Who makes up the richest 0.1% of households?

St. Louis Fed Research Officer Serdar Ozkan explains that top wealth owners include successful, self-made entrepreneurs who rose to riches (the “New Money”) as well as those who started their working lives with significant wealth invested in high-return private businesses (the “Old Money”). Using data from Norway, he shows that the New Money tended to earn higher returns and save at higher rates than the Old Money, while Old Money fortunes were primarily driven by higher initial wealth relative to the median-wealth households. The views expressed in this video do not necessarily reflect those of the St. Louis Fed or Federal Reserve System.

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Transcript:
I'm Serdar Ozkan. I'm a research officer at the Federal Reserve Bank of St. Louis.

In a recent analysis, we broke down a sample of the richest 0.1% of households into two groups, New Money and Old Money. We chose to look at the data this way because it offers some valuable insights into the makeup of the wealthiest segment of the population.

But before getting into who exactly the New Money and Old Money are, let me start with a little background.

We used a data set from Norway that allowed us to identify the wealthiest 0.1% of households in that country in 2015, when they were in their 50s, and then look back at how they accumulated their wealth by tracing them to the beginning of our sample period, in 1993, when they were in their late 20s.

New Money is the term we used in our research to describe people who started out in their 20s with little wealth and by age 50 or 54 were in the richest 0.1% of households.

In other words, they are the portion of the richest 0.1% who started out in the poorest quartile two decades earlier. We found that this group actually started out the period with negative wealth, meaning they borrowed money. But like Old Money, the New Money tended to invest heavily in equity, particularly private businesses.

We also found that New Money tends to experience rapid wealth gains early in life. In fact, they earn even higher returns and save at higher rates than Old Money.

Finally, New Money increasingly shifted their portfolios from housing to private equity as they get older.

By comparison, Old Money describes the portion of the richest 0.1% households who started out the sample period in 1993 with the most wealth, specifically in the richest quartile.

Higher starting wealth relative to the median household is the primary component of Old Money fortunes. That is opposed to higher saving rates and higher rates of return, which, like I mentioned, primarily drive New Money fortunes.

However, the data showed that Old Money's net worth still exceeds New Money's net worth after 22 years, although by then, their portfolio allocations look alike.

We also investigate the group that began in the wealthiest 0.1% of households at the beginning of the sample period, but fell out of that group by the end of it. These households had lower returns on their investments and saved at lower rates than the median households, and in turn squandered their large initial wealth.

The bottom line is that the richest 0.1% of households seem to consist of both successful, self-made entrepreneurs who rose to the top, as well as those who started their lives with significant wealth invested in high-return private businesses.