We Really Don’t Measure Wealth Properly

It’s the Americans who are really going overboard about wealth inequality, here in the UK the polemicists are still warming up. We’re rather more shouting about income inequality still.

There is though a problem with the basic underlying figures that everyone uses. Something built into the very definitions which are being used.

Just as an example, let’s measure pension inequality. Some of us have really great savings in our pension IRAs. Others of us don’t. We were ill, didn’t earn enough to save, had bad luck, got wiped out in a stock market crash. That’s wealth inequality. Nearly all of us have some income to arrive in our retirement from Social Security. That’s obviously just as much wealth as any other pension income we’re going to get and should be valued at the same capital value as any other income stream of the same amount. Except that it isn’t. In our calculations of wealth, Social Security is treated as being worth nothing. It comes from government, you see?

Equally, if our lovely defined benefit pension of 50% of salary comes from a funded pension scheme then that’s counted as wealth. If it comes from an unfunded scheme, like must public sector pensions, then it is counted as constituting zero wealth. You could be on $50,000 a year for life with adjustments for inflation, and our standard wealth calculations say that’s worth nothing. This is, quite obviously, a ridiculous way to measure wealth.

Sure that’s about the US. But the same thing applies to UK measures of wealth. The Old Age Pension is not counted as being wealth. Yet it is, quite obviously, wealth. So too – as far as I know – the distinction made between funded and unfunded defined benefit pensions.

Consider for a moment. Somewhere out there in the government universe there’s a fully funded pension scheme. No, I don’t know which one. But something that owns lots of assets which then pay those pensions. There is also a number of unfunded such schemes. Where it’s the current pension contributions of the current workers paying the pensions of those retired.

The effect on the wealth of those receiving the pensions is of course entirely equal. And yet in our calculations of wealth the funded schemes count as the net present value of the future pension income stream, the unfunded as nothing.

This is not the way to measure wealth, is it? And yet that is the way it’s done and that is the way Grandpa Death’s schemes to steal all the money are justified.

This is before we even go on to discuss the wealth effects of the rest of the welfare state. Why do we have unemployment insurance? Because we generally agree that such a safety net makes us all richer. By the value of what might be got, times the possibility of getting it, plus some premium for the peace of mind from knowing we’re insured. Education free at the point of use is wealth – what would be the capital value of the cost of having to educate out of pocket? So too health care and so on.

All of these things are entirely ignored in our calculations of wealth. That is, they’re all lying to us. Absolutely all of them.

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Quentin Vole
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Quentin Vole

While I wouldn’t claim that they were fully funded, there were (are?) funds attached to many government pension schemes outside the central civil service ones – university staff, local government schemes, …

Jonathan Harston
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Jonathan Harston

I’m currently shouting at people bemoaning the “fact” that the UK state pension is 8K, while Germans get 26K. No! UK state pension is 8K plus free healthcare. German state pension is actually 13K unless you have chosen to buy top-ups. What’s free old-age healthcare worth as a monetary value? Waving several fingers in the air gives me 8K, so UK “pension” is actually 16K.

TD
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TD

While pensions are most certainly wealth, they typically end with death, though some might continue for the life of the surviving spouse. So, you have a present value of cash flow analysis over one’s expected remaining life span, which could vary greatly, but let’s say it might commonly be for 20 years. Appropriate discounts rates could also vary greatly, from a modest one on a fully funded pension plan to a steep one on a plan that is not fully funded. At the end though, you can get a wealth figure or range of figures that you could defend. However,… Read more »

timworstall
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timworstall

“this is mice nuts in the wealth inequality debate”

/90 ratio for income – top 10% average to bottom 10% average for income – in the UK moves from 12:1 to 4:1 when we measure all the things we do to reduce income inequality. That’s a pretty big change.

Don’t have the equivalent for wealth but it could be around the same sort of level.

Mohave Greenie
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Mohave Greenie

Ran a few of the numbers based on $18000/yr over 40 years starting at age 62 for Social Security in the US. Based on a 4% return and 2% inflation you could expect to get the same amount with starting pot of $360,000. $18k per year is at the high end of the Social Security payout. So that is the equivalent wealth in the pension plan. This does not include the Medicare/Medicaid coverage that one gets as well. I have no good way to convert that to an equivalent wealth. The biggest difference is that if you might have inheritable… Read more »