How Rich People Raise Rich Kids

A new paper from economists at the University of Texas at Austin, University College Dublin, and Lund University (in Sweden) offers an answer. They looked at the adult net worth of adopted Swedes born in the 1950s, ‘60s, and ‘70s, and then compared those figures to the net worths of both their biological and adoptive parents. (In mid-century Sweden, all adoptions were arranged through the state, so the country has data on everyone involved, which is not out of character for a nation with a Förmögenhetsregistret, or wealth register, which tracks the assets of all its citizens.)

In short, the researchers found that environment prevails. For children who were raised by their biological parents, the correlation between parents’ wealth and a child’s eventual wealth was strong—calculated to be 0.33. (A correlation of 0 would mean parents’ wealth has no bearing on children’s wealth, and a correlation of 1 would mean they are identical.) For children who were adopted, the correlations were much different: Between adopted children and their birth parents, it was weaker (only about 0.13), while between children and their adoptive parents, it was in the middle (about 0.23). These numbers suggest that children who are raised wealthy owe their future financial success more to the household they grew up in than any inherent ability they possess.

So what exactly is it about being raised by a wealthy family that improves economic outcomes? A closer look at the data yielded possible answers, but none of them were conclusive. The researchers’ best guess was that, surprisingly, it had little to do with teaching kids how to buy and sell stocks, putting kids in touch with useful professional contacts, or paying tuition to send them to private schools. Instead, what might matter a lot is that wealthier children develop a tendency to save money. Or, the researchers say, it could be even simpler: Richer parents gift their children with more money (and less debt).

The study is not without its shortcomings, the biggest of which is that birth parents and adoptive parents tend to come from very different backgrounds. The birth parents in the sample had about $36,000 in personal wealth on average, while the adoptive parents averaged about $122,000. (Both of those figures are in today’s dollars.) So, while the researchers did get to see what happens when a baby from a poorer family is raised by a wealthier one, they didn’t get to study the reverse—the financial outcomes for kids born wealthy but raised poor.

Still, it’s fair to say that the study describes a dynamic that’s also at play in the U.S., where the median net worth of wealthier families has roughly doubled in the past three decades and the net worth of lower-income families decreased over the same period of time. Sweden, with its relatively generous pensions and higher tax rates, might not be the perfect analog for the U.S., but it seems close enough. (And besides, the chances of social mobility in Sweden might be just as low as in the U.S.) For once, it looks like a Scandinavian country’s supposedly egalitarian birth lottery is just as rigged as the one in the U.S.

Joe Pinsker
http://www.theatlantic.com