Age explains most wealth inequality in Canada
The fact that the top 20 per cent of households in Canada hold 67 per cent of the personal wealth and the bottom 20 per cent hold no wealth at all seems, on the surface, to be a very inequitable and unfair situation. Surely the "system" must be rigged in favour of the rich and against the poor. Or there must be substantial inheritances that explain these huge gaps in wealth.
Without denying that wealthy people can get wealthier through government connections and "cronyism" or that some people can get wealthy via large inheritances, much of the observed wealth inequality has a very simple economic explanation. The vast majority of people get richer as they get older. If we take a snapshot of wealth at any point in time, we will have big differences in net worth due to age.
The typical 25 year old has little or no wealth. They may still be in school or the early stages of getting established in the work world. They have had no time or capacity to accumulate any wealth and, indeed, many may have negative wealth (debts exceed assets). However, 40 years later that same 25 year old will, most likely, be among the top wealth-holders having had a lifetime to accumulate assets and pay down debt.
Imagine a perfectly "egalitarian" society where everyone is identical in every respect except for age and where a person's income grows slowly as they take on more responsibility and leadership in their job. Everyone would have exactly the same lifetime income and wealth but would have different levels of wealth at different stages of life. In such a society, if people saved 10 per cent of their income in a fund for retirement, then at any point in time, the top 20 per cent would have 50 per cent of the wealth and the bottom 20 per cent would have no wealth.
Understanding the natural rhythms of life, age and wealth accumulation is an essential starting point in any intelligent discussion of economic inequality. Such an understanding is an effective counterpoint to the rhetoric and, often, hysteria, that accompanies stories relating to inequality in the media.
Of course, we don't live in an egalitarian society. People are different in terms of the capacities, virtues and choices. While the overwhelming majority of people accumulate wealth over a lifetime, a very small number reach middle age with no wealth. There are many explanations for this that do not involve the standard post-modern list of evils. And clearly, there are an even smaller number of ultra-wealthy (usually sports, entertainment and business superstars) who stretch the distribution of wealth out even further.
However, most of our wealth inequality is explained simply by age. In a recent study published by the Fraser Institute, I found that age accounts for about 80 per cent of wealth inequality in Canada. A study by Statistics Canada shows that inheritances account for only about 5 per cent of the wealth gap.
If we look at the Statistics Canada data on wealth in 2012, the most recent year for which we have data, the study notes that the average household net worth ranges from $55,814 for those under 25 to $465,773 for those between 40 and 44 and up to $968,914 for those between 65-69. Wealth declines after that. This hill-shape pattern is fully consistent with our understanding of how most people accumulate wealth over their lifetime.
It’s also a fact that wealth inequality in Canada has been declining since the early 1970s. The wealth gap is not growing, it’s shrinking. Again, this flies in the face of a common belief. For sure we ought to be concerned about cronyism and unethical practices. And, we definitely need to better understand poverty and deprivation. However, much of the emotion and indignation about wealth inequality is misplaced.
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