Should social security benefits be considered when looking at wealth inequality?

People often discuss the wealth gap between the top one per cent and the rest of the population, but measures of wealth inequality don’t consider social security retirement benefits.

A new paper by Sylvain Catherine, an assistant professor of finance at the Wharton School of the University of Pennsylvania; Max Miller, a PhD candidate in finance at Wharton; and Natasha Sarin, an assistant professor of law at the University of Pennsylvania, explored how social security impacts wealth inequality measures. It found, when accounting for the old-age retirement program, there’s no increase in wealth inequality.

“Social security traditionally is not really thought [of] as wealth because it’s not something that you have in a bank account,” says Catherine. “It’s not something that you can sell right now so that you can finance consumption. . . . But if you think about why people save money in the first place, well, that’s because they need to prepare for retirement.”

The paper explored how social security wealth has outpaced the growth of market wealth over the last three decades, which can be explained because social security programs have been expanded, people are living longer and real interest rates have fallen, which increases the market value of future income flows.

Social security wealth is significant, he adds. “We estimate it to be around $40 trillion as of 2016.”

To put that amount into context, total wealth — without considering social security — in the U.S. in 2016 was around $90 trillion. “It’s one third of the total, but when you look at people that are in the bottom 90 per cent of the distribution — for that part of the population, social security is more than half today.”

In particular, the paper found the top wealth shares have not increased in the past three decades when social security is properly accounted for and measures of inequality that don’t include social security programs are misleading.

When programs like social security increase, the incentives for people to save are reduced because people know they can rely on these benefits, Catherine says.

It’s important to have comprehensive measures of wealth; otherwise, it may lead to situations where, if social security programs were increased, it might look like wealth inequality rises, which is paradoxical, he says. “But if you put back the value of the transfer into your wealth measure, then you would arrive to the right conclusions: that when you have more redistribution you have less wealth inequality. So that’s also something that we’re pushing. We really think it’s very bizarre to have a measure of wealth inequality that goes up when you actually redistribute wealth.”

The paper was presented at the Northern Finance Association’s 2020 conference. The Canadian Investment Review is a proud partner of the NFA conference.