Survey finds it’s harder to get rich than it used to be

Whatever challenges there may have been for Americans three decades ago to move up the wealth ladder pales in comparison to what it takes to make a significant move up today, according to a recent study by the Federal Reserve Bank of Cleveland.

In this land of opportunity, the researchers found that it’s gotten a whole lot harder to have opportunity.

Families have become less likely to change their financial position than would have been the case in the 1980s, and those who do manage to improve their position are less likely to make a significant move up to the highest levels.

While there is no universally accepted dollar amount of wealth that makes one “wealthy,” the authors use the term in relation to other people in the sample studied. In that way, the top 20 percent who had an average net worth of about $380,000 and above would be considered wealthy because they are the wealthiest people in the sample.

The lowest 20 percent of people in the country have an average net worth that is not much greater than zero.

Wealth, or net worth, measures the total of one’s assets – cash in the bank, stocks, bonds and real estate – minus debts, including home mortgages, auto loans, credit cards and student loans.

Families that are able to make big jumps in attaining more wealth appear to be more likely to own some form of a risky asset – stocks, a business, a farm, or ownership in investment real estate properties, said Daniel Carroll and Nicholas Hoffman, authors of the Cleveland Fed study.

“At least relative to how things were 30 years ago, there is a lower chance of some people born in low-wealth circumstances to rise far beyond the station they were born in,” Carroll said.

He said he plans to do more research to better understand the mechanics behind the numbers.

“Why is it harder to move up than it was 30 years ago?” he said. “I don’t know exactly what is behind this. Some of it is due to rising wealth inequality, which makes the standard for reaching upper wealth quintiles harder. We hope to learn more about the mechanisms behind the numbers in future research.”

The mobility of a household is affected by many factors, including the level of education and career choice of those in the household.

There’s also the accumulation of job experience resulting in different earnings as people age. When individuals pair with or separate from one another, total household income can change considerably.

Using the Panel Study of Income Dynamics between 1968 to 2013, the report authors were able to track people of low-wealth status to see how they progressed over time. In this case, about 64 percent of households that were in the bottom group in 2003 were still there in 2013. Meanwhile, 1 percent had moved up to the top segment.

The segments were created by taking all of the people in the survey sample and dividing them into five groups. The top in this case would be the top 20 percent of wealthiest people. The bottom quintile would be the lowest 20 percent, with three other segments in between.

The Federal Reserve Bank keeps a close eye on wealth mobility because of its dual mandate of full employment and price stability.

“In order to effectively achieve that mandate, Fed economists and analysts are continually seeking to improve our understanding of the economy and how it functions,” Carroll said.

The authors compare wealth mobility to runners in a race. Inequality is the distance between the runners at the starting gate or at any point in the race. For a runner to catch up and pass someone already ahead of him, it requires an extraordinary effort.

“If you have rising inequality, the threshold those on the lower end of wealth must cross to get to the next bin of wealth has gotten higher,” Hoffman said.

Young households are generally more wealth-poor because they have had little time to save, while older households typically save more, paying down debt and building up assets.

The researchers agree that luck can also play a role in where families end up. An unforeseen illness that leads to expensive medical bills could cause a downward movement. Winning the lottery or receiving a large inheritance from a parent could move a family several tiers up the ladder.