A National Bureau of Economic Research (NBER) working paper sought to answer this question: What determines whether children of wealthy parents will be wealthy themselves? That is, is the transmission of wealth genetic or environmental?
It turns out that even when you factor out any bequests, the transmission of wealth is environmental. The researchers who wrote the working paper used data on adopted children in Sweden, which tracks the net worth of all its citizens, along with their adoptive and biological parents, to determine the correlation between wealth and family. The researchers measured net wealth by subtracting total debts from total wealth.
(Joe Pinsker first reported on this study in The Atlantic. You can attempt to download the paper itself for free here at NBER’s website, though you may have to pay for it. And if you want to quote it, you must include the copyright notice, as I do here: © 2015 by Sandra E. Black, Paul J. Devereux, Petter Lundborg, and Kaveh Majlesi).
In Poor Little Rich Kids? The Determinants of the Intergenerational Transmission of Wealth, the academics from Texas, Sweden and Ireland conclude the children of rich parents become wealthy, too, not “primarily because children from wealthier families are inherently more talented or more able but that, even in relatively egalitarian Sweden, wealth begets wealth.”
This “substantial role for environment and a much smaller role for genetics” remains the case “even prior to any inheritance,” the researchers report.
The case mentions the rising rates of income and wealth inequality in the developed world, particularly in the U.S., and cites French economist Thomas Piketty’s 2013 book Capital in the 21st Century that helped bring the issue to the forefront, since his work “highlights the intergenerational transmission of wealth as a key determinant of the nature of society more generally.”
Since they’re economics researchers, the authors mention in passing some important points that an advisor might find interesting:
1. Wealth is probably a better measure of economic success than income or education.
2. Wealth is more easily transferred across generations.
3. Wealth is much less equally distributed than education and income.