In the popular imagination, dynastic wealth is a fragile thing indeed. The old adage — “from shirtsleeves to shirtsleeves in three generations” — captures the conventional wisdom: Founders of family fortunes are doomed to watch their idle children fritter away the money, leaving nothing for the grandchildren.
But how true is this? It’s a question worth asking, given the debate about growing inequality. Some $30 trillion in the U.S. will reportedly be passed from the baby-boom generation to their heirs over the next 30 years, and recent changes in the tax code make passing along inherited wealth all the more easy.
Economists and sociologists have spilled plenty of ink studying how wealth and status can be transmitted from parents to children. Tracking that process to a third generation, to say nothing of four or five generations, poses a host of challenges to anyone studying the history of the issue. But several studies have tackled it over the years — and arrived at much the same conclusion.
A study by economist Jenny B. Wahl in 2003, for example, addressed the problem by focusing on federal estate-tax returns from the state of Wisconsin from 1916 to 1981. (Wahl chose Wisconsin because some of the grunt work of digesting the data had already been completed, but also because people in Wisconsin tended to move to other states at a lower rate, making it easier to follow the money.)
In order to link data across several generations, Wahl processed a vast amount of data using what she aptly described as “creative computer programming.” In effect, Wahl had to identify wealthy decedents at the beginning of the date range under study, track down their children when they, too, died, and then locate the grandchildren when they finally passed away.
After sifting tens of thousands of “linkages,” Wahl subjected her three-generations-long cohort to rigorous statistical analysis. The results should reassure the lucky heirs. While family wealth tends to regress toward the mean in the long run — meaning that the descendants of the wealthy will eventually resemble the average citizen — Wahl wryly noted that “the evidence presented here suggested that the long run may be long indeed.”
How long? Wahl offered this hypothetical: Imagine that the wealthiest family at any given point in time has 100 percent more money than the average family. According to this sample, it would take 13 generations — approximately four centuries — for this hypothetical wealthy family to return to having a mere 10 percent more than the average household.
Of course, the nation’s wealthiest families have assets thousands of times larger than the average family’s. If these rates remained operative for the super-wealthy, too, it would take immeasurably longer for their descendants to fall back into the common herd of humanity.