Once Upon a Time in America: Rags to Riches Gone

08/29/2012 05:57 pm ET | Updated Oct 29, 2012

Once upon a time in America, it was expected that most children would surpass their parents on the income ladder. However, a new study released by The Pew Charitable Trusts has found that although most Americans are earning a bit more than their parents, only a meager one-third of the current generation will surpass their parents in wealth and income and climb to a new rung on the economic ladder.

This recent Pew report, which is a follow-up to its seminal 2008 work on the topic, investigates absolute mobility (whether a person has more or less income and wealth than his/her parents did at the same age) and relative mobility (whether one is ranked higher or lower on the income and wealth continua than his/her parents). In particular, the study, titled "Pursuing the American Dream," delineates five income and wealth categories, or "quintiles," in the economic ladder and divides families into each quintile in two ways, based on their family income and family wealth.

Eighty-four percent of Americans exceed their parents' family income. Surprisingly, those at the bottom of the income ladder are the most likely to exceed their parents' income as adults -- 93 percent do so. Yet, the extent of income growth varies by quintile. Thus, even those at the bottom who are more likely to surpass their parents' incomes do so by the smallest absolute amounts, while Americans raised in the top who surpass their parents' incomes do so by the largest absolute amounts.

In terms of wealth, 50 percent of Americans have more wealth than their parents did at the same age, ranging from 72 percent of those whose parents were at the bottom of the wealth ladder to just 25 percent of those whose parents were at the top. While it may initially appear surprising that those raised in the bottom of the wealth ladder are the most likely to have more wealth than their parents did, it makes sense when one realizes that this occurs because their parents had few or no assets. In the parents' generation, the bottom wealth quintile contained people with less than $31,110 in wealth and 5.6 percent of those reported having less than $1,000 in family assets. Thus, the bar for surpassing the previous generation's wealth is much lower for these families.

Those coming from the top quintile of the wealth ladder, on the other hand, have the greatest range in their own wealth quintile as adults, with many holding fewer assets than the previous generation. Of course, those whose parents were at the top of the wealth distribution face the highest bar to exceed their parents' wealth, at $270,218 or more.

Less surprising is the fact that in terms of relative economic mobility, the American dream of "rags to riches" is more fantasy than reality. Only 4 percent of people raised at the bottom quintile will ever make it to the top, while only 8 percent of those raised on the top rung will fall to the bottom. In fact, only a mere 35 percent of people will achieve both absolute and relative mobility, both making more money than parents and climbing a ladder rung. In other words, Americans who started in the top and the bottom of the economic ladder tend to remain stuck there themselves as adults. Thus, the 43 percent of Americans who begin on the bottom rung stay there.

It is also not surprising that there is a huge gap between blacks and whites. Sixty-five percent of blacks were raised on the bottom quintile, whereas only 11 percent of whites were. Similarly, only 2 percent of blacks were raised at the top rung, versus 23 percent of whites. In fact, the percentage of black families at the top two rungs of the family income and wealth ladders is so small that median and absolute mobility estimates cannot be calculated with statistical certainty.

In terms of economic mobility by race, half of blacks who were raised on the wealth ladder's bottom rung stay there as adults, compared to a third of whites. And downward economic mobility is much more likely for African Americans. Half of all blacks raised on the middle rung will fall to the bottom two rungs, whereas 32 percent of whites will.

The report also confirms what the Occupy Wall Street and "99 percenters" have been claiming: the rich are getting richer while the poor are getting poorer. According to the report, the wealth compression is especially notable at the bottom: Median wealth for those in the lowest wealth quintile decreased from just under $7,500 in the parents' generation to less than $2,800 in the children's generation. Conversely, at the top of the wealth distribution, median wealth increased from just under $500,000 in the parents' generation to almost $630,000 in the children's generation.

As the middle class shrinks, more and more Americans are finding themselves in the "low-income," or poor, category -- roughly one in two Americans fall into those categories. At the same time, the richest 1 percent of Americans saw their income, adjusted for inflation; balloon up by 275 percent between in 1979 and 2007.

These findings also corroborate the latest findings on the racial wealth gap. In less than a generation (from 1984 to 2007), the racial wealth gap has more than quadrupled, mostly as a result of rising white wealth. In terms of household net worth, for every dollar owned by a white household, Latinos own 12 cents and African-American families own only 10 cents. In fact, the median net wealth of white households is 20 times that of black households and 18 times that of Hispanic households.

These lopsided wealth ratios are the largest since the government began publishing this data a quarter century ago and roughly twice the size of the ratios that prevailed among these groups for the prior to the Great Recession.

In sum, the entire notion of the American Dream is being eradicated as a new nightmare emerges of the average everybody being unlikely to rise through the system. For policy makers seeking to promote and protect the American Dream for generations to come, creating more opportunities for saving and asset building for all Americans will be crucial.