Wealthy parents’ greatest asset is the assets they will pass on | Torsten Bell

Parents shape our lives. There’s the love or its absence – and the genetics. On the financial side, academics focus on intergenerational income persistence (how much parental income determines our own) and its inverse (social mobility).

This varies between countries. Economist Miles Corak has shown that higher inequality nations tend to be less socially mobile. When the rungs on the ladder are far apart, individuals born poor struggle to climb them.

However, these comparisons of average mobility levels between countries hide something important: differences within a country in how parents’ economic circumstances shape their children’s. That is the key takeaway from a new Danish study that tracked more than 630,000 children born between 1972 and 1982.

Examining the relationship between parental income and that of their offspring in their mid-30s, the study confirms the obvious: richer parents beget richer kids.

More interesting is how economic outcomes of those from low-, middle- and top-income households are affected by their parents’ finances. For those with lowest incomes, the main way in which your parents being slightly better off increases your own earnings is by raising the chance of you working at all.

Among middle-income families, it’s education, not employment, that matters. Higher income households have more highly educated children. But for the top 5%, something new happens: rich parents boost the next generation’s prosperity via higher capital income (returns on owning assets). So it’s the passing on of assets that keeps the very rich, rich. Our parents shape us all, but in very different ways.