NR Digital

Who Are the Millionaires?

by Graeme Wood
Little unites them other than that they are tax targets

In May 2012, the same month Mitt Romney made the “47 percent” remark that helped lose him the election, his consulting-industry alma mater, the Boston Consulting Group, released its annual report of global wealth, a statistics-laden summary of who’s rich where. The United States ranked seventh in millionaire households per capita. Of the countries that beat us, two are well-managed city-states — Singapore, which topped the list, and Hong Kong — and one is the world’s piggy bank, Switzerland. The remaining three ahead of us — Kuwait, Qatar, and the United Arab Emirates — owe their wealth to vast oil deposits.

So among countries that are not statistical outliers, because of either their size or their natural resources or their readiness to conceal Nazi gold, the United States is the millionaire capital of the world. Various proposals have called for some type of “millionaire’s tax.” One version would impose a minimum tax rate on those earning $1 million or more per year. Another would exclude them from a deal to extend the Bush tax cuts that are set to expire at the end of the year. These measures are quite popular by all accounts. Earlier this year, for example, an Associated Press–GfK survey found that 65 percent of Americans backed a minimum federal tax rate of 30 percent for households earning over $1 million, an overwhelming endorsement of President Obama’s “Buffett rule.” State governments have also gotten in on the act. This November, voters in millionaire-dense California passed by a margin of 55 percent to 45 percent a ballot initiative designed to “temporarily” hike taxes on high earners, and other states are sure to follow.

And yet the common conception of millionaires, on whom so much of the nation’s long-term fiscal viability depends, is largely a caricature. An accurate snapshot of this group — whether one understands it to include those who have $1 million or more in assets or those who make $1 million or more per year — shows that it is enviable, to be sure, but also that it pays a hefty share of the government’s bills. In 2007, a peak year for America’s high earners, the top 1 percent of households earned 19 percent of all income and paid 27 percent of all federal taxes, including payroll, corporate, excise, and income taxes.

Millionaires are also a surprisingly broad group of Americans, not just an über-wealthy group of idle rich. Among the millionaires-by-wealth, those whose net worth exceeds $1 million, the majority are working people, and not exclusively in professions that involve stethoscopes or compulsory neckties. Even the millionaires-by-earnings are a group that exhibits many qualities widely regarded as desirable: relatively fluid membership, entrepreneurial spirit, and increasing diversity of national origin as well as race. We might acknowledge the virtues of the millionaire class, even as we prepare to open its veins.

First, a note on the distinction between the millionaires who have $1 million in the bank or in assets, and the millionaires who stack another million-dollar block of cash in their accounts every year. The first group, as the Boston Consulting Group report noted, is not just large, but huge: 4.3 percent of American households — 5.26 million nationwide — meet this definition. (For perspective, though, keep in mind that about a quarter of households have zero or negative net worth.) The second group, millionaires-by-earnings, is more rarefied, and includes fewer than half a million tax-filing households per year.

Paul Schervish, a former Jesuit priest who teaches sociology at Boston College and heads its Center on Wealth and Philanthropy, cautions that the millionaires are, first and foremost, a varied group that consists — especially at the bottom end — largely of short-term members. “The category is very volatile on the income side,” he says. “Think of all the ways people get a million bucks in a year: They win lotteries, they inherit from their parents, they sign with a baseball team and then get released two years later. There are a lot of one-time events.” These lucky one-timers (most of us never make it to the big leagues at all) cluster near the bottom end of the millionaire spectrum, usually making a million or two but not more. Taxes mean that they often don’t have $1 million in wealth after the IRS takes its share. They are in the millionaire’s club for one year and move on.

But consider the rest. “You have corporate people who make $1 million or more for 40 years,” Schervish says. “You have attorneys, physicians. But even just in education: university presidents, investors who manage Harvard’s money, football coaches.” If you winnow out the exceedingly rare jobs (there are only 36 university presidents who make more than $1 million a year), plus all the one-timers, you start to see trends and broad categories.

Imagine that you’re scaling a mountain, and on its peak, sitting like a guru, is the person who made the most money last year. All the rest of us are on the slopes, at elevations corresponding to how much we make. As you climb the mountain of income, the kind of person you pass changes with the elevation. When you climb into the top 1 percent, the most common profession is medicine: One in five doctors belongs to this group. But as you ascend, the doctors thin out, and once you reach the million-dollar snow line, you’ve left nearly all of them — and indeed, nearly all professionals — behind. The people you do see are not typical.

Consider Hank, a dermatologist in northern California. (I’ll describe a few millionaire composites along the way, with names and details obscured. Like 63 percent of millionaires, they’re men.) Hank attended a top-ranked state medical school and pulls in just north of $1 million a year, making him one of the highest-paid dermatologists in the country. He has a leading role in a major university health-care system. His success is exceptional: The average dermatologist in his area earns $300,000 a year or so. Shamus Khan, a Columbia University sociologist, explains that only doctors in certain fields are able to achieve success like Hank’s. “You might see cosmetic dentists, maybe some OB-GYNs who are fertility specialists,” he says. Hot-shot cardiologists might make it, or the highest-earning eye surgeons. But your average internist is much closer to Base Camp, earning $200,000.

The only other professionals you’d encounter above the millionaire line would be lawyers — and almost exclusively those at white-shoe firms that serve the corporate financial industry. Virtually all the lawyers in practices representing individuals or located outside of major cities are below, with the internists. Of those who have attained the millionaire level, Scott is typical: A partner at a firm near Battery Park in New York City, he has spent 20 years in the business and has a record of attracting and keeping clients. A young lawyer in his firm might have an income in the mid six figures. Scott makes more than $3 million per year and is near the peak of his earning potential. Financial-industry footmen like him are the last professionals of any type you’ll meet on your ascent. If you do meet a dentist on the higher slopes, he’ll almost certainly have quit pulling teeth long ago and started inventing new and lucrative ways for other dentists to pull them.

And that brings us to the last salarymen who have kept pace on the climb. They are overwhelmingly tied in one way or another to the finance industry, as investment bankers, traders, or analysts. “Financiers own a lot of stock,” Khan says. “But they also get a paycheck.” And those paychecks make up the largest share of those received by millionaires.

 “It used to be the case,” says Khan, “that you’d make your money through accumulation of capital. You’d own a factory, say. But now the long-term trend is toward joining the top part of the 1 percent through earnings.” The share of the top 1 percent who are in finance has increased markedly. About 9 percent of those whose names appeared on Forbes’s list of the richest Americans in the 1980s were in finance, whereas today the percentage is in the mid- to high 20s.

The final segment of the millionaire class, where the zeroes start to multiply, makes even the most successful doctors and lawyers look like paupers. They are the entrepreneurs. “The richest of the rich are the owners and starters of businesses,” says Schervish. Their stories are not easy to generalize — nor is it simple to characterize their income and wealth, since the former accrues through equity and the latter is tied up in investments and therefore fluctuates based on the price of Facebook stock on any given day.

Wendell is one such person. He grew up in a middle-class household, his father in manufacturing and his mother a homemaker. An Ivy League B.A. taught him abstract thinking, but from Graduation Day onward he planned to build businesses. After a half-dozen tries, Wendell had watched four businesses die in their infancy and seen two “hit pretty well.” Along the way, his wages were paltry, but he has made out reasonably well, with a present-day net worth in the tens of millions of dollars. He’s just barely over the age of 40, and he admits happily that his most productive entrepreneurial days are behind him; he now plans to focus on investing in start-ups.

Also doing a victory dance near the top of the mountain is Antoine, a French-born entrepreneur who balked at the government-oriented aspirations of his countrymen. He worked three jobs after moving to the U.S. to study, then worked as a consultant in New York. He left after a few years and put his every dollar and euro into a series of tech ventures in France, the U.S., and elsewhere. Around 2003, no venture capitalist, or anyone else, wanted to back him, and he flirted with personal and business bankruptcy. But eventually Antoine was successful with more than a few of his investments, and he found himself worth around $30 million at the age of 29. The second he closed his first big sale, he started a new company. “What brought me to entrepreneurship wasn’t money,” he says. “It was creating something out of nothing.” His companies employ hundreds, and he has made $60 million or so from his ideas.

The long-term trend in the sources of income for working millionaires is clear: An increasing share of the top bracket of earners comes from finance. This expansion has been largely at the expense of corporate managerial types — the professions never made up a large portion of millionaires. There are other signs of change as well. Shamus Khan says that not only have millionaires tended more often to be wage-earners than in the past; they’ve also tended to slip in and out of the category with greater frequency.

“During the immediate postwar period, there was more dynastic wealth,” says Khan. “In the 1960s there was more mobility in the U.S. in general, but at the very top there was more stagnation. Today, you have the opposite. Since the 1980s, overall mobility has been stagnant, but among the elite, the wage growth is high, and you see a lot more people going in and out of that group.” The millionaire set, in other words, has in this respect become what most of us would like the country as a whole to be: a place where it’s possible to rise to the top even if you didn’t start somewhere near it. Still, mobility increases have been more pronounced within generations than between them, Khan says.

Mobility has, by some measures, improved for the non-millionaires as well. Scott Winship of the Brookings Institution has found a mild increase in upward mobility from poverty to the middle class between the cohort born in the early 1960s and the cohort born in the early 1980s: 51 percent of the former group escaped poverty, and 57 percent of the latter. As for mobility among the elite, at least one well-regarded 2009 study, by Gerald Auten and Geoffrey Gee of the U.S. Treasury Department’s Office of Tax Analysis, found that roughly 75 percent of those who started out in the top 1 percent of the income distribution were still in the top 5 percent after nine years. At the tippy-top of the distribution — those starting out in the top 1 percent of the top 1 percent — 82 percent were still in the top 1 percent after nine years, and 58 percent were still in the top tenth of the top 1 percent. This isn’t to deny that there is considerable volatility among the extremely wealthy. Plenty of the highest earners in any given year are people realizing a once-in-a-lifetime windfall. But those who make it to the very top do seem to stay there.

That said, inherited wealth accounts for less of the top fraction of the top 1 percent than it ever has. Khan says that the best proxy for measuring the prevalence of inherited wealth is to see how many women are among the top earners. Because wealthy women are far more likely than wealthy men to have gained their money through the death of a family member, a decline in the number of women at the very top strongly suggests a decrease in the prevalence of inherited wealth. Very few of the very richest Americans inherited wealth, though most of them grew up prosperous (think Mark Zuckerberg and Bill Gates, respectively the son of successful doctors and of a successful lawyer, and both alumni of elite prep schools), and the best predictor of a person’s wealth remains whether his parents were rich.

Perhaps the most interesting trend of all is the rise of millionaires without entrepreneurial drive or a professional degree. Paul Schervish, the sociologist at Boston College, is fond of pointing out that in 1985 there were just a million millionaires, as measured by wealth. Since then, the number has exploded to 5 million, according to the Boston Consulting Group (it would be nearly double that absent the bust in 2008).

“The secular trend is that there’s a greater variety of millionaires than ever before,” Schervish says. “We have pension millionaires, housing millionaires, savings millionaires, inherited millionaires.” Of these categories, only the last existed in serious numbers 40 years ago. “Pension millionaires” may sound like an odd phrase, but when one draws a defined-benefit pension — perhaps after three decades on an automobile-assembly line or working for the federal government, or after a quarter-century in the military — one has the equivalent of an annuity. And it is quite common for that theoretical annuity to be drawn from a pile of cash approaching $1 million. Defined-benefit pensions are, of course, a vanishing species of retirement vehicle, as most plans move toward defined contributions. But at least some of the wealth-millionaire set nonetheless consists of, for example, auto workers who have done their “30 and out.”

In the past, only misers could hope to reach the million-dollar mark, in present dollars, by slowly stashing away cash over the course of a long career. But now, due in large part to the general stock-market growth during the lifetimes of those nearing retirement, the “savings millionaire” has become relatively common. “Ben Franklin said, ‘A penny saved is a penny earned,’” Schervish comments. “That’s true, but it didn’t really kick in until the 1970s.” Similarly, housing prices have jumped so much that anyone who bought early has a reasonably good shot at owning a valuable home.

So the final composite millionaire — after Hank the doctor, Scott the lawyer, Wendell the American entrepreneur, and Antoine the French one — is Paul the Boston College professor. “Virtually any professor who has been at Boston College since 1980 has a net worth of $1 million or $1.5 million,” Schervish says. The most modest husbanding of resources, plus home ownership, plus contributions to BC’s retirement plan, almost surely adds up to millionairedom, so long as one hasn’t suffered financial tragedy, such as ruinous health crises, or having a large Catholic brood of smart children pawing at your checkbook and demanding college tuition.

Schervish’s point is that millionaire status is, as he says cheekily, both more common than we think, and also, sadly for him, not what it once was. “There’s a world of difference between having a million dollars and having $10 or $20 million,” Schervish the millionaire complains. A millionaire enjoys a comfortable retirement in a house he owns himself. But the millionaire 20 times over owns the financial equivalent of a perpetual-motion machine, capable of spontaneously replenishing itself and fairly reliably producing large amounts of money for its fortunate owner. Slightly more than 200,000 households fall into this category, and it’s unlikely that one of them is headed by a Boston College sociologist or a line worker for General Motors.

The rest of the wealth-millionaires are rich but not carefree, nor even, for that matter, obviously different from the average non-millionaire. Most people don’t know anyone who makes $1 million a year on Wall Street or by founding a tech company. But who among us doesn’t know a career federal worker, or a professor, or someone who spent years working on an assembly line in a pensioned union job? They certainly aren’t top-hat-wearing Scrooges.

Indeed, even the richest of the millionaires who spoke to me seemed to be in the moneymaking game genuinely out of pleasure at making their own and other people’s schemes work, or in order to provide a service that would improve their customers’ lives. These millionaires could, according to one theory, be a class ripe for exploitation, since they’ve supposedly risen to their position through exploitation themselves. Or they could, as entrepreneurs, be drivers of innovation and essential contributors to productivity growth and the fiscal health of the country. Schervish, ever the Jesuit, sees things both ways, and in rather stark terms. “The millionaires could be the enemy,” he told me. “Or their behavior could lead to salvation.”

– Mr. Wood is a writer in Oakland, Calif.

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