Mark Rank, a professor of social welfare at Washington University, has written extensively on income inequality in the United States. For example, in a 2013 New York Times blog, he wrote that “Contrary to popular belief, the percentage of the population that directly encounters poverty is exceedingly high.” Specifically, he says his research shows that at least 54 percent of Americans between the ages of 25 and 60 “will spend a year in poverty or near poverty (below 150 percent of the poverty line).”
But in an opinion piece in the April 20 Sunday Review section of the New York Times, Rank reveals the findings of research he conducted with Thomas Hirschl of Cornell that addresses the issue of the highest-income group in America, the 1 percent. That research shows that “12 percent of the population will find themselves in the top 1 percent of the income distribution for at least one year” during that same age range — 25 to 60. Moreover, 39 percent will spend a year in the top 5 percent, 56 percent will be in the top 10 percent and “a whopping 73 percent will spend a year in the top 20 percent of the income distribution.”
Rank’s conclusion is that his research “casts serious doubt on the notion of a rigid class structure in the United States based upon income.” Instead, “the majority of Americans will experience at least one year of affluence at some point during their working careers.” He is quick to point out that such “fluidity” of income applies to poor people, going back to his earlier data that shows 54 percent of Americans will experience poverty or near poverty during their working years. He proposes that we “shape our policies” to reflect this fluidity, and concludes that “we have much more in common with one another than we dare to realize.”
For advisors, the lessons could be different, and could serve as one more reason why getting professional financial advice is beneficial to consumers. Why do some people enter the affluent ranks for only a short time? Rank mentions it could be because someone changed jobs, received a bonus or a spouse started working.
In addition, it could be because there was some other kind of liquidity event, such as the sale of a business or a home, or receiving an inheritance. The death of a spouse or divorce also can have significant effects on wealth, or the lack thereof.
Rank’s contention is supported by research conducted by Robert Carroll, who used IRS data to look at mobility within the millionaire ranks. In a 2010 special report for the Tax Foundation, Income Mobility and the Persistence of Millionaires, 1999 to 2007, Carroll concluded that “concerns over increased income inequality should be tempered by the fact that a substantial number of households move up or down through the income distribution over time.” He found that nearly “half of households move up from the bottom income quintile within 10 years. Roughly 50 percent also move down from the top quintile” within that same time period.
In his paper, he found that nearly half of the taxpayers who were millionaires attained this status just once during between 1999 and 2007, and only 6 percent “were millionaires in all nine years.” In actual numbers — remember, Carroll was using actual tax returns over that time period — 675,000 taxpayers earned more than $1 million for at least one year. Of those, 50 percent had income of $1 million for only one year, while only 38,000 (6 percent) had that amount for all nine years.
The group with the highest incomes, he points out, “also receives income from more volatile sources, such as from the disposition of financial assets and earnings from small businesses.”
Carroll’s research also suggests that one explanation for the “transience” of millionaire taxpayers is capital gains: “It appears that the realization of capital gains is at least one explanation. This income source tends to be lumpy and periodic and is a major explanation for why taxpayers reach millionaire status.”
Of course, the real reason may be that they got either bad advice or no advice.