Other Sources of the Education/Wealth Correlation

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A recent essay from the St. Louis Fed’s Center for Household Financial Stability examined the link between educational attainment and income/wealth, showing that education and wealth are highly correlated. However, the researchers cautioned that correlation does not mean causation because there are several other factors at play that contributed to increased educational attainment.

Senior Economic Adviser William Emmons and Lead Policy Analyst Bryan Noeth, both with the center, discussed that people with college and postgraduate degrees also generally make financial decisions that are more conducive to wealth accumulation. This led to the question of whether skills and behaviors acquired outside of those learned during higher education may play a role in the additional income and wealth. They noted, “In short, the positive correlation we observe between a person’s education and his or her wealth does not imply that education itself is solely responsible for the amount of wealth accumulated.”

Emmons and Noeth looked at some specific factors that contribute to this partly spurious correlation.

Natural Ability

People with higher natural cognitive ability are more likely to complete higher levels of education.

Family Background

In addition to natural intelligence (which may be largely inherited), the parents’ social class or status, occupation, education, income and wealth also predict many measures of success as an adult.

Assortative Mating

 Highly educated people are more likely to marry each other, which effectively doubles the college wage premium these families experience and compounds the effects of better financial decision-making potentially contributed by both partners.

Incentive To Become Financially Knowledgeable

The bulk of lifetime earnings for high-earning individuals and couples accrues in a relatively short period during middle age. Thus, they are more motivated to learn how to shift their resources efficiently to savings for the later stages of life.

Inheritances

Better-educated people are much more likely to receive sizable gifts or inheritances simply because they are more likely to have better-educated, higher-earning parents who have accumulated wealth.

Benefits of Better Health and Longer Lifespans

People with more education are healthier, on average, which extends their working lives and lengthens their healthy retirement years. This means they collect more lifetime benefits from Social Security and private pensions, as well as giving their investments more time to compound and grow.

Additional Resources

• Center for Household Financial Stability: The Demographics of Wealth: The Role of Education
• On the Economy: Costs of Defaulting on Credit Card Debt Vary
• On the Economy: The Financial Pressures of the Middle Class