It’s no secret that wealthy parents tend to have wealthy children. But a groundbreaking new study out of Denmark has revealed that for the ultra-rich, it’s not just about passing on higher incomes – it’s about bequeathing a bounty of income-generating assets that keep family fortunes flourishing for generations.
Cracking the Code of Generational Wealth
Economists have long focused on intergenerational income persistence – the degree to which parental income determines the incomes of offspring. Its inverse, social mobility, varies considerably between countries, with higher inequality nations like the U.S. having lower mobility on average compared to more egalitarian states.
But this Danish study, which tracked over 630,000 people born between 1972-82, reveals that those averages conceal critical differences in how parental prosperity influences the next generation depending on where families fall on the income spectrum.
For low-income families, wealthier parents modestly boost children’s future incomes mainly by increasing their odds of working at all. Among the middle class, the impact mostly manifests through higher educational attainment leading to better-paying jobs.
But for the top 5%, another factor altogether takes center stage: the transfer of income-generating assets. At this elite level, higher capital income – the money made from owning assets – becomes the key differentiator that allows the wealthiest of the wealthy to maintain top incomes across generations.
The Privileged Power of Asset Ownership
Assets like real estate, businesses, stocks, and bonds don’t just provide a safety cushion – they are the gift that keeps on giving, spinning off income year after year without additional labor. By handing down substantial asset holdings to their heirs, ultra-wealthy families are able to future-proof their good fortune.
Our parents shape us all, but in very different ways.
– Torsten Bell, author of the Danish study
So while education and a strong work ethic certainly boost upward mobility for the non-rich, at the loftiest heights of the wealth hierarchy, the real key to enduring affluence lies in the possession of income-generating assets. Meritocracy, it seems, only goes so far in explaining top incomes.
Wealth Begets Wealth
The study makes plain that the adage “it takes money to make money” is more than a cliche – it’s the guiding principle by which the ultra-rich maintain their positions at the top of the economic ladder over multiple generations.
With a sizable war chest of assets accumulating returns and dividends, the scions of privilege can practically coast on capital income while their less fortunate peers must rely chiefly on labor to get ahead. The end result is a society in which the top tier is not only wealthier, but playing an entirely different game than everyone else.
Implications for Inequality
The Danish findings add an important wrinkle to debates over wealth inequality and what to do about it. They suggest that the usual suspects blamed for unequal outcomes – differences in talent, effort, or education – only tell part of the story at the highest levels.
For the ultra-wealthy, success is less about what you know or even who you know, and more about what you own. This has profound implications for economic policy, hinting that getting a handle on stratospheric wealth accumulation may require taking aim at the tax shelters, trusts, and inheritances the richest lean on to hoard assets across generations.
The Asset Advantage in a Crypto World
In today’s crypto economy, the ability to leverage assets takes on new significance. With the emergence of decentralized finance (DeFi) and yield farming platforms, crypto assets can be an especially potent source of passive capital income for those with the savvy and the savings to put them to work.
Much like owning an apartment complex or a dividend stock portfolio in the traditional economy, holding governance tokens, staking crypto, or providing liquidity to DeFi protocols can generate returns without active labor. As in the conventional financial system, those with more assets to deploy stand to benefit most.
This means the crypto affluent could be especially well-positioned to cement a lasting place atop the digital asset economy. By parlaying today’s crypto holdings into a perpetual income stream, they may establish a permanent crypto-elite with outsized influence over the industry’s future.
Toward a More Egalitarian Digital Economy
If the lessons of the Danish study are any indication, creating a more equitably distributed crypto economy may necessitate reining in asset hoarding among the digital nouveau riche. Measures aimed at democratizing access to crypto assets and encouraging their productive use over pure speculation could help level the playing field.
This might include promoting crypto projects with more even initial token distributions, supporting user-friendly DeFi interfaces that lower barriers to participation, or creating tax incentives for staking and liquidity provision over simple buy-and-hold strategies.
Ultimately, the power of assets to entrench inequality across generations is a challenge that transcends any one financial system. But as crypto matures, being mindful of this dynamic and taking steps to counteract it could help the industry make good on its egalitarian promise and resist becoming a playing field titled in favor of a well-diversified few.
