The notorious 1%: who are they?

Sharpen your pitchforks!! Or don’t, whatever

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Ok, now for this week’s article: I hear a TON about the 1%, but there’s not much out there that reliably breaks down what the 1% is and who is in the club. So I took that upon myself.

What is the 1%?

There’s no formal definition of the 1% which makes it hard to give a simple answer. The two most common measurements are the top 1% of earners (as in, annual income) or the top 1% of wealth (as in highest net worth). Using that first definition, the top 1% of US earners make at least $515,000 per year.

Measured by net worth, the cutoff is just over $11,000,000 for a household:

There’s a big difference between income and net worth. Theoretically, you could be the wealthiest person in the world and not earn a penny in a given year. Which measure matters? “Generational wealth, that’s the key, my family didn’t have shit so that ship started with me.” [1] I agree with Jay-Z. Salaries are fleeting, Swiss bank accounts are forever.

The rich are like contestants on The Bachelorette. To an outsider, they are all one homogeneous bunch of bastards. Once you’re in, though, you realize that, like Bachelorette contestants, the rich have layers. While a $515,000 income gets you into the 1%, you’ll need to make $2,000,000 to get into the 0.1%. The 1% of the 1% (the 0.01%) make over $63,000,000 per year. In 2017, over 1,400 people made above $63,000,000. If you have $11,000,000 then you are in the 1% (measured by net worth), but you might feel poor hearing that the IRS estimates there are 7,000 households have art collections worth north of $50,000,000. There are clearly layers to the 1%. Again, Jay-Z explains this better than me: “Y’all on the gram holding money to your ear; there’s a disconnect, we don’t call that money over here.” [2] 

This stratification explains a fascinating phenomenon: many people who are rich by any measure don’t think of themselves as wealthy. There’s always a higher rung on the ladder, and a rung after that. Here’s a quote from the former CEO of Goldman Sachs, Lloyd Bankfield: “I consider myself well-to-do. I can’t even say rich. I don’t feel that way. I don’t behave that way.” [3] That’s right, the billionaire former CEO of the firm synonymous with money doesn’t feel rich. Jay-Z on the matter: “Success is like lust, she’s good for the touch, she’s good for the moment but she’s never enough.” [4]

Who Are the 1% and Where Did They Get That Cash Money?

Here’s a chart with a breakdown of high-income earners by profession. Did you know that 0.2% of the 1% are pilots? That’s a little known fact, like Susan B. Anthony’s real cause of death (lost a duel to Zelda Fitzgerald).

Figuring out how the 1%, measured by net worth, amassed their fortunes is murkier because wealth transfers (inheritance) and spending habits come into play. If you spend all your income, you won’t be wealthy no matter how much you earn. On the flip side, you could become extroadinarily wealthy without ever working if somebody just writes you a check. There’s not much data available on who the wealthiest 1% really are, and the data that does exist is conflicting. Analyzing anonymized IRS data can give us a clue:

Note that as income increases, salary tends to play less of a role - it gets replaced by dividends, capital gains, and all sorts of investment returns. That means the rich put their wealth to work. The more wealth someone has to put to work, the more passive income they have, the less they need to rely on salary & wages. The rich understand this or else they wouldn’t stay rich.

How Much of the 1% Wealth is Earned vs. Inherited?

That data is again hard to come by. According to a US Department of Labor Study (that is ten years old, full disclosure), about half (46%) of the 1% (measured by net worth) receive wealth transfers in a given year. Those wealth transfers account for about 20% of total wealth of the 1%. Having said that, the vast majority of the top earners make most of their money from non-inheritance sources. Does that mean it's earned? Depends on the definition of earned. Yale Professor Daniel Markovits argues that the wealthiest 1% of Americans spend over $10,000,000 raising their children - multiples above the average household. That $10,000,000 includes things like prep school tuition and private tutors, and other stuff that the average American student may not have access to: lawyers to bury DUI charges, bribes to Stanford swim coaches, semesters abroad in Bermuda, bassoon lessons, and of course least affordable of all, lacrosse equipment. Wealthier kids receive more educational investments, and go on to earn more. It’s impossible to prove or disprove what is earned vs. not earned. The 1% is such a contentious topic because it’s so subjective. What does it mean to earn something, anyways? Paris Hilton thinks she’s self-made, and she actually has a case (not a great case, but a case nonetheless). Speaking of ambiguity...

The Gray Area

There is no perfect way to measure wealth. Take Jeff Bezos as an example. His fortune constantly changes because it’s mostly unrealized capital gains (i.e., Amazon stock that fluctuates with the price). He also (probably) has a warehouse of stem cells harvested from baby Jeff Bezos clones on a Caribbean island not found on any commercially available maps – also hard to value. His, or any ultra-wealthy persons, true net worth is anybody’s guess.

Moreover, nominal income and wealth metrics can be misleading. These metrics are supposed to be measures of spending and earning power, but cost of living depends on where you live. Median home prices in Atherton, CA are almost $10,000,000; in Bay City, MI they are $70,000. As an extreme case, my Cousin Dave pays $40 a month to sleep in a shipping container, which is dirt cheap, although he has been lost at sea for a few months now (hidden costs, people). Put another way, the cutoff for the 1% in Alabama is $390,066. In New York, it’s $702,559. 

Additional Reading & Sources

USA Today: How Much You Need to Make To Be in the Top 1%

Jobs and Income Growth of Top Earners, Bakija Cole Heim

Inheritances and the Distribution of Wealth, Wolff, Gittleman, US Department of Labor

[1] Legacy, Jay-Z

[2] The Story of O.J., Jay-Z

[3] Lloyd Bankfein Interview

[4] History, Jay-Z