FOCUS ON WEALTH: its uneven distribution and disproportionate impact on the young generation and women

Research has established a direct link between the level of economic inequality and unhappiness in society. The more unequal the economic standing of people in the society, the higher the level of negativity in people’s sentiment and views. Happiness is in large part driven by how people perceive themselves relative to others. That is, when people are too far apart in living standards, access to healthcare and education and opportunities to progress - when a lot of people are left behind and excluded from fair share of economic prosperity - such an environment fuels dissatisfaction, distrust, fear of corruption and unfair influence on government policy and ultimately, anger. An unhappy society is an unstable society - politically as well as economically. On the side of those at the low end of the inequality spectrum is their voting rights - one person one vote. Populism is dangerous in the long run. The negative impact on political stability and economic growth is huge and cannot be ignored. High level of inequality is not just morally bad but economically damaging.

Economic inequality is most stark in the ownership of wealth - more so than in share of income. Furthermore, the inequality is disproportionately experienced by the young people and women.

We focus on wealth because it plays an important role in our lives - it determines our lifetime living standard: the quality of our homes and where we live, our ability to withstand shocks such as job loss, illness or divorce, our ability to take risks to pursue business or career opportunities, our income in retirement and resources to pass on to our children and grandchildren. Severe wealth inequality in a society means huge disparities in people’s financial wellbeing and, therefore, a source of unhappiness.

The scale of the global wealth is huge - USD 280 tn in 2017, according to the Credit Suisse Global Wealth Report 2017, which is 3 1/2 times global GDP of USD 80 tn. However the distribution of this tremendous amount of money, as we all know, is vastly uneven. We are facing massive inequality here. Given the importance of the role of wealth in one’s life, wealth inequality should be far more concerning than income inequality and sadly, wealth inequality itself is far more severe than inequality in income.

The wealth pyramid shown below (CS Global Wealth Report 2017) captures the overall wealth inequality in one graph.

The global wealth pyramid demonstrates the severity of wealth inequality: a staggering 70% of the world’s adults have less than USD 10,000 in wealth individually and collectively owns a mere 2.7% of the global wealth, whereas at the top of the pyramid, 8.6% of the world’s adults with at least USD 100,000 in wealth individually, owns 86% of the global wealth. According to the report, the top 1% owns half of the world’s wealth. Compared to income where the top 1% earners take a share of 20% of global income (2016, World Inequality Data), wealth inequality is more than twice that of income inequality. It is forecast that wealth inequality will continue to grow - by 2030 the top 1% will own 64% of global wealth. To the extent that return on capital exceeds that of wage growth, wealth inequality will continue to grow.

Wealth inequality affects women and men differently as well as the young and older generations. Behind wealth inequality lies gender as well as intergenerational inequality.

The link between income and gender inequality - the gender pay gap - receives a lot of attention. For example, in the UK, companies with employees of more than 250 are required to disclose publicly their gender pay gap data, and this reveals that on average across 10,000 UK companies, women’s median pay is 18.4% lower than men’s. However, the gender wealth gap is far worse and given wealth’s impact on women’s lifetime living standards and financial resilience, this challenge should be receiving much more attention than it does today.

In the US, according to Women and Wealth Report by Mariko Chang for Asset Funders Network 2015, single women’s median wealth is less than a third of the median wealth of single men. As wealth generally increases with age, the gender wealth gap persists throughout the lifetime of men and women. Young women are hit particularly hard with millennials’s median wealth at zero! Those who are 35-49 years of age have median wealth that is just 4% of men counterparts. These women are more saddled with student debt and more likely to be single mothers. Even controlling for education, the wealth gap also persists with women’s wealth 30-50% lower than men’s for those with university and higher education. Let’s not even talk about the gap at lower level of education where there is a gaping divide between men and women.

And what’s it like at the very top of the wealth pyramid? Bloomberg reports that of the wealthiest 500 adults in the world, only 12.8% are women!

On the disproportionate impact of wealth inequality on the young generation, the Intergenerational Commission sponsored by the Resolution Trust of the UK, point to deteriorating living standards for the young adults as they confront two trends: increasing risks and decreasing asset ownership to help them manage and mitigate their life risks. These circumstances for the young are not confined to the UK - the young generation across most developed countries are in the same boat. We can only conclude that the young generation, especially young women, face a grim financial future.

There are many root causes for the extreme level of wealth inequality - failure of government policy among them - and we will not delve into them in this note. Instead, we look at a number of stumbling blocks along the path of people in general and women in particular that hold them back from accumulating and building their assets: failure of the finance industry, regulation and people’s low level of financial literacy and behavioural biases.

Firstly, the financial industry has failed in delivering value for money for individual savers and investors. Fees are excessive and intransparent and they significantly eat into the long term value of people’s savings and assets. A landmark study demonstrated that intermediation fees charged by the industry on saver’s money have not come down over the last 130 years in the US at around 200 bps per year and this is quite surprising given the technological and infrastructure improvements that resulted in huge efficiency gains in other industries. In addition to excessive and opaque fees, conflicts of interest and wrong incentives have brought on a history of the finance industry that is littered with scandals and crises that destroy huge amounts of people’s wealth.

Secondly, regulation, despite its increasing volume and intensity, has not led to lower fees and more transparency, nor has it mitigated conflicts of interest and wrong incentives. Regulation’s design does not focus on encouraging the right behaviour nor the development of finance that is “fit for purpose” to serve its customers and society.

Finally, multiple surveys confirm that financial literacy is very low around the world. This low level of financial literacy increases the propensity for abuse by so called financial “experts”. Furthermore, our own behavioural biases contribute to holding us back from accumulating assets and in nurturing our wealth well. Our focus on the short term leads us to systematically underestimate the amount of assets we need in the long term to fund our retirement. Inertia and procrastination hinder us from getting into the first rungs of the investment ladder. We tend to be hyperactive in managing our investments, overestimating our own abilities to “beat the market”. Women, too, have their own biases that prove unhelpful in accumulating assets: undue risk aversion and lack of proactiveness in managing our money.

Everyone has a role to play to address the inequality and actions big and small have part to play to tip the balance. The focus for us should be to support asset building and wealth accumulation as a means to financial empowerment for the most disadvantaged: the low to middle wealth class with focus on the young and women. we need to get the young and women in the low to middle wealth class on to the rungs of the investment ladder and keep them there over the long term. The young have time on their side as they take advantage of the power of compounding of investment returns and women will need more help because a lot of obstructions - structural, cultural and behavioral - are on their way to building wealth that supports their financial wellbeing. Any initiative with a purpose to serve and support asset building for these individuals must be such that it addresses the failures raised above: the failures of finance, regulation and individual behaviors.