Focusing on wealth inequality is counterproductive | Job Binary


A new Congressional Budget Office (CBO) report on trends in wealth inequality over the past 30 years has raised concerns that wealth inequality is too high. Some attribute this to the policy choices the US has made over the past few decades, suggesting that policy changes could significantly reduce the wealth gap.

We can do more to encourage lower- and middle-class households to save more and build wealth, but a closer and more comprehensive look at data and trends in other countries shows that America’s wealth gap is not as alarming as some might think. .

CBO’s headline numbers conclude that the bottom half of the income distribution accounts for only 2 percent of all wealth in the U.S.—a share that hasn’t changed over time, but the wealth of the top 10 percent continues to grow significantly.

The analysis primarily relies on the Survey of Consumer Finances (SCF) to track changes in the distribution of household wealth since 1989, when the survey was first conducted. The report notes that the survey does not track changes in wealth special households over time, but provides a “snapshot” of the distribution of wealth in any given year. This is important because of changes in wealth that occur as people age, also known as the life cycle effect.

Take, for example, a 22-year-old recent college graduate. She may have lower student debt and lower wages than more experienced workers because she is just starting out in her career. But over time, he moves on, earns more, saves, pays off debts, maybe starts a family and buys a house. Although he may start at the bottom of the wealth distribution at the beginning of his career, he will gradually rise over time. A snapshot of wealth misses these effects.

Looking at six birth cohorts, from those born in the 1930s to those born in the early 1980s, the report shows that, as expected, wealth generally increases with age. Given that, on average, people are living longer and working longer than many decades ago, they have many opportunities to continue building wealth. And because wealth compounds over time, even a few extra years can make a big difference in wealth accumulation. Although the report does not provide demographic data for each income quintile, controlling for age and life-cycle effects may reduce some wealth disparities.

Of course, these factors alone do not account for all wealth differences across the distribution. For example, even when controlling for age, the report shows that a 25- to 29-year-old born in the early 1980s has a lower level of wealth than a person of the same age born in the 1970s. At first glance, this seems to indicate that current generations are having more trouble building wealth than previous generations.

But there are additional demographic factors that make these groups relatively smaller. While the newcomer cohort is more likely to attend college (increasing earning potential), they are also more likely to have debt at a young age (reducing their net worth). Additionally, this recently married group is less likely to marry, so some of the differences in wealth are due to smaller household sizes. Finally, while the report does not provide a racial breakdown, it notes that members of this latter cohort were less likely to identify as white than earlier cohorts. As new immigrants, who often start at the bottom of the income distribution but, like other households, eventually move up, make up the share of these groups over time, they artificially make these pictures of inequality worse.

One improvement this paper makes over studies using similar data is that it more accurately captures wealth at the bottom. Previous analyzes have ignored the defined benefit positions of employer pensions, which return benefits based on a specific formula, because while these plans are an important source of wealth for those in the bottom half of the income distribution, they can be difficult to measure. This document contains specified benefits. However, it excludes another important source of wealth for lower- and middle-class households: Social Security payments.

A recent paper by Federal Reserve economists found that accounting for Social Security benefits reduces the wealth gap ratio among 90 earners.th For households aged 40 to 59, the income percentile is about half that of the median earner.th percentile. This indicator decreased to 67 percent for 40-49-year-olds, and 80 percent for 50-59-year-olds. Another paper reached a similar conclusion, estimating that Social Security benefits account for 59 percent of the wealth of the bottom 90 people.th the percentage of income distribution and their inclusion has significantly reduced the share of the top 10 percent of wealth.

How does the US compare to other developed countries? Looking at other “equal” countries, the same wealth gaps seem to persist. For example, even in Norway and Sweden, which are recognized as having greater social welfare policies than the US, wealth inequality remains very high and comparable to US levels. As here, adjusting for age and life cycle effects somewhat reduces the wealth gap.

There are things we can do to encourage lower- and middle-class households to save more and build wealth, but punishing wealth taxes should not be one of them. Simplifying and expanding savings accounts and improving the taxation of savings more broadly will increase incentives to save. Much more needs to be done to improve tax and financial literacy in America. But the economic data show that we need to stop bowing to the wealth gap and instead pursue policies that improve the standard of living for all Americans.



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