of longitudinal data sets, such as the Panel Study of Income Dynamics (PSID) in the United States. This allowed researchers to track individuals' financial journeys over decades. For instance, a study utilizing the PSID found that rates of intragenerational wealth mobility are highest between the ages of 25 and 35, suggesting that early adulthood is a critical period for establishing one's financial trajectory.¹² The Brookings Institution has conducted extensive research into this area, highlighting how individuals' wealth percentiles can shift (or remain stagnant) from their early thirties to their late fifties.¹⁰, ¹¹

Key Takeaways

• Lifetime Changes: Intragenerational wealth mobility assesses an individual's change in relative wealth position within their own generation over their adult life.
• Dynamic Nature: It reflects the dynamic processes of wealth accumulation, including gains from investment, earnings, and losses due to consumption or economic shocks.
• Influencing Factors: Factors such as education, career choices, entrepreneurial ventures, inheritance, and market performance significantly influence an individual's intragenerational wealth mobility.
• Early Adulthood Impact: Research suggests that the highest rates of wealth mobility occur in early adulthood, indicating that initial financial decisions and opportunities can have lasting effects.
• Racial and Socioeconomic Disparities: Studies show significant disparities in intragenerational wealth mobility across different racial and socioeconomic groups, with certain groups experiencing less upward mobility and more downward mobility.⁹

Formula and Calculation

While there isn't a single universal formula to calculate "intragenerational wealth mobility" as a single numerical value, it is typically assessed using measures of persistence and transition probabilities within wealth percentiles or quintiles. Researchers often track an individual's rank in the wealth distribution at different points in their life.

A common approach involves calculating the "rank-rank slope," which measures how much an individual's later-life wealth percentile changes for a given change in their early-life wealth percentile. For example, a rank-rank slope of 0.59 implies that a ten-point increase in an individual's wealth percentile in their early thirties leads to a 5.9-point increase in their wealth percentile in their late fifties.⁸

Another method involves analyzing transition matrices, which show the probability of an individual moving from one wealth quintile (e.g., bottom 20%, second 20%) at an earlier age to a different or the same quintile at a later age.

For example, if (W_{initial}) is an individual's wealth percentile at age A1 and (W_{final}) is their wealth percentile at age A2, the concept focuses on the change:

This change is then analyzed across a population to understand patterns of mobility. The analysis often uses net worth as the primary measure of wealth, which includes all financial assets and tangible assets minus liabilities.

Interpreting Intragenerational Wealth Mobility

Interpreting intragenerational wealth mobility involves analyzing the degree of persistence or fluidity within an individual's financial standing over their adult life. A high degree of mobility suggests that individuals have a greater chance of significantly changing their economic position, either upward or downward, based on their choices, opportunities, and economic growth conditions. Conversely, low mobility indicates that individuals tend to remain in the wealth bracket they started in, implying less opportunity for significant shifts.

For instance, if studies show that a large percentage of individuals who start in the bottom wealth quintile remain there later in life, it suggests low upward intragenerational wealth mobility. Similarly, if those in the top quintile tend to stay there, it indicates persistence at the top. Research in the U.S. has revealed limited intragenerational wealth mobility, with individuals in the top or bottom wealth quintiles in their early thirties often remaining in those same quintiles in their late fifties.⁷ This persistence implies that initial advantages or disadvantages in wealth can solidify over an individual's lifetime. Analyzing these patterns helps policymakers understand the effectiveness of various programs aimed at fostering social mobility.

Hypothetical Example

Consider two individuals, Alex and Ben, both starting their careers at age 25.

Alex: Alex begins with a modest net worth, placing him in the second quintile of the wealth distribution for his age cohort. He consistently invests a portion of his income into a diversified investment portfolio, focuses on career development that leads to steady salary increases, and actively manages his personal finances. By age 55, through a combination of diligent savings, smart investments, and career progression, Alex has accumulated substantial assets, moving him into the fourth quintile of the wealth distribution. Alex demonstrates significant upward intragenerational wealth mobility.

Ben: Ben also starts at age 25 in the second quintile. However, Ben experiences several unexpected medical expenses and job displacements over his career, leading to periods of financial strain. He makes limited investments and takes on consumer debt. Despite periods of employment, he struggles to build significant wealth accumulation. By age 55, Ben finds his net worth has stagnated, keeping him in the second quintile. Ben shows low intragenerational wealth mobility, as his relative position has remained unchanged despite the passage of time.

This example illustrates how individual choices and external circumstances contribute to varying degrees of intragenerational wealth mobility.

Practical Applications

Intragenerational wealth mobility is a crucial metric in several areas:

• Economic Analysis: Economists use it to gauge the dynamism and fairness of an economy. High mobility might indicate a vibrant economy where individuals can improve their financial standing, while low mobility could signal structural barriers or the entrenchment of existing wealth inequality.
• Policy Development: Governments and policymakers consider intragenerational wealth mobility when designing social welfare programs, education initiatives, and tax policies. Policies aimed at improving access to quality education, vocational training, and financial literacy are often proposed to enhance upward mobility, particularly for disadvantaged groups.⁶
• Sociological Research: Sociologists study wealth mobility to understand class structures, social stratification, and how financial opportunities (or lack thereof) affect different demographic groups, such as the disparities observed between Black and white Americans.⁵
• Personal Finance and Investment Planning: While not a direct tool for individual investors, understanding intragenerational wealth mobility highlights the importance of consistent wealth accumulation, prudent asset allocation, and strategic financial planning over one's working life.

Limitations and Criticisms

While providing valuable insights, the analysis of intragenerational wealth mobility has limitations and faces criticisms:

• Data Availability and Quality: Comprehensive longitudinal data on individual wealth over several decades is rare and often relies on survey data, which can be subject to reporting biases. Administrative data, such as tax registries, can offer more complete pictures but may not always be publicly accessible for broad research.
• Definition of Wealth: Different studies may define wealth slightly differently (e.g., gross wealth vs. net worth), which can affect comparability of results. The inclusion or exclusion of certain assets like pensions or human capital can also alter findings.
• Life-Cycle Effects: Wealth naturally fluctuates over a lifetime due to the Life-cycle hypothesis of saving and consumption. Distinguishing between genuine mobility and typical life-cycle patterns of asset accumulation and decumulation can be challenging.
• Measurement of Mobility: The choice of mobility measure (e.g., absolute vs. relative mobility, rank-rank slopes vs. transition matrices) can influence interpretations. A low rank-rank slope might indicate low relative mobility, but individuals could still experience significant absolute wealth gains.
• Causality vs. Correlation: Studies can identify correlations between various factors and wealth mobility, but establishing direct causality is complex. For example, while entrepreneurship can enhance intragenerational wealth mobility, it's difficult to isolate its precise causal impact from other contributing factors like initial capital or personal drive.⁴

Intragenerational Wealth Mobility vs. Intergenerational Wealth Mobility

Intragenerational wealth mobility and intergenerational wealth mobility are two distinct but related concepts within the field of economic mobility.

Intragenerational wealth mobility focuses on the changes in an individual's wealth position within their own lifetime. It examines how a person's financial standing, relative to their peers or the broader population, evolves from early adulthood through their working years and into retirement. This type of mobility reflects the cumulative impact of an individual's earnings, savings, investments, and consumption decisions, as well as external economic conditions and unexpected life events.

Intergenerational wealth mobility, on the other hand, measures the extent to which an individual's wealth position is influenced by, or differs from, that of their parents or family of origin. It looks at the transmission of wealth, or the lack thereof, across generations. This concept often examines the role of inherited wealth, access to education, and social networks passed down from parents in determining a child's eventual financial standing. For instance, high levels of wealth inequality are often associated with reduced intergenerational mobility, as advantages from wealth are passed on to a smaller share of the next generation.², ³

The key distinction lies in the timeframe: intragenerational is about an individual's journey, while intergenerational is about the link between different generations.

FAQs

What factors drive intragenerational wealth mobility?

Key drivers include education and skill development, career choices, entrepreneurial activities, personal savings rates, investment returns, inheritance or gifts received, and unexpected life events like health crises or job loss. Economic conditions, such as periods of high economic growth or recessions, also play a significant role.

Is intragenerational wealth mobility common?

Research suggests that intragenerational wealth mobility in many developed economies, including the United States, is relatively limited, particularly at the extreme ends of the wealth distribution. Many individuals who start in the bottom or top wealth quintiles tend to remain there throughout their adult lives.¹

How does financial literacy impact intragenerational wealth mobility?

Financial literacy can significantly impact intragenerational wealth mobility by empowering individuals to make informed decisions about saving, investing, and managing debt. Better financial understanding can lead to more effective wealth accumulation and resilience against financial setbacks.

Can policy influence intragenerational wealth mobility?

Yes, various government policies can influence intragenerational wealth mobility. These include progressive taxation, educational funding, vocational training programs, social safety nets, and regulations affecting financial markets and wealth transfer. The goal of such policies is often to create more equitable opportunities for individuals to improve their economic mobility.